Calls Current Environment “Spectacular Opportunity” for CDFIs
(June 22, 2009 - Phoenix, AZ) On Friday, June 12, Ellen Seidman, an ardent advocate for community development financial institutions (CDFIs) and Senior Policy Advisor at ShoreBank, the nation’s leading community development bank, adressed more than 250 community development credit union (CDCU) representatives, credit union organizers, credit union regulators, and government officials during a plenary session at the National Federation of Community Development Credit Unions’ (Federation’s) 35th Annual Conference on Serving the Underserved, held June 11-13 in Phoenix, Arizona.
During her remarks, Seidman discussed the importance of local financial institutions in addessing the current economic environment, as well as emerging opportunities for CDFIs under the new Administration. Despite those opportunities, Seidman acknowledged the challenges that CDFIs and nonprofit institutions across the nation are facing and provided some recommendations to address those challenges and strengthen those institutions. Seidman concluded her presentation with an explanation of why credit unions do not want to become banks.
A Period of Intense Contradiction: Challenges & Opportunities
This year more than any other since the Great Depression has been a difficult one for millions of hardworking Americans who are feeling the strain of the economic downturn. Seidman’s remarks echoed this reality: “In 2008 alone there were more than 1 million new bankruptcies in the United States,” explained Seidman. “While people have been trying to save, many are now losing their livelyhoods as employers cut costs by laying people off.”
Seidman’s forecast on the housing markets was similarly downbeat, stating that the current lull in foreclosures “is a bump up, but we’re likely to see another major wave of foreclosures in the near future... and while the new Administration is talking a lot better, whether they are actually able to come through is yet to be seen.”
According to Seidman, these economic woes are precisely the reason CDFIs are more important that ever, but in order to achieve impact, there must be significant policy change, strengthening of institutions, and cross-sector collaboration. “There is a major liquidity issue in the CDFI industry, and we need to figure out how to get more equity into these responsible institutions,” she said. “We need to come together to build a collective and collaborative movement where we network, learn from each other, rebuild our own capacity, and subsequently, rebuild the entire movement.”
“This is a time of spectacular opportunity for our industry. We have a president who identifies himself as a community organizer and there are huge amounts of money flowing into the communities where you operate," she told the audience. "Many people are coming to understand that ‘relationship finance’ is what we should have been doing for the past 10 years.”
A bright spot on all of this, said Seidman, is the work being done by CDFIs across the nation. “Why do I have faith that people in this room and other rooms across America are going to survive,” she asked. “It’s because the community development finance industry is being run by extremely dedicated, mission-oriented leaders and staff; because each of your institutions has a local presence and you know what your members are going through. It’s because you are flexible in how you provide financing, with a high degree of attention and handholding. It’s because you use a risk curve based on the true potential of the borrowers and not simply their credit ratings; and it’s because you are willing to experiment, and that is where true innovation comes from... You ask yourselves what do people need and how do we do that in a way that’s sustainable for everyone.”
Why CUs May Not Want to Convert to a Bank Charter
The issue of credit union to bank conversions has been a heated one over the past several years. Most credit unions attempting to make a charter conversion cite the need to convert to a stock company in order to quickly grow their assets as a way to provide additional products and services to their membership. Many within the credit union movement see this type of reasoning as somewhat disingenuous; and more of an excuse for the board and management to enrich themselves from compensation from the conversions, copensation can be in the millions of dollars. During her closing remarks, Seidman was asked by Federation President/CEO Cliff Rosenthal to address this issue and to highlight why credit unions might not want to convert their institutions into banks.
Seidman’s response was frank. “Why do you not want to become a bank? Well for one, our banking regulators are increasing their premium assessments across the board; so financially, it might not make a lot of sense,” she explained. “Our regulators are also very tough, especially on the smaller financial institutions; institutions that don’t tend to fight as well as the larger players, and are thus easier to close.”
“Another major factor to consider,” Seidman continued, “is that bank insurance premiums are rising, and this generally disadvantages the smaller institutions. We also have higher requirements on capital and return on assets (ROA), which are generally much tougher than those of credit unions. Of course there’s always the issue of taxation, both as a for profit institution and under CRA [Community Reinvestment Act]. While your institutions would have no issue meeting CRA requirements, why on earth would you want yet another complicated exam to deal with?”
© 2009 National Federation of Community Development Credit Unions.