So You Want to Start a CU?
The chartering process can take years and requires patience, perseverance, and the ability to jump through hoops.
The movement’s history is rich with stories of credit union pioneers barnstorming the U.S., starting credit unions on a shoestring and storing deposits in a shoebox.
During the credit union movement’s early years, organizers Thomas Doig and Louise McCarren Herring together organized more than 1,500 credit unions. The growth of credit union charters reached its peak in 1954 with 960 new credit unions.
Today, NCUA issues just a few charters each year, and most of those are community development credit unions (CDCUs) located in economically distressed areas. To start a credit union today, you can forget the shoestrings and shoeboxes. Instead, you’ll need patience, perseverance, dedicated people, and a few hundred thousand dollars.
Although NCUA has no minimum capital requirement before granting a charter, “the reality is you need to raise at least $250,000 to $500,000 to carry you through the first few years,” says Cliff Rosenthal, president/CEO of the National Federation of Community Development Credit Unions in New York City. That’s before you even open your doors and begin accepting member deposits.
Besides the need to raise money, anyone hoping to create a credit union will face meticulous scrutiny as regulators assess an applicant’s ability to operate a sound financial institution in today’s complex environment. Possessing a hefty dose of determination is vital, Rosenthal says.
“You have to be beyond persistent,” he says. “You need the focus and drive of a marathon runner. And at the finish line, you’ll drop to the ground exhausted.”
Even so, some actually subject themselves to this test of endurance. Since 2000, 44 out of the 77 credit unions that have been granted charters remain in operation. Because individual credit unions have expanded their fields of membership, “the impetus to start new credit unions is much diminished,” Rosenthal says, “except in truly underserved populations.”
Getting a credit union charter is “a slow birthing process,” says Dave Morton, board chair at $680,000 asset Inspire Community Development Federal Credit Union, Battle Creek, Mich. “It’s like watching a soap opera in which one of the characters is pregnant and then delivers two years later.”
In Inspire’s case, three years lapsed between submitting documentation to NCUA and obtaining a charter. “We had to jump through a lot of hoops,” Morton says. “Sometimes we felt we were told one thing only to find out we had to go in a different direction.”
The length of the process turned out to be an expensive surprise. Morton, a local minister, and other community leaders spent a couple of years laying the groundwork. They brought in Rosenthal to explore the possibilities of a CDCU, and some attended the Federation’s CDCU Institute.
Another early step was to hire an outside consultant, who spent a year assessing community interest and raising start-up funds, totaling roughly $500,000 in grants and deposit commitments from foundations and various organizations. Then the organizers were ready to rent office space and hire a CEO to navigate the chartering process.
Three years passed, and still no charter. And because they were paying rent and a CEO’s salary, “we were eating into our capital,” Morton says. “We didn’t expect it to take so long.”
Their charter finally materialized in March 2010, and the credit union opened for business two months later. “We were the first new credit union in Michigan in 25 years,” Morton reports. Inspire offers basic services such as deposits, money orders, and personal loans of less than $5,000. It plans to offer checking
and vehicle loans within the next couple of years.
To anyone thinking about starting a credit union, Morton advises taking advantage of training from sources such as CUNA and NCUA. Do so, he stresses, even before you have a charter in hand.
“It can be hard to convince board members, even when they’re very supportive, to invest time and money in training before you know whether you’ll get chartered,” Morton says. “But I think getting training up front saved us from making mistakes, and it helped us interpret the issues NCUA brought to us.”
While the chartering process can be frustrating, “we got through it because we had a board of seven people who were committed to getting this off the ground,” Morton says. “We weren’t going to back away from it.”
Next: Orchestrating events
The most difficult part of starting a credit union is putting together all the right pieces, in the right way, at the right time, says Carmen Perez, CEO of $350,000 asset ERDA Federal Credit Union, founded by Bishop Mitchell Taylor, president of the East River Development Alliance (ERDA) in Long Island City, N.Y.
“You need to orchestrate events so all the different elements come together at the right time,” she says. “You need to think about compliance, the business plan, start-up capital, your organizing team, future members, and having the right leadership on your board. You need all those elements not just to make your case to NCUA, but also to be able to run a successful credit union.”
Perez came on board in October 2008, after Taylor and others had spent a couple of years raising funds and scoping out community needs. They hired Perez to educate the community about credit unions and to do the legwork to obtain a charter.
All along, the organizers envisioned the credit union as being fully staffed and open four days a week. “The most important thing for any organizing group is to make sure your funding adequately supports the business plan you put on the table,” Perez says. ERDA submitted a charter application to NCUA in March 2009 and won approval that December. The credit union opened its doors in April 2010.
Throughout the organizing process, Taylor and Perez sought help from various credit union resources. “Working with Neighborhood Trust and Brooklyn Cooperative [both federal credit unions in New York City] was extremely helpful to us,” Perez says. “They’re both successful and growing.” Other key resources included Brian Gately and Pablo DeFilippi from the Federation and Nick Sanimarco from NCUA. “Having all those different perspectives was a major help,” Perez says.
Initially, ERDA Federal offered only regular savings accounts. Within a few months, offerings included certificates of deposit, check cashing, direct deposit, online account access, e-statements, and other basic services. In December, the credit union added personal loans of up to $5,000.
“We didn’t expect to be starting a credit union during a serious recession,” Perez says. “Even so, we were able to open 600 new memberships in our first year.”
