How a Credit Union Increases Access to Affordable Financial Services

Article and images cross-posted from Community-Wealth.org. Written by Katie Parker.

Founded in 1980, Self-Help works to create and protect ownership and economic opportunity for all, especially minority, women-headed, rural, and low-wealth families and communities. In 2006, Self Help expanded into California and, in 2008, launched Self-Help Federal Credit Union to increase access to affordable, responsible financial services in low-income communities. We had the opportunity to talk to Steve Zuckerman, President of Self-Help Federal Credit Union, about Self-Help’s evolution, and their innovative work in California.

Katie Parker: Can you talk a bit about your background and how you came to be involved in this line of work?

Steve Zuckerman: The route to my current role at Self-Help was a pretty circular one. After graduating from undergrad and working two years for a business consulting firm, I wanted to do something service oriented before going to grad school. And just by luck, one of my closest colleagues in the consulting firm was one of the founding directors of Self-Help. He was a college classmate of Self-Help’s co-founders, Martin Eakes and Bonnie Wright. At the time Self-Help was a four-year-old start-up nonprofit and I was staff person number five. The work they were doing was great, the people were great, and I worked with them for a year in the mid-80s.

After one year, I moved to California for grad school, but stayed on Self-Help’s board for much of the next 20 years. I spent 14 years with a small firm doing private investing, knowing that someday I would return to economic justice work. In 2002, I left what I was doing to be “Mr. Mom” to our three children while my wife was still working full time. I got to talking with Martin Eakes, the co-founder and CEO of Self-Help. By this time, Self-Help was a totally different place. It was one of the largest CDFI’s in the country. And the next thing you know, we were talking about what it might look like and why it might help Self-Help better fulfill its mission to have operations in California.

We had always envisioned opening an office on the west coast for policy purposes. And in 2005, when I was having this conversation with Martin, they had just decided to open an office in Oakland. It opened in January of 2006, and in September of 2006 I became the one Self-Help employee in California. I hired a small team to figure out what Self-Help could do in California that would both be good for community development as well as add to Self-Help’s total impact, and we grew from there.

Before we talk more about Self-Help’s expansion into California, can you give some background about the organization? What is Self-Help’s mission, and has it evolved over time?

Our mission is “creating and protecting ownership and economic opportunity for all, especially people of color, women, rural residents, and low-wealth families and communities.”

The words in the mission have only changed twice. The first change was back in the early 2000s, when we formalized our policy work. We added two words: “and protect,” realizing that during that period of time, the predatory financing practices were draining wealth out of low-income communities faster than we or any other community development organization was helping to build it. And so the notion of protecting the wealth that lower-income families have is just as, if not more, important than developing new ways of helping build this wealth.

Then we added the phrase “for all, especially.” This was after we focused our efforts in California on retail credit union activity, which was a bit different from what we did before—more on that later. We were inheriting through merger and starting credit union branches that were designed to serve the communities that are articulated in our mission, but we were also inheriting members who were more middle class. We were very happy to serve people who were not part of our mission target audience, but who were just people who wanted a good, responsible cooperative place to do their financial banking. And that’s when we added the word “all”.

The fundamental mission of the organization has never changed since it was founded in 1980.

Self-Help refers to itself as “family of organizations.” Can you expand more on this, and talk about the evolution of the different organizations?

The Center for Community Self-Help is, in a sense, the umbrella nonprofit under which this whole family of organizations sits. We often talk about it as lines of service that don’t necessarily tie specifically to legal entities. Together, our organizations provide financing, technical support, consumer financial services and advocacy.

For a long time, Self-Help’s activity is what we now often refer to as the more traditional community development work. It was lending to small businesses, lending to community facilities and other nonprofits. We did a small amount of real estate development, but were never particularly big in the development of multi-family housing. We focused on single-family housing as a means for low-income families to begin to build wealth. We were also a very active mortgage lender, creating responsible mortgages for people who couldn’t get the prime mortgages. These individuals were responsible and they had enough income, but you had to work a little harder to figure that out. We refer to that whole set of activities as our traditional or classic community development activities.

