Why CDFI Loan Funds Are the Best Positioned Organizations to Start a Credit Union

There are more than 500 CDFI-certified loan funds in the United States. Over the past several years, the industry has chartered an average of 2.5 to 3 new credit unions per year. That number has barely moved.

Those two facts point to a gap. Hundreds of mission-driven lenders already serve the communities credit unions are chartered to serve. Almost none of them have taken the next step. If you lead a CDFI loan fund, this article makes the case that your organization may be better positioned to charter a credit union than almost anyone else.

The mission already matches

Loan funds exist to deploy loans into their communities. CDFI-certified loan funds focus on markets that are underserved by traditional financial institutions. Those are the same markets credit unions exist to serve, and often the same markets credit unions pursue through their own CDFI certification.

This is not a theoretical overlap. It is the same population, the same intent, and often the same neighborhoods. The mission does not need to change. Only the structure does.

What a charter adds

A loan fund can lend. It cannot take deposits, offer share accounts, or provide digital banking. A credit union charter closes that gap.

Chartering a credit union lets a loan fund:

• Offer a full suite of products and services. Deposit accounts, share accounts, and digital banking join the lending you already do.
• Access lower-cost capital. Member deposits fund lending at a lower cost than most loan fund capital sources.
• Lend more. With a broader balance sheet and more ways to serve members, the organization can reach more people than the loan fund could alone.

It has already worked

At least two credit unions chartered in the past decade grew out of CDFI loan funds.

A loan fund in Little Rock, Arkansas looked at how well it was deploying capital in its community and asked a simple question: what would it take to serve a broader segment of this population with more products and services? A loan fund in Lancaster, Pennsylvania asked the same question. Both are now full-fledged credit unions. Both kept their community focus. Both now reach more people and lend more than they could before.

You already have most of the pieces

Starting a credit union takes three to four years on average. The process is demanding. But a CDFI loan fund starts with advantages most organizing groups do not have.

You already operate like a financial institution. You have a lending department. You have the systems to take applications and deploy loans. Chartering a credit union is an expansion of what you already do, not a new business built from scratch. The biggest change is regulatory: how you are supervised, not how you operate day to day.

You already have the people. Many loan funds have a board that can carry over in some form and leaders ready to lead a credit union. The partnerships a credit union needs to run well are not far from the partnerships a loan fund already relies on.

You already have capital access. CDFI certification often comes with access to capital for loan loss reserves. That supports the same kind of lending a new credit union would do from day one.

The model works in both directions

Chartering a credit union does not mean shutting down the loan fund. The two organizations work better together.

The credit union sets its own credit parameters. When a member falls outside them, the loan fund provides a direct path to serve that person anyway. Credit unions have used the same model in reverse, setting up loan funds or CUSOs to reach parts of their field of membership they could not serve directly. Each organization does more of what it is already good at, and the community gets more options.

A partner, not a competitor

The credit union movement needs new entrants. CDFI loan funds already serve segments of the population that credit unions and the broader financial industry underserve. They bring an existing mission match, existing infrastructure, and existing community trust. Those are the three hardest things for any new charter to build from scratch.

If your loan fund has ever asked what it would take to do more for the people you serve, chartering a credit union deserves a serious look.

CUCollaborate helps organizations navigate the de novo chartering process from initial feasibility through NCUA approval. Contact us to talk about whether a credit union charter fits your loan fund’s mission.

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