By Ray Birch
NEW YORK–Inclusiv has created a $45-million fund aimed at investing in CUs where capital growth can’t keep up with asset growth so those same CUs can better serve low-income people and communities of color in 17 southern states. The ultimate goal: close the financial services gap between the unbanked and those with financial means.
The fund provides money for community development credit unions to deliver new products and services—such as creative loans for people of modest means—as well as to allow community development credit unions (CDCUs) to grow and continue the good work they’re doing, explained Eben Sheaffer, CFO and chief investment officer at Inclusiv.
Inclusiv’s $45-million Southern Equity Fund will invest capital in credit unions serving low-income members and communities of color in Alabama, Arkansas, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia.
“Usually, the credit unions that we’re lending to are very profitable; it's just that retained earnings are not keeping up with their asset growth, and so they need a capital infusion,” Sheaffer told CUToday.info.
Many of those same credit unions also need secondary capital to enter a new market, whether that be geographic or product based.
“Some want to take a little more risk in some areas of their loan portfolio, and they realize they need to hold a little more capital to support that new business initiative,” Schaeffer said. “It’s critical that these low-income-designated credit unions be able to grow and serve their communities, and without a secondary capital infusion, that might not happen.”
The Need is Great
Shaeffer emphasized the need is very great in the south. He said lack of inclusive financial services is highest in communities of color, with 49% of Hispanics and 45% of African-Americans unbanked or underbanked.
“Southern states have the highest concentrations of persistent poverty and the highest concentrations of predatory financial services, including payday lenders, check-chasers, and pawnshops,” Schaeffer said. “The lack of upward economic mobility in low-income communities of color, combined with the prevalence of predatory lenders in many southern states, underlines the need for equitable financial services in the region and led to the creation of the Southern Equity Fund.”
Eben Sheaffer
The fund will make investments of up to $5 million in secondary capital loans to credit unions described as “high-impact” CDCUs.
“In making the loans, one of the things we look at is not only the credit union’s financial goals, but also the impact they're having on the community—the difference they are making,” explained Cathi Kim, director of Inclusiv Capital.
Kim noted that credit unions receiving secondary capital are outpacing the industry growth averages in lending, assets, shares and memberships.
How One CU Has Benefitted
Among those that have benefitted from secondary capital is the $956-million Park Community Credit Union in Louisville, according to EVP David Shadburne.
“This secondary capital has allowed us to not only continue normal growth, but also to reach deeper and wider to support our mission of providing fair and affordable financial services to all,” said Shadburne. “Examples are several of our loan products. Park has always been active in providing mortgages to first-time home owners. The secondary capital has allowed us to expand that product and modify it to meet some of the challenges in the underserved areas of our communities. Borrowers who may not have had the opportunity to own a home and start building some generational wealth now are being given that opportunity.”
A Micro-Commercial Loan
Shadburne said secondary capital has also allowed the CU to grow its payday lending alternative, and to establish a micro-commercial loan program to help small business owners.
Cathi Kim
“We are very interested in increasing our secondary capital so we can expand these types of programs in the future,” Shadburne said. “We believe that secondary capital should be considered by all credit unions. The credit unions who will be successful in implementing secondary capital are the ones that have an intentional mission of serving the underserved.”
Inclusiv’s Shaeffer said the organization believes the program will help close the equity gap in the south, saying this round of loans will not be the last.
“What we hope to do is once these funds are deployed is to look at the results and then possibly scale it up,” said Shaeffer, who noted the loan ceiling per credit union for this round of loans is $5 million. “Maybe we do this with another bunch of credit unions that are larger in size.”
Pricing on the Loans
The Kresge Foundation, a private, national foundation that seeks to create pathways to opportunity for low-income people in America’s cities, is the single-largest source of funding for the program. Schaeffer said there were a number of other private investors, as well. Inclusive recently announced four new investors: Bank of America, MetLife, National Cooperative Bank and Prudential Financial, Inc.
The interest rates on the loans, which are risk-priced, are generally about 4.5% on average, Kim said.
“The loans are 10-year terms, but we expect a seven-year life, so we price them off the seven-year Treasury. The price is generally 2.25% to 3.25% above the seven-year Treasury,” Kim said.