Calif. CU Finds Profitable Niche In Construction Lending

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High Desert Federal Credit Union has taken an unusual path to success: construction lending.

The $145-million, 13,000-member CU, which has three branches in the "high desert" region of Southern California from which it draws its name-rural San Bernardino County east of Los Angeles-has for the past two decades lent money to people who buy a lot and wish to build a custom home of their own.

According to Tom Brown, High Desert FCU's CEO, the credit union developed a stellar reputation with local contractors long before the new home construction frenzy that has consumed California in recent years. Brown said construction loans account for at least 50% of High Desert's loan activity, with 500 to 600 construction loans on the books.

'Lucrative' Lending

High Desert Federal sells the loans into the secondary market at the end of home's construction, he added.

"We have been doing construction lending for 17 years. It fulfills a need, and has been very lucrative," said Brown. "We have a niche, have had it for a number of years, and we do it very well."

In addition to its Apple Valley headquarters, High Desert Federal Credit Union has branches in the fast-growing communities of Victorville and Hesperia. Brown said the credit union thrives on word-of-mouth advertising in the area.

"We are a preferred provider for a lot of contractors," he said. "Custom home building is more prevalent than people think. Members get a better deal than they'd get at a bank, and it is a lot easier for sub-contractors to deal with us. There are about 150 contractors that will only work with us."

The CU has its "system" down to a science, Brown said. High Desert requires general and sub-contractors to sign vouchers when a certain amount of work is done. The credit union pays only after an inspection by an independent, third-party general contractor.

"This is the way we do it, and we prefer it to a draw system," he explained. "It has a lot of built-in protections for the credit union."

Membership in High Desert FCU is open to all who live, work or worship in San Bernardino County. It has had a community charter since 1982. Brown said the CU is discussing expansion into Arizona and/or Nevada.

Taking On Client CUs

In the last year, HDFCU has "expanded" into the San Diego, Los Angeles and Sacramento areas through its construction lending program. Brown said the credit union has been taking on client CUs.

"For our clients, we underwrite and service loans. We pay a $500 referral fee, and the client credit union gets the long-term financing. Another way we do it is participation loans," he continued. "It is a 12-month contract, with interest paid only on the draw."

High Desert FCU began the client credit union program in the wake of the devastating fires that hit Southern California in October 2003. Brown said it was a way to help get people back on their feet.

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