Minority Lenders Offer Crisis Support
CUs say outreach to members before a crisis is vital, as is keeping direct lines of communication open.
When times are good, credit unions’ efforts to help minorities might be focused on finding a way to expand home ownership. Now, many are trying to find ways to keep minorities in their homes and keep their businesses afloat.
Among the credit unions dealing with the pandemic recession is Florida A&M Federal Credit Union (FAMU) of Tallahassee, Fla. ($22.9 million in assets, 3,169 members). It’s a Minority Depository Institution, a designation that requires that minorities account for more than half of a financial institution’s potential members, current members and board members.
The disparate impact of the pandemic recession has extended to FAMU.
Tallahassee is both a college town and state capital. Most FAMU members are educators or retirees who have been buffered from the worst economic effects of the pandemic.
Many other members are part of the gig economy. They might maintain grounds, operate food trucks, take care of children or the elderly, or cater events. Those workers have been hit hard, and the credit union has worked out loan deferrals and payment plans for many of them.
Still, only about $1 million of its $13 million loan portfolio was under a loan deferment plan and only three accounts went into default.
“We’ve been working with our members, keeping in contact with them and letting them know they can call us at any time,” Sheilah Montgomery, FAMU’s president/CEO and a co-founder of the African American Credit Union Coalition, said.
About 90% of the three-month loan deferrals started in May, so most rolled off in August. And most borrowers are back at work.
“It’s a long haul,” she said. “We don’t know what the next six months is going to be like.”
After COVID-19 was declared a pandemic March 11, layoffs and business closings spiked across the nation. Conditions have eased, but the pandemic recession continues and its impact has fallen heaviest on minorities, especially Blacks:
- Financial health: A report released Oct. 13 by the Financial Health Network in Chicago found 15% of Black households were “financially healthy” in August based on a wide range of criteria from ability to pay bills to savings reserves. That percentage was little changed from 2018 or 2019. Meanwhile, 39% of white households were financially healthy in August, up from 34% in 2018 and 2019. Among Hispanic households, 24% were financially healthy, up from 20% in 2019 and 16% in 2018.
- Unemployment: In September, there were 2.4 million Blacks unemployed, 1.2 million more than in February. The Black unemployment rate peaked at 16.8% in May, its highest level since March 2014. By September, it had fallen to 12.1%, which before the pandemic had not been that high since March 2014. The white unemployment rate followed a similar, but muted pattern. It was 7% in September, down from 14.2% peak in April and more than double the 3.1% rate in February.
- Labor force participation: Nearly one million Blacks have dropped out of the labor force since February, including 194,000 in August. The Black labor force participation rate was 59.7% in September, down from a low of 58.6% in April, which was the lowest since it fell to 58.5% in July 1975. The participation rate among whites was 61.6% in September, down from this year’s high of 63.4% in January. This year’s low of 60.3% in April was the lowest since it reached 60.1% in January 1973.
Taylor C. Nelms, senior director of research at Filene Research Institute in Madison, Wis., said one of the worries he and others at Filene have is the devastation to members if there is a wave of evictions.
“There are a lot of problems that can’t be resolved by a loan,” Nelms said. “This is a time when credit unions need to be proactive, reaching out to members before there’s a crisis.”
One example of that took place at CASE Credit Union of Lansing, Mich. ($347.2 million, 45,237 members). The low-income-designated credit union helped to launch a micro-grants program Oct. 15 designed to help female minority business owners. Its partners are the Michigan Credit Union League and Transformation GEMS, a Lansing non-profit and startup accelerator space.
Carmen Thomas, Transformation GEMS’ founder and executive director, pitched the idea earlier this year to Jeffrey S. Benson, president/CEO of CASE.
“When she brought me the idea, I was so excited I jumped all over it,” Benson said.
The Michigan Credit Union Foundation and CASE are each providing $6,000 for the grant pool. The groups’ goal is to award 20 grants by year’s end. There is no minimum amount for a grant, but the maximum is $1,000.
The grants are designed to help minority women who have a viable plan for a new business, but lack the funding to get started. The owners must provide a percentage of cost-sharing, which can be in the form of cash or in-kind, and use the grant funds within one year. The application window is Oct. 15-31, and awards will be determined by the credit union and Transformation GEMS.
“As a credit union we’re very big on diversity,” he said. “In our area, that’s a major feat. I don’t think any other financial institution has that kind of mix.”
From April through June, the credit union granted $31.1 million in loans, a 41.6% increase from 2019’s second quarter. Its loan portfolio stood at $256.3 million on June 30, up 16.8% from a year earlier.
Its growth has included business lending. Real estate-backed commercial loans stood at $57.8 million on June 30, up 91.4%, while other commercial loans fell 33.2% to $2.8 million.
Benson said there are worries about the ability of members to withstand a prolonged recession without further government support, and he is watching the credit union’s portfolios closely.
CASE’s net charge-off rate for the second quarter was 0.10%, down 22 basis points from 2019’s second quarter. Loans delinquent at least 60 days were 0.79% of its total portfolio June 30, up 4 bps.
Benson said there have been no delinquencies among business members, it has had to do few modifications and the majority of its loans carry SBA guarantees.
“Most of our business members have a significant amount of money in their savings and checking accounts,” he said. “They’ve been building up their cash reserves.”
Benson said he is “cautiously optimistic” but is watching the economy closely. “We’re checking in with our business members frequently to see how they’re doing and if they need any help.”
Down in Tallahassee, FAMU has been trying to be more visible about its business lending. It held $797,346 in real estate-backed commercial loans as of June 30, up 79.1% from a year earlier.
As it adds business owners as members, it can also provide them with checking and other services. “And just being with a Minority Depository Institution is something they appreciate.”
FAMU makes sure it communicates with its business borrowers to discuss their needs and become a trusted source of advice.
“The conversation is what sustains a borrower,” she said. “Black businesses have never had the opportunity to have a conversation.”
In one case, a couple approached FAMU for a loan. They both had good jobs and paid their bills on time, but their credit scores were around 500 because they were close to maxing out on their credit cards.
Montgomery took a closer look. The problem wasn’t the amount of their debt, but low borrowing limits. On one they had a $2,300 balance against a $2,500 limit; on another the balance was $450 on a $500 limit.
She worked out a two-step plan. First she arranged to combine the cards with one through a CUSO partner that would provide a higher limit that would reduce their utilization rate to below 50%. Then she asked the couple to come back to apply for the loan in 60 days.
When they returned, their credit scores topped 600, and “it was easy to give them that $50,000 loan.”
But since the pandemic recession, “we’re being more cautious about giving out business loans. We’re doing more counseling and coaching than we probably would have in the past, because we want them to think through the pandemic.”
Most of its small business loans range from about $25,000 and $65,000.
“Small business owners, especially Black entrepreneurs, do not know credit unions do lending for businesses,” she said.
“When they find out, it’s almost like ‘Wow, where have you been? I’ve been looking for you,’” she said. “That brings us a lot of joy.”