The primary entity through which that classic community development activity happens is something that we call the Self-Help Ventures Fund, structured very much like a revolving loan fund. It’s a nonprofit 501(c)(3) that operates like a lot of community development organizations do. The second entity that we have is the Self-Help Credit Union. That was founded in 1984 to support that traditional community economic development activity. We thought it would be very helpful to have a federally insured depository so that we could attract insured deposits, a very low cost of capital, and then use that money to do the lending activities permissible in that regulated environment. Together, those two entities were supporting a lot of the same activities: the mortgage lending, the small business lending, et cetera.

The third major entity that was formed was The Center for Responsible Lending, founded in 2002. We always tried to use what we learned with regards to low-income communities to then influence policy so that the playing field could be leveled in a systematic way. Our fourth entity is the Self-Help Federal Credit Union, chartered in 2008.

Oakland Branch

What was your vision for Self-Help Federal Credit Union? You mentioned earlier you were interested in opening an office in California for policy reasons. Can you talk more about this, and what sets your work in California apart from your other operations?

I have said to many people that the great decision that Martin and I made at the very beginning was to not simply try to replicate in California what we were doing effectively in North Carolina or elsewhere, but to give ourselves the time to really get to know the California landscape.

Even though the Self-Help Credit Union founded in 1984 is a credit union, it really didn’t operate the way most credit unions do with branches that people came into and opened checking accounts and opened savings accounts. We really operated more as what I would call a wholesale credit union. We raised most of our deposits from socially-responsible depositors around the country and then we had lending offices. We weren’t doing a lot of consumer lending. We weren’t making unsecured signature loans, where somebody just wants to borrow $5,000 to do X, Y, or Z. We really weren’t doing that consumer lending at any scale through the Self-Help Credit Union in North Carolina.

A lot of our early policy work was around predatory mortgage lending and trying to eliminate predatory practices in the mortgage lending arena. But increasingly, our research was focused on consumer lending areas, in particular the payday lending industry and the car title lending industry, which we and many others believed were using predatory product structures and predatory pricing so that it was stripping wealth from low-income communities that could least afford it.

And unlike the mortgage arena, where we had a very deep, practical experience from having been a fairly large-scale mortgage lender for 15 years, we had less of that experience on the retail/financial services side. So both because we saw a growing need for more responsible, community-based financial institutions meeting the banking needs of underserved communities, and by doing so we could add to our knowledge base and support our policy work, we decided to make that our focus in California.

And what led to the creation of a new credit union?

There were two key pieces to the decision to build Self-Help Federal. This was now right at the beginning of the Great Recession. Because we were very much a part of the community development credit union world through our credit union in North Carolina, we started to see that community development credit unions, or even just small credit unions serving lower-income communities that didn’t think of themselves as community development credit unions, were going to be under financial stress because of the recession. Faced with higher unemployment rates, more people were defaulting, particularly on their auto loans. Likewise, if a credit union had gotten into the mortgage lending arena, as the housing crisis started to take hold, all it took was a year or two of significantly greater loan losses and these credit unions could become financially unstable.

Unlike the banking world, where if your financial stability is at risk, there is at least an option of going out and raising more capital from investors, credit unions are member-owned cooperatives. There really isn’t a place on the balance sheet to bring outside investors in to raise your capital and satisfy the regulators that you’re safe and sound. And so a credit union really has three options. 1) They can either convince the regulator that they have a way to earn themselves out of the problem, so that their business will generate enough net income to replenish the balance sheet and bring them back to a stable position. 2) They can merge with another credit union that has a stronger balance sheet. 3) The regulators eventually may have to close down the credit union. And we saw that this was going to become a growing problem for the credit unions that were serving the communities that we cared about.

Still from video produced by The Economist

And Self-Help was able to provide that strong balance sheet?

Between our own Self-Help parent capital and some philanthropic capital, we were able to raise money mostly in the form of very long-term loans. We were able to start Self-Help Federal with a strong balance sheet, one that could afford to absorb credit unions whose fundamental practices and business were fine. We said if we can be the landing pad for these credit unions so that they can continue to serve their communities, we can also create a larger, more efficient credit union dedicated to serving these same communities. Then we can not only make sure they don’t get shut down or get merged into a credit union that cares less about low-income communities, but we can actually take one plus one and get three by bringing many of these credit unions together and getting some of the efficiencies of scale.

