WASHINGTON-A new federal program could provide low-income credit unions with fresh secondary capital at a critical time.
The U.S. Treasury Department recently unveiled details of its new Community Development Capital Initiative designed to spur lending in low-income areas and credit unions that are certified as CDFIs will get an opportunity to apply for up to 3.5% of assets at a 2% dividend rate for the first eight years. The final five years of the investment would earn a 9% rate.
Though the program's funding will come from TARP, National Federation of Community Development CU's CEO Cliff Rosenthal stressed that the initiative is not a bailout.
'Particularly Important'
"This is the largest targeted initiative that low-income credit unions have had available to them. It's particularly important in the wake of loss of net worth that many credit unions suffered as a result of the corporate meltdown," Rosenthal said. "We've never seen a program like this that enjoyed such active support from NCUA. Some people think TARP funds are a sign of weakness but this program is rather the opposite. Credit unions can only qualify for the problem if they are certified as viable by NCUA and certified as such by Treasury."
Only credit unions that have been certified as CDFIs by the Fund will be eligible for the program; low-income CUs have until April 16 to apply for such certification and until April 2 to apply for capital under the CDCI. Applicants will also be required to submit a secondary capital plan by May 3.
Both Treasury and credit union industry experts will review each application, though CAMEL 1 and 2 institutions would likely move directly to the Treasury investment committee for consideration. A five-person board composed of NCUA officials, which will make recommendations to the Treasury committee, would first review credit unions with weaker CAMEL ratings.
"We're also going to look at performance trends such as business loans, non-performing loans, asset quality and delinquency," Diane Rector of NCUA's Office of Small Credit Union Initiatives explained in a teleconference.
Concerns Over Matching
While Rosenthal is excited about the prospect of low-income CUs benefiting from this program, he remains concerned about the matching secondary capital requirements.
Because the Treasury's investment term is 13 years, the department could compel credit unions to find a matching 13-year investment in the private market before putting up its cash. Rosenthal believes such a requirement is a non-starter as that kind of investment simply isn't available; he's asked Treasury to consider an eight-year matching investment as acceptable, especially since most CUs will likely pay Treasury back before the dividend rate sharply increases.
To get the ball rolling, the Federation will be providing $1 million in matching funds through its Community Development Investment Program.