Credit union organizers need to know they’ll encounter bumps along the way, Perez points out. “Don’t expect a smooth ride,” she says. “There were times when something we expected didn’t come through from NCUA. When that happens, you can either turn back or become more determined.”
While Inspire and ERDA Federal have been operating for only about a year, Bradley Initiative Credit Union in Cleveland, Tenn., has a longer tenure under its belt. Chartered in 2003, it now has $2.2 million in assets and nearly 1,400 members. It sits in the midst of one of the most impoverished areas in the state. “A flat tire represents a financial emergency for many of our members,” says CEO Denis Collins.
Still, the credit union started to make money by its second year, Collins reports, although it lost money in the past two years due to the nation’s economic woes. “We thought we’d be shielded from that,” he says, “because people here don’t own houses or have permanent jobs. Most of them have temporary jobs and are teetering on the brink.”
But the temporary jobs disappeared, too, and members’ dire financial situations worsened, causing losses for the credit union. “This year we hope to turn it around,” Collins says. The credit union has added one part-time financial literacy director to the two full-timers already on staff, counting Collins. Plans for the immediate future include opening a branch in the local high school, which will serve two purposes: adding new members and providing financial literacy training to youth.
Now in its eighth year, Bradley Initiative offers savings, direct deposit, money orders, prepaid Visa cards, and loans—90% of which are used-vehicle loans. Besides trying to stimulate loan growth, the other key challenge is shouldering the regulatory burden, Collins says.
“The regulatory requirements are the same for us as for any credit union,” he explains. “When you serve low-income members, meeting those requirements is extremely difficult. When NCUA examiners come in, they compare us to traditional credit unions. I understand it’s about safety and soundness, but it puts us in a difficult situation. Good loans are scarce here.”
That’s why nonmember deposits are crucial, Collins notes. Bradley Initiative now has $646,000 in such funds, for which depositors receive no interest. “That has really helped us,” he says. “If you’re a true low-income credit union, you must have those extra funds to keep going because you’ll have loan defaults.”
What odds does he place on the credit union still being in business 10 years from now? “I’d say we have an 80% chance of survival,” Collins says. “If we were someplace else, I wouldn’t give it that much. But community support is the reason this credit union is able to survive. When I talk to groups who want to start a credit union, that’s the first thing I ask them. What commitments do you have in your community, and how strong are those commitments?”
Next: Long process, lasting benefits
Long process, lasting benefits
Starting a credit union from scratch might seem “overwhelming,” says Tawney Brunsch, executive director at Lakota Funds in Kyle, S.D., but “you absolutely can do it. It’s a matter of being devoted to it, having the right people on task, and not giving up.”
Lakota Federal Credit Union submitted its charter application in April 2010 and, a bit more than a year later, is awaiting approval. If approved, it will be located in the heart of the Pine Ridge Indian Reservation, where 40,000 inhabitants are spread out over 3,125 square miles.
Lakota Funds—a key sponsoring organization—is a community development financial institution (CDFI) providing only small-business loans. “In serving those needs,” Brunsch says, “you’re aware of the big need here for consumer financial services. About 80% of the population is unbanked.”
Brunsch came to Lakota Funds in June 2008 as a business loan portfolio manager after eight years as a branch manager and loan officer at Black Hills Federal Credit Union in Rapid City, S.D. Soon she and Lakota Funds’ former executive director started to talk about opening a credit union on the reservation.
“I had never thought about starting a credit union,” Brunsch says. “It sounded impossible, but the first thing I did was order the [organizing] manual from the Federation.”
Other help came from Black Hills Federal Credit Union, which served as a mentor. A grant from the Native American CDFI Assistance program, under the U.S. Department of Treasury’s CDFI Fund, allowed the group to hire the Federation’s Brian Gately as a consultant for one year. “He was a sounding board for us all the way through submitting the business plan and charter application,” Brunsch says.
Organizers have raised nearly $75,000 in start-up capital, and various organizations and individuals have made deposit commitments totaling $650,000 once the credit union has a charter. Brunsch doesn’t know if and when that will be. But once the credit union opens, the plan is to offer savings accounts, direct deposit, ATM cards tied to savings accounts, online access, and other basic services.
“Six months after we open the doors, we’ll dive into consumer lending,” she says. “Most of that will be used-auto loans and other secured loans for horse trailers, four wheelers, and so on, as well as signature loans.”
Besides raising start-up money, creating a credit union is an exercise in patience, Brunsch says. “You can’t be discouraged by how long it takes,” she says. “This credit union will change people’s lives for generations. They’ll be able to build assets, rather than living on a cash basis and being unable to track and plan their spending. This is going to be worth the wait.”
- CUNA, marketing and business development resources
- NCUA’s Office of Small Credit Union Initiatives
- National Federation of CommunityDevelopment Credit Unions
NCUA OFFERS CHARTERING ASSISTANCE
NCUA’s Office of Small Credit Union Initiatives fosters credit union development and the effective delivery of financial services by small credit unions. It’s led by Bill Myers, founder and former CEO of Alternatives Federal Credit Union.
The office administers the Community Development Revolving Loan Program, which supports low-income designated credit unions serving low-income communities.
Credit unions can enroll in the NCUA’s Small Credit Union Program for assistance with strategic management or operational issues. To qualify, NCUA says you must be a:
Contact your examiner if you’re interested or find more information at ncua.gov.