“There has been a growing need for basic, safe and responsible financial services in low- and middle-income communities,” Cathie Mahon, president/CEO of the New York-based National Federation of Community Development Credit Unions, said.

Despite higher risks and greater operating costs to serve low-income residents, a CU Times analysis of CDFI credit unions showed they differ little as a group from the average credit union. CDFIs:

• Are well capitalized and highly profitable, just slightly less so than non-CDFI credit unions. Their net worth ratio was 10.31% at the end of 2016, compared with 10.94% for all non-CDFI credit unions. Their return on average assets was 0.74%, compared with 0.77% for all non-CDFI credit unions in 2016.
• Maintain low delinquency rates, but slightly higher ones than other credit unions. Delinquency rates (60 days or more) were 0.84% of total loans at CDFI credit unions in the second quarter, compared with 0.74% among non-CDFI credit unions.
• Lend more on used cars and less on houses than other credit unions. Used cars accounted for 27% of total loans at CDFI credit unions on June 30, compared with 21% among non-CDFI credit unions. First mortgages accounted for 35% of total loans at CDFI credit unions on June 30, compared with 41% among non-CDFI credit unions.
• Hire more employees per member. CDFI credit unions had 374 members per full-time employee in the second quarter, compared with 408 among non-CDFI credit unions.

Natco Credit Union of Richmond, Ind., ($80.9 million in assets, 14,529 members) has 279 members for each of its 52 full-time employees.

After Natco was certified as a CDFI in 2012, it opened the Natco Community Empowerment Center where people can get credit counseling, help applying for jobs and referrals to other agencies for assistance, such as paying heating bills.

Natco serves Wayne and Fayette counties, where about 27% of residents live in poverty. Manufacturers were once a major employer in the area, but most of the big factories have closed.

“A lot of people have been moved from high-paying jobs to service jobs that don't pay nearly as well,” Natco CEO Cynthia Duke said.

Natco's employees go far beyond credit scores. They listen to members' stories and rely on judgment. That means not only that Natco takes on greater risk than a typical credit union, but it also spends more time on each dollar loaned.

“Our expense ratio is through the moon,” Duke said. “When you're serving underserved members, it takes more employees, it takes more resources.”

Nationwide, CDFI credit unions have 196 branches in “Persistent Poverty Counties,” where poverty rates have been above 20% for past 30 years, according to the federation.

Overall, 19% of the residents near CDFI branches live below the poverty level, and the median family income in the areas served by CDFI credit unions is 83% of the median for their regions.

About 40% of credit unions are designated low-income institutions because more than half of their members have incomes below the mark.

The number of credit unions that are low-income designated has increased significantly over the last 20 years even as credit unions have consolidated and the number of credit unions is declining, Mahon said.

One reason is the changing fields of membership, with community charters expanding and single-employer memberships declining.

Another reason is that median incomes have been declining in many credit union communities, and income and wealth disparities have widened.

As factory jobs have dwindled, more people are employed in lower-paying, non-union service jobs. While some families have been able to maintain household income by cobbling together several part- or full-time jobs among breadwinners, their income has become more unstable.

“It's the changing nature of the U.S. economy,” Mahon said. “Credit unions are finding that the communities they're serving are increasingly made up of more and more families that are struggling to make ends meet.”

These households with income instability are often locked out of traditional bank loans, which is one of the reasons for the explosion of high-cost predatory lenders. The growth of CDFIs offers a remedy, building more capacity to meet needs of people “with financially fragile household budgets,” Mahon said.

Credit unions have been seeing low-income people and immigrants coming in the door when an emergency has struck and caused a cash crisis. Many families don't have a cushion of even a few hundred dollars, which means a crisis can be triggered by events that seem mundane.

The emergency might be something as simple as a car breaking down on the way to work. The breadwinner can't afford the repairs and faces losing their job. Or it might be a sick child, which causes a parent to miss work.

These are familiar issues to most credit unions. The learning is occurring as credit unions find ways to both stem the immediate crisis and start building resources to avert the next one.

One thing credit unions can sometimes do is refinance high-cost used car loans. “There's a huge amount of subprime auto lending going on right now,” she said.

Natco's CDFI grant this year is to combat predatory car loans, including those from buy-here pay-here car lots. Many people who borrow at those lots can't get loans elsewhere. The terms are so onerous that buyers are at a high risk of losing their cars because of default and repossession.

A person with a credit score of 500 could get an $8,000 used car loan with a 17.95% interest rate at Natco. The alternative would be 30% interest at a buy-here-pay-here lot — “or you're not going to get it at all.” For a 60-month loan, monthly payments would be $203 at Natco, compared with $259 elsewhere.

“Our hope is to put people in reliable transportation so they can keep their jobs,” Duke said. “We're not giving this away, but they're getting a much better rate than they would anywhere else.”

Like most CDFIs, Natco has remained well-capitalized despite higher risks, more write-offs and higher delinquencies.

Natco's 60-day-plus delinquency rate was 1.17% on June 30, compared with 0.74% for non-CDFI credit unions. Its return on average assets was 0.33% in 2016, compared with 0.74% for CDFI credit unions and 0.77% for non-CDFI credit unions.

But Natco's net worth ratio is well above average. It was 12.14% at the end of 2016, compared with 10.31% for all CDFIs and 10.94% for non-CDFI credit unions.

“We take a lot of risk,” Duke said. “We treat each loan individually based on the member's story — what's going on in their life — and do we think we'll get our money back. They may pay us for a car when they're not going to pay anybody else.”

While CDFIs account for 7% of credit union assets, they account for 93% of grants from all sources, including the Community Development Financial Institution Fund. President Donald Trump recommended eliminating the program and the House in June recommended cutting its budget 23%.

The federation and credit union trade groups want the fund's budget maintained.

But grants — from all sources — account for only a tiny portion of assets. Among the 87 CDFIs receiving grants in the first half, they accounted for just under 0.1% of assets, according to NCUA data. CDFIs received $31.5 million in grants from all sources in the first half of 2017, up from $24 million in last year's first half and $29.1 million in all of 2016.

If the CDFI was canceled, the credit unions would survive, but “it would limit their ability to grow and innovate,” Mahon said.

“It would be a real loss to their ability to innovate and accelerate new growth. The loss at the end of the day is to the people who won't be able to get the great credit union services as quickly or easily as they might otherwise.”