Chartering a new credit union shouldn't be this hard

I was heartened recently to see past and present members of the National Credit Union Administration board express their concerns surrounding the need to charter new credit unions.

It was especially encouraging to see them link the issue to considerations of diversity, equity and inclusion. For nearly 30 years, I helped organize CDCUs, community development credit unions that serve low-income and minority communities. With my colleague, Linda Levy, former CEO of the Lower East Side People’s Federal Credit Union in New York City, we wrote "Organizing Credit Unions: A Manual." But often, we had to advise community groups against pursuing a credit union — even though credit unions are a compelling answer for communities long disempowered by the mainstream banking system. Why?

First of all, as any credit union manager can tell you, it’s tough to operate a highly regulated business. A credit union’s day-to-day operations are generally far more demanding than a nonprofit’s. Moreover, chartering a credit union is a lengthy, demanding process, typically taking at least two or three years, but often five years or more. You can start a nonprofit far more easily. Then there is the crucial issue of access to capital. As NCUA has noted, obtaining capital is perhaps the greatest challenge for a prospective credit union.

Here, unfortunately, is where nonregulated institutions have a major advantage. I cofounded the CDFI Coalition with the hope that the CDFI Fund would be the solution, providing capital for wealth-deprived low-income and minority credit unions. But for more than 20 years, as I detailed in my book "Democratizing Finance," 80 cents of every CDFI Fund grant dollar went to nondepository loan funds.

But this year promises to be a game changer. The recent COVID-19 federal appropriations provide $12 billion for Minority Depository Institutions and CDFIs — of which $9 billion is specifically for banks and credit unions. Potentially, that could make a huge difference for existing credit unions, but not necessarily for prospective Black credit unions and other minority startups.

The problem is a Catch-22 in CDFI Fund regulations, which effectively prevent the fund from committing an investment to a chartering group before the credit union is legally constituted. If this obstacle is removed — for example, if the CDFI Fund could pledge $1 million to a prospective credit union (subject to a charter being granted) — it would be far easier for a community group to raise additional capital and to galvanize community support. Chartering a credit union within one to two years could become a reality.

Removing the obstacle through a regulatory change would be the quickest way, but it may be necessary to pursue a technical change in the CDFI Fund and/or statutory language from the Treasury Department. This should be followed by the Treasury and the CDFI Fund dedicating a small portion of new and future CDFI funding to startup credit unions and banks serving Blacks and other minority communities.

I don’t pretend that this path is easy. But the potential benefit — a new generation of credit unions that can advance diversity, equity and inclusion — is well worth it.