Financing Low Income Communities

6. The Un-Banks: The Community Development Role of Alternative Depository Insitutions

CHAPTER SIX TheUn-Banks:TheCommunityDevelopment RoleofAlternativeDepositoryInstitutions MarvaE.Williams ONE OF the most important functions of financial institutions is to provide services such as checking and savings accounts. These accounts are the most basic financial assets that most households own (Williams and Hudson 1999) and, when held in insured depository institutions, provide a safe place to keep money, create opportunities to build wealth, and often serve as prerequisites for obtaining other forms of credit. Households without such transaction accounts face a number of financial disadvantages. They typically have to use currency exchanges to cash checks. They also have difficulty establishing the credit history necessary to purchase a home or build other wealth. Overall, low-income households without transaction accounts are 43 percent less likely to have positive holdings of net financial assets, 13 percent less likely to own a home, and 8 percent less likely to own a vehicle than those with such accounts (Carney and Gale 2001). In short, the lack of such services can be a major impediment to asset accumulation and financial security. Alternative depository institutions, consisting of low-income and community development credit unions and community development banks, play a major role in the United States in addressing the challenges of the unbanked.1 Their overall objective is to provide low-income individuals and communities with access to financial services as well as to loans for consumers, businesses , and nonprofit organizations that often are neglected by conventional banks. They also enable low-income people to become viable borrowers by 160 FinancingLow-IncomeCommunities providing credit counseling, personal finance management advice, and credit repair programs. Community development banks provide many of the same services, investments , and loans offered by conventional banks. However, their primary mission is the comprehensive development of lower-income, often minority, communities. Creditunionsaretax-exempt,nonprofitfinancialcooperativesthatprovide members with access to affordable savings and checking accounts as well as reasonably priced consumer loans and home mortgages. Membership in a credit union is based on a common bond—referred to as a field of membership . A field of membership may include membership in a church, residence in a community, or employment in a business. The credit union industry has evolved to include two subsets, low-income credit unions and community development credit unions. Low-income credit union (LICU) is a designation made by the National Credit Union Administration (NCUA), which regulates credit unions, for credit unions that can demonstrate that more than 50 percent of their members have incomes at or below 80 percent of the median income of the community. To support their services to lower-income consumers, low-income credit unions are eligible to receive technical assistance and grants from the NCUA and other sources, and deposits and investments from nonmembers. They also benefit from flexible NCUA fields of membership regulations, allowing them to expand into other communities. Community development credit unions (CDCUs), or members of the National Federation of Community Development Credit Unions,2 focus on revitalizing lower-income and minority communities, often in partnership with other community-based organizations (not to be confused with mainstream credit unions with a community field of membership). They play an important role in lower-income communities by providing basic deposit and transaction services and loans, often working in communities that have been abandoned by mainstream financial institutions. In fact, community development credit unions may be the only source of capital in some disadvantaged communities. Many of them focus on youth, offering young people special accounts, leadership training, and opportunities to participate in field trips and conferences. Thereissubstantialoverlapbetweencommunitydevelopmentcreditunions and low-income credit unions; 86 percent of community development credit unionsarealsolow-incomecreditunions,andabout25percentoflow-income credit unions are also community development credit unions. Credit unions and community development banks have advantages over other forms of community development financial institutions (CDFIs).3 Deposits in banks and credit unions are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC), and deposits in credit unions are TheUn-Banks 161 insured up to $100,000 by the NCUA or private insurance funds. This makes it easier for these institutions to attract funding than it is for community development loan and venture capital funds, which cannot offer a guarantee to their investors. Deposits in community development banks and credit unions can be used to make loans, which provide revenues to these institutions. Banks and credit unions also benefit from the ability to substantially leverage their equity capital . Banks, for example, often lend...