“My mom was a loan officer in a community in San Diego called Barrio Logan, an almost all Mexican-American community,” says Melissa Marquez. She was co-presenting on the history of community development finance at the CommonBound 2016 gathering, in Buffalo, New York.
“It was 1974, she would come home and I remember this very clearly because she would come home and she would cry,” Marquez continued. “The only other time she would cry was if there was a death in the family, so I was thinking, who died? I was 14.”
Marquez remembers her mother explaining that she was sick of working for a major national bank, and they refused to lend to the community in Barrio Logan. People would come in, make their deposits, stay faithful customers to the bank, Marquez remembers her mother saying, but got little to no mortgages or loans.
“That really affected me. That’s why I’m running a credit union,” says Marquez, now CEO of Genesee Co-Op Federal Credit Union, in Rochester, New York. Credit unions, Marquez and her co-presenters explained, started largely as a means of survival for communities that faced systemic racial and other discrimination from regular banks. Focusing intensely on members, consumer loans like home mortgages, home repair loans, car loans or loans to pay medical bills remain the bread and butter of most credit unions.
While there’s still plenty of discrimination to counter in those spheres, credit unions are increasingly feeling the pressure to venture more into small business lending, Genesee included. The credit union recently made its first loan to a worker cooperative, a line of credit to Small World Food Collective, a worker-owned bakery and fermentery in Rochester. More broadly, the city hopes to work closely with Genesee as part of a city-led initiative to incubate a network of worker-cooperatives connected to its anchor institutions.
“Because credit unions are financial cooperatives, it’s really important in our work to collaborate with and support other worker co-ops that are trying to start and formalize,” Marquez says.
Whether they’re worker-owned businesses or conventional small businesses, credit unions everywhere still face some key obstacles to small business lending. First of all, most credit unions are only allowed have 12.25 percent of their loan activity in business lending, per regulations from the National Credit Union Association (NCUA), the federal agency that regulates credit unions nationwide. That said, credit union business lending is up, from $5 billion in 2002 to $46 billion in 2014, according to Blake Myers, who leads business lending initiatives at the National Federation of Community Development Credit Unions (NFCDCU).
The NCUA allows low-income credit unions, defined as those whose members have incomes below a certain threshold, to apply for an exemption from the 12.25 percent business lending cap. Genesee is one of around 2,000 low-income designated credit unions, and has an exemption from the cap. The agency has also made several recent reforms to be more conducive to small business lending for credit unions. Notably, as of May 13 this year, in certain circumstances credit unions are now permitted to make business loans without requiring a personal guarantee from the business owner.
The personal guarantee requirement has long prevented many small business owners from seeking business loans from otherwise business-friendly and community-minded credit unions. Owners didn’t want to risk taking on the personal liability in case things went wrong.
Because of its own policies, Genesee did ask for personal guarantees from three of the principal worker-owners of Small World Food Collective, whose entire worker-ownership still had to vote unanimously to take out the line of credit and prove that everyone was in agreement. “They’re small like us, so it wasn’t hard to get written proof of the unanimous vote,” says Deniz Akman, Genesee’s consumer and business loan officer. “We’ve watched them grow. It’s amazing how much they’ve grown. If they didn’t get this line of credit from us they would have gone somewhere else, and we didn’t want to lose them as a client.”
Still, navigating the risks of small business lending is a new challenge that many credit unions just haven’t had experience doing, and simply hiring that experience can be expensive. “The skill set is probably the most common concern for credit unions. They hire at more of a nonprofit rate than a for-profit rate,” Myers explains.
There’s another option of retaining a credit union service organization (CUSO), which are often retained by multiple credit unions to perform tasks like preparing small business loan applicants. “The credit union still has to make their own decision on each loan opportunity, but the third party can help prepare the paperwork, analyze the company, make a preliminary recommendation and provide that back to the credit union for internal review and approval,” Myers explains.
But CUSOs can still be a cost that many credit unions can’t bear. Plus, according to Myers, some of the more popular CUSOs tend to hold applicants to standards that end up discriminating against the exact business clients that low-income credit unions like Genesee want to work with.
Another way to deal with making riskier loans is by joining the Small Business Administration’s 7(a) loan guarantee program. While it’s a significant paperwork burden, Myers says, the 85 percent government guarantee on each loan helps reduce losses, giving credit unions more protection to do small business lending. Low-income credit unions especially need that kind of protection to be able to make riskier loans out of their members’ savings. Of the roughly one-third of credit unions that do small business lending, Myers estimates, about 16 percent do SBA-guaranteed lending.
To help with the SBA lending paperwork, the NFCDCU has partnered with Community Reinvestment Fund (CRF), a Twin Cities-based CDFI, to encourage members to use Spark, CRF’s online tool for managing small business loan applications. CRF has been a pioneer in SBA 7(a) lending; it was one of the first lenders in the SBA’s Preferred Lending program, meaning the SBA found them so reliable, they no longer needed to pre-approve CRF’s 7(a) loans. While it can be used for any small business lending, Spark is tailored specifically for the SBA’s loan programs, helping to generate all the paperwork necessary to get through the process in a user-friendly, web-based interface. NFCDCU members get a discounted rate to use the platform and have access to technical support from CRF.
Credit unions’ untapped potential to support small businesses in underserved communities is immense. Nationwide, CDFIs have $108 billion in assets. CDFI credit unions have just over half of those assets, but 89 percent of their lending activity is still consumer loans. Another challenge on NFCDCU’s radar, is simple awareness. Later this year, in partnership with the NY State CDFI Coalition, they are launching the NY State CDFI Business Lending Network, which will consist mainly of a simple online map and platform to connect small businesses with CDFIs near them, including credit unions like Genesee, which is also a federally certified CDFI.
“We’re really looking at these tools to help credit unions fill that gap and provide a fair alternative to these online, predatory lenders in many cases, and really help fill the market need,” says Myers.
The Equity Factor is made possible with the support of the Surdna Foundation.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.