Over the course of about four years, we absorbed the operations of eight different credit unions and brought them together into Self-Help Federal. So while, in some ways, Self-Help Federal is a very young institution, it has the very long legacy of Self-Help going back to 1980 and it has the legacies of all of these credit unions. These credit unions are a critical part of who we are today, and they have long histories—one operation extending all the way back into the 1800s.

Can you talk more about the development of Self Help Federal’s hybrid branch model?

I mentioned that there were two key pieces to the decision to build Self-Help Federal. One was this merger strategy and the other a new idea. At the time, many banks were pulling out of low-income communities. And at the same time, a lot of what are often known as alternative financial service providers, which are the payday lenders, the check-cashing operations, the pawn shops, were growing dramatically. This created a financial services gap, where you had one set of communities that were being served by these larger and larger banks—I say that generically. It was banks, it was credit unions. Then you had another set of communities that were increasingly not being served by the federally-insured depositories. The latter was being served by these alternative financial service providers. We looked at it all and asked, “What can we do about that?” and decided to create a branch model that was a hybrid between the two.

We recognized that people were using check-cashing operations, as an example, for a very good reason. To ask them to come to a credit union branch, even if our intentions were great, would require that they make some significant changes. They’re walking through a different door with different people, and they also have to change how they do their business—they were cashing checks. Now they’re being asked to open an account; that is a lot of change all at once. We thought, “What if we built a branch that looked like a check casher and provided the same services of a check casher?” We would offer a better check-cashing price, and the client would only have to change one thing: where they were doing business.

Still from video produced by The Economist

Then as they got to know us as an institution and our tellers, or,as we call them, member service representatives, they could talk to them about the benefits of an account. It might not be on their first visit or even their second or their third or their fourth, however, at some point they might decide to open an account and enter the financial mainstream with a path toward growth with access to credit. It might be the tenth visit, but they could make that change on their timetable, not right up front. We formed a branch model that we initially called the microbranch. We then rebranded it CT Prospera. CT stands for Community Trust, which is one of our other brands. And the idea was to build a network of these hybrid branches and see if they could both meet a market need and help people transition into the financial mainstream.

You may be familiar with an organization called CFSI, the Center for Financial Services Innovation. They’re one of the leading resources for information about financial services to underserved communities. They were the ones who initially coined the unbanked and underbanked expression, “unbanked” being people who have no relationship with an insured depository bank or credit union, and “underbanked” being someone who does, but they still get most of their financial services from non-depositories. The number is staggering. I believe the unbanked and underbanked combined is about 40 million households in the United States. And so we hoped, and continue to hope, that a model like our hybrid branch is able to help bring some of these people into the financial mainstream.

At the same time that we were absorbing these merged operations, we were also launching and then managing a small number of the hybrid branches, and continue to do so, trying to prove the economic model. We feel very good that the market likes the idea and we’re not having trouble attracting customers and members. But we haven’t yet built them to a scale wherein they’re financially sustainable; that’s still a work in process.

I’m curious about the merger process. As you mentioned, a lot of the credit unions that Self-Help absorbed have really long histories and deep ties to the community. Can you talk a bit about how the mergers might have affected membership and governance?

Sure. It’s interesting to note that when Self-Help was first formed in 1980, before it created Self-Help Credit Union and before it became a lender, its mission was what it still is, but the strategy was to help in the formation of worker-owned cooperatives. So our cooperative roots go very deep. And that was one of the reasons why, when we decided that we wanted to have an insured depository, we chose to create a credit union and not a bank.

A lot does change with a merger. Most of the credit unions that merged into Self-Help Federal were either single-branch credit unions or a very small number of branches in a close geographic proximity. A lot of very small credit unions have very active membership. The board plays a pretty active role in the management of the credit union. We’ve got 23 branches spread throughout California and in southwest Chicago. Clearly the membership can’t engage at an institutional level, and we as management of the credit union can’t engage with our community of members in the same way. We’re just too big and spread too far and too wide.

