NEW YORK-Community development credit unions may play a larger role in the U.S. economic recovery, now that they will have access to TARP funds.
To boost lending to small business, the U.S. Treasury Department announced last week that it will make money from the Troubled Asset Relief Program (TARP) available to credit unions, banks, and thrifts designated as community development financial institutions (CDFI). The treasury has agreed to provide up to $1 billion in loans, which charge 2% for the first eight years, and then 9% during the final five years of the term. The money is separate from a $30-billion TARP program launched for troubled banks.
Clifford Rosenthal, CEO of the National Federation of Community Development Credit Unions, told the Journal that details are still being ironed out. He believes about 125 credit unions will be able to access the funds that cannot exceed 3.5% of the CU's total assets. "This is secondary capital. To qualify the credit union will not only have to be CDFI certified, but have a low-income designation."
Rosenthal termed the program a "major milestone" in the evolution of CDCUs, pointing out the loan differs from NCUA's 1% community development loan. "NCUA does not make this kind of loan. In essence, they provide a low-cost deposit that does not count as net worth or capital. This will count as net worth and that is what will appeal to credit unions. That, plus the long term, will have a major stabilizing effect on community development credit unions. It will remove some from the red zone."
Rosenthal noted that while the Treasury is targeting business lending with the program, the net effect of the capital investment will be to increase CU lending in many areas.
NCUA will set guidelines for CU participation in the program later this month. NCUA Chairman Debbie Matz applauded the effort, touting it as "bold and innovative."
Hank Hubbard, CEO of the $28-million Communicating Arts Credit Union, a Detroit based CDCU, explained the funding will provide inexpensive and stable lending capital for CDCUs. "It will be cheaper and easier to acquire than trying to drum up deposits in a low-income field of membership," he said.
