By Ray Birch
TACOMA, Wash.—Should a credit union seek a community development financial institution (CDFI) designation?
There are certainly benefits to be achieved from the designation, and data also point to the higher performance of CDFIs over many non-CDFI peer group CUs, points out CU Strategic Planning, which is offering an outline of what a cooperative should evaluate in its own operations to help it make a decision on CDFI certification.
CU Strategic Planning provides grant-writing services to credit unions, among other solutions.
“With nearly $1 billion in CDFI awards secured for credit unions and having certified over 200 credit unions, our team has identified several key trends for CUs considering this designation, and its annual access to grants,” said CU Strategic Planning President Stacy Augustine.
The “key business indicators” for those shops considering pursuing a CDFI designation, according to Augustine, include:
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LID: “If a credit union is a Low-Income Designated credit union, it is an indicator that its lending is aligned with the CDFI certification,” Augustine said.
Stacy Augustine
- Average Share Per Member: “If a credit union’s average share per member is at or below peers, it’s a good sign members have less in savings and CDs. This indicates a likelihood that the credit union is serving a qualifying CDFI population or market,” Augustine said.
- Higher Loan Yield: “If a credit union’s yield on loans is higher than peer averages, this indicates lending to lower credit tiers, which aligns with CDFI performance of access to capital by working-class people,” Augustine said.
- Loan Loss Reserves: “If a credit union’s loan loss reserves are above peer levels, it indicates that the credit union is taking risk in its portfolio, indicating CDFI aligned lending. This is especially true if its yield on loans is higher, reflecting a business model where the lower credit tier loans produce a yield on loans that outpaces loan losses,” Augustine said.
- Community Partnerships: “Having established community partners is crucial for leveraging CDFI benefits,” Augustine said.
- Inclusive Lending Practices: “If a credit union’s personal and auto lending digs deeper than a 640 credit score, or is character-based, it’s already aligning with CDFI goals,” Augustine said.
Issues to Consider
Once a CU has determined it wants to apply for CDFI certification, Augustine said it should consider the following:
- Warning Signs: “Do not pay for an analysis you can do yourself. CU Strategic Planning warns credit unions not to pay for unnecessary services and does not charge for this guidance, even in a call to review a credit union's financial trends,” she said. “Credit unions know their own financial trends.”
- Consulting vs. Grants: “Don’t spend money on a grant you can’t win. For credit unions with a low loan-to-share ratio, it might be more beneficial to start with community development strategies, or even consulting, to turn lending around,” Augustine said. “CDFIs are among the highest performing credit unions, and the most relevant in their communities. It’s wise to wait on applying for a CDFI grant until the loan-to-share ratio improves.”
- Challenges and Tips: “The CDFI certification landscape is evolving. CU Strategic Planning can provide tips and note pitfalls to avoid in CDFI applications, ensuring credit unions are well-prepared to navigate the process successfully,” Augustine said.
Advice on Best Practices
Augustine also shared advice on best practices from top-performing CDFIs she said deserve emulation for a reason.
“CDFI-certified credit unions fully engaging with the community development business model are the most profitable credit unions in the country,” said Augustine.
She said the company authored a white paper with Filene in 2014 that is currently being updated documenting its analysis, Augustine said.
“They do well because they are relevant. They don't need to fight for market share because the market needs them,” Augustine explained. “As a result, their members demonstrate greater loyalty in products per member and loan repayment, and these are higher-yielding loans.”
About the Trade-Off
Augustine acknowledged that the higher-yielding loans come with some increased risk and a need for greater loan-loss reserves.
“However, the charge-off trend is not proportional to the risk because these members are loyal and pay the credit union first when they run into money problems,” Augustine said. “They know their credit union is the one financial institution that will always help them in the future. Some members even repay loans after charge-offs. That helps makes the CDFI credit union somewhat recession-proof.”