But the cooperative structure of a credit union is still exactly the same, and Self-Help Federal is the same as all of the credit unions that merged into us. We’re governed by a Board of Directors. That Board of Directors is elected by our members, and hires a management team that’s entrusted to run the operation for the benefit of the members. But we now have a board that is representing the interests of about 50,000 members, whereas each of our merged credit unions might have been serving and looking out for the interests of 2,000, 4,000, 5,000, members, within a close geographic area.

This means as mergers unfolded, people that were serving on the board before wouldn’t really be able to play the same role. We let the board focus on the critical oversight responsibilities and the fiduciary duty to make sure that management is running things effectively and in the best interests of the members, and that our safety and soundness is strong. We don’t get involved in some of the things that boards of smaller credit unions might.

What we’ve been working hard to do, and to be honest it’s very much a work in process, is to create local involvement at the branch level. In some cases, we have a local advisory board that’s not a governing board. It doesn’t have fiduciary responsibility, but it enables the branch manager to have a group of people in that community who care deeply about the community, providing input, assistance and feedback on how well that particular branch of Self-Help Federal Credit Union is serving its community.

How has Self-Help been able to scale up, and what factors have made that successful?

That’s a hard question to answer. Scaling different things that have different structures are different challenges. Self-Help Federal Credit Union went from zero assets in formation in 2008 to just shy of $600 million in assets today. I believe that has never been done in terms of the growth of a credit union.

What enabled us to do that was a couple of things: First, having been in the credit union industry and having managed a credit union for 20 years, we had a knowledge base and relationships with regulators and with others without which we could never have done what we’ve done. And the second was that, as an institution, we had a track record and relationships with funders and financial strength that brought stability. We were able to attract fairly major philanthropic investment that enabled us to have the capital we needed to grow as fast as we did.

We often talk about the fact that Self-Help Federal, in just five years, scaled to the same size as Self-Help Credit Union scaled to in 25 years. But it’s an apples to oranges comparison because Self-Help Federal was able to leverage all of the knowledge, credibility and relationships that were built up over those 25 years. If there’s a takeaway here, it’s that very often in some kinds of scaling, it may look like it’s a standing start, but often there is a huge foundation that’s been built, enabling that rapid scaling of one particular piece.

That obviously is a very different kind of scaling than the kind they talk about in the technology world, where you build a business or an operation, and once you figure out the formula, it doesn’t take a lot more capital or it doesn’t take a lot more people to grow it dramatically. We are definitely trying to use technology to help grow specific products that we’ve introduced. And in most cases, that’s because the technology allows us to reduce costs. One of the challenges we have around scaling, and this is something that I think anybody working in underserved markets has, is very often the products that are most important to achieving our mission involve small dollars and a lot of people. Therefore, the ability to generate revenue relative to your costs is very challenging. This makes it very difficult to scale just from a pure economics perspective.

What are some policies that you would like to see that could help facilitate the adoption of some of the innovations you’ve developed at Self-Help across the sector as a whole?

If I were to boil that down to one, we believe there is a need to ensure that any and all lending being done is held to a standard of ability to repay. There are many different ways to make money in lending—charging very high fees, having loans that roll over time and time and time again, for example. And this gets to the scaling—If you try to automate lending to bring the cost down, it then makes it harder to really understand somebody’s ability to repay.

When I say ability to repay, I don’t just mean that the loan doesn’t default. Borrowers who are struggling can borrow from one pocket of their money to pay another pocket, but then it just leaves the first pocket that much more empty than it was before. This is called the debt trap of the payday lending industry. Somebody may borrow for 14 days, and they may in fact pay off that loan because they got a paycheck, but they not only paid off a loan, but also a very high fee. They’re then going to run out of money again before the next paycheck comes, so they borrow again. And so that person was able to pay off the loan, but they really weren’t able to repay the obligation in a permanent way.

In the regulatory environment, if all lenders were held to a standard of only making loans where the borrowers had the real ability to repay and satisfy that obligation in a reasonably permanent way, that would be a huge help to taking predatory products out of the system and creating more room for responsible, affordable products.

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