Small CU, Big Plans: MBLsTo Stimulate Economy
PACOIMA, Calif.-A small credit union in this working-class suburb of Los Angeles is doing its best to stimulate the economy with business loans-and at the same time demonstrate that CUSOs are not just for mid-sized or large credit unions.
Golden State Financial Services, LLC is a CUSO formed by $3.2-million Pacoima Development FCU in partnership with the non-profit Valley Economic Development Center. Its purpose is to help other small credit unions offer Small Business Administration loans to their members.
The idea germinated at the 2010 California and Nevada Credit Union League Annual Meeting. Roberto Barragan, president of the Valley Economic Development Center, and Antonio Pizano, manager of Pacoima Development FCU, were in a session that discussed the demise of home loans and HELOCs, and the challenge credit unions faced in generating returns. The panel advised CUs to look into making more student loans and SBA 7(a) loans. Pizano said he and Barragan looked at each other in surprise, as the credit union already was heavily involved in SBA loans.
"From day one 7(a) lending has been a primary focus of this credit union," Pizano said. "We wanted to help consumers get away from payday lenders, and we wanted to impact the local economy, so 7(a) loans were a great option. With the economy the way it is, we need these loans to stimulate the community by getting capital to small businesses that will help create or retain jobs. The focus of our sponsor, the VEDC, is economic impact, so this was perfect."
After the conference ended, Pizano said Pacoima DFCU immediately began looking into ways it could expand SBA lending, and eventually settled on launching a CUSO. He said Golden State Financial Services currently is in the process of negotiating with other credit unions about helping them establish 7(a) loan programs.
According to Barragan, the CUSO is in the midst of negotiating with a local community bank that bought another bank and acquired an SBA loan portfolio.
"The acquiring bank is not an SBA lender and does not want to be, so we are looking to purchase that portfolio as a way of jump-starting the CUSO," he said.
The CUSO will help other credit unions to side-step the time-consuming process of being licensed and certified as SBA lenders. If the credit union already is an SBA lender, then the CUSO would offer basic services, such as underwriting, processing, closing and funding the loan.
"Servicing is the part that scares credit unions away, so we would do the servicing for them," Pizano said. "We make it easy because the CUSO itself would be doing the servicing. Every credit union will get a monthly report of their loans that will include payment history and any covenant violations, such as if a business were to not submit a quarterly earnings report."
Currently, the main task for the CUSO is education, Barragan said. In the next 30 to 45 days credit unions will be invited to visit the facility and learn about the operation. "We want to promote our CUSO and get credit unions motivated to do small business lending. Many credit unions are fearful of the unknown or scared about examiners, so we will do some hand-holding. We can leverage the relationships we have with many sources. If there was an opportunity outside of our area and there is a credit union doing SBA lending in that neighborhood we can help make it happen."
Pacoima DFCU opened its doors six years ago, in May 2005. The VEDC sponsored the creation of the credit union and subsidized some of the operating expenses in the first five years. The City of Los Angeles, Wells Fargo and Citibank all contributed initial capital for the credit union. It has grown to 900 members and $3.2-million in assets.
"Today we are $3.2 million, but by the end of the month we will be $3.7 million," said Pizano. "We are growing. We are designated as a low-income credit union, and sometimes depositors place deposits in our credit union, either for CRA reasons or because we have good rates."
Added Barragan, "When we started the credit union the VEDC had a focus on the north San Fernando Valley. Pacoima was known only as the birthplace of Richie Valens. There was one bank and no ATMs. After some effort, one Wells Fargo branch was added to an existing Citibank branch. Many residents are undocumented. We wanted an alternative to the 20 check cashers and payday lenders."
Pacoima's population is 90,000, of which 80% are Latino, he added. "Very few SBA loans are done here compared to the rest of LA County."
As was the case with many credit unions, PDFCU suffered through red ink during the recession. In 2008 it lost $59,000, narrowing its loss to $32,000 in 2009. In 2010, it rebounded with net income of $50,472 before assessments. It paid $2,526 to the NCUSIF and $2,737 to the corporate stabilization fund, leaving it with net income of $45,209.
In the first quarter of 2011 it had net income of $96,541. Its net worth ratio was 8.57%, making it "Well Capitalized."
Barragan said the VEDC has "always been about making small business loans," but as a non-profit corporation it had limited access to capital. The credit union was a way for it to make small business loans, he said.
The CUSO is "up and running," Pizano reported. "We have hired a staff person and are getting software in place to manage the potential portfolio. We are trying to start on a small scale, with CUs $150 million or below, and personalize it. We have the credit union perspective and we understand SBA lending in our area."