By Ray Birch
NEW YORK—The credit union movement is losing too much of its diversity at a time when the nation is emphasizing a greater need for acceptance of minorities, says one small CU expert.
Pablo DeFilippi, SVP of membership and network engagement at Inclusiv, spoke with CUToday.info about the increasing loss of minority depository institutions (MDIs), an issue over which NCUA also recently shared concerns.
With the pandemic-wrecked economy, DeFilippi fears many MDIs won’t make it to the other side of the health and economic crisis.
“We are losing diversity at a moment when the whole country is craving diversity,” said DeFilippi. “It's like we're going in the opposite direction. This problem is something the movement has to address; otherwise, we're going to be even less connected with the overall direction of the nation. We have to build a foundation that will make the movement resistant to losing MDIs in large numbers.”
NCUA recently reported there are currently 514 credit unions that qualify as MDIs operating in 36 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The institutions are typically small, and the combined assets of those more than 500 institutions is approximately $40 million.
DeFilippi emphasized that just like what occurred during and after the Great Recession—where many MDIs merged out or closed due to their inability to survive the economic downturn—the same thing is likely to happen with the COVID-19 crisis.
Lack of Scale
DeFilippi pointed out MDIs lack scale and sufficiently deep enough pockets to add on the new technology members are demanding—especially as the pandemic drives greater use of remote delivery—to survive the downturn. As many analysts have stated, institutions that were operating on very thin profit margins or were in trouble prior to a downturn are often the ones that fail during rough economic times. Pablo also noted MDIs typically forgo opportunities to make more money as they find ways to serve their low-income members.
At the agency’s June open board meeting, NCUA Chairman Rodney Hood said MDIs, and all credit unions, can play a role in addressing some of the diversity, racial and equality issues that have been in the news across the United States.
What Can Be Done?
What can be done?
DeFilippi said there needs to be greater support from larger credit unions across the country to prop up MDIs and to provide mentorship programs for MDI leaders who are overworked and wearing too many hats; there needs to be a sharing of resources among MDIs and community development financial institutions, and, and finally, the possibility of mergers needs to be explored.
Indeed, during the June meeting, an NCUA board member suggested MDIs consider merging.
“…MDIs are disappearing, institution-by-institution, and that’s the unfortunate reality we face today,” stated Board Member Mark McWatters.
McWatters said one approach to consider would be mergers between financially weaker MDIs and other larger and more financially robust credit unions, although it brings with it a disadvantage.
“This approach may solve one issue: the financial challenges of the MDIs, but it may create another problem—the closing of MDI branches that leave minority communities as financial deserts where residents do not have access to federally insured financial institutions within a reasonable distance,” McWatters said.
Another approach to consider, suggested McWatters, would be having two MDI credit unions, merge, with the surviving MDI credit union continuing to serve the fields of membership of both credit unions without abandoning either minority community to payday lenders and other similar institutions.
Not the Answer
But DeFilippi believes merging with other, larger credit unions is not the answer, because what ties the MDI to the community—the close working relationship and trust developed with low-income members—will be lost. He does believe merging in one or even two MDIs with another, stronger MDI could be an answer, but that has to be approached carefully.
“What makes MDIs effective is their uniqueness,” explained DeFilippi. “And that does not mean their uniqueness in the communities they serve. So I would not say you could just automatically merge together two MDIs that have faith-based fields of membership. A faith-based MDI in New York City may be very different than a faith-based MDI in Cleveland, for example. Instead, if mergers of MDIs happen, they should happen based on the common elements and synergies among the merging organizations.”
Pablo DeFilippi
A strategy that could be more effective than mergers, according to DeFilippi, is the sharing of back-office resources among multiple MDIs, CDFIs, and even other credit unions that want to assist the tiny CUs.
Mentors Needed
Providing mentorship for MDI leaders is needed, as well, said DeFilippi.
“In these small credit unions you often have a manager or CEO wearing 10 different hats at any given time,” he said. “We have got to get more expertise to these institutions, but we have to do it in a non-threatening way. The help can’t be seen as an invitation to a merger. We can’t have a situation where the mentor is providing help but is hoping to someday merge in the institution.”
Ultimately, what DeFilippi is hoping for is more support for the funding for MDIs.
“That’s the reason we just launched the Inclusiv Resilience Fund, which aims to support MDI credit unions under $100 million,” DeFilippi said. “I hope more of the industry steps up and backs this fund.”
The Inclusiv Resilience Fund is supported by The Annie E. Casey Foundation, Capital One Financial Corporation, Citi, JPMorgan Chase, and Prudential Financial.
Don’t Need Lip Service
DeFilippi emphasized that as the country and credit union movement call for action steps—as opposed to lip service—to drive greater diversity, equity and inclusion (DEI) in the nation, preserving MDIs is a step.
“It’s one strong action step,” DeFilippi said. “Everyone is talking about the need for greater DEI, and we are hearing all of these great statements. But we have to go beyond just the words.”