91.1 F
San Fernando
Thursday, Mar 28, 2024

Low-Capital Lender

For more than a decade, Pacoima Federal Development Credit Union has done what few other financial institutions were willing to do: Bank the financially underserved residents of Pacoima, a 73,000-strong community with a poverty rate of 23 percent. The credit union serves as a vital alternative to payday lenders that prey on the region’s working class, enabling locals to open checking accounts, save for milestone purchases and cash paychecks without paying onerous cashiers’ fees. But last month the institution almost self-destructed. A series of management misfires coupled with an already tight budget led to its net worth falling below the threshold required by the National Credit Union Administration for continued operations, resulting in a near-collapse. “The devastation would be huge,” said Gloria Lazalde, a Pacoima resident who has worked with day-labor centers in the community, in reference to the prospect of the credit union closing. “Before the credit union opened, people here were spending as much as $600 a year on check cashing.” Lazalde and other community members say they would stage a protest if the institution were ever to close. But a lifesaving partnership with the Valley Economic Alliance and fresh perspectives on its past mistakes have given the credit union a chance to serve the east San Fernando Valley well into the future. “I want to see this credit union grow to what I think it can be,” said Chairman Roberto Barragan, former chief executive of the Valley Economic Development Center. “It can grow to be a multi-million dollar institution providing services to residents and small businesses in Pacoima. The capital is needed here more than ever.” Turnaround story The Pacoima credit union is certified as a community development financial institution, meaning that more than half of its consumer base falls into low- or moderate-income Census tracts. It has around 2,000 members and holds assets of just over $4 million – much less than the second-quarter 2017 industry average of $237 million, as reported by the National Credit Union Administration. “For socioeconomic reasons, this is has been a historically neglected area,” Lisa Winkle, a credit union member and independent marketing consultant, explained. For instance, Pacoima was without an ATM until 1998, and had only one bank until Wells Fargo & Co. opened a branch there in 2003. Meanwhile, there was no shortage of check cashers and payday lenders to fill the void, Barragan recalled. Then chief executive at the Valley Economic Development Center, he reached out to many established credit unions to request that they open a branch in Pacoima. “All of them said no,” Barragan recalled. “It wasn’t a market they wanted to be in.” Undeterred, he and his team at the VEDC solicited grants from Wells Fargo, Citigroup Inc. subsidiary Citibank and the city of Los Angeles to open a credit union in Pacoima. Despite having raised $500,000 in seed capital and the required $2 million in deposit commitments, the institution was denied a charter by the National Credit Union Administration three times. It was not until Congressman Brad Sherman voiced his support that the agency obliged. “This isn’t even his district, but Congressman Sherman supported us because he believes in credit unions,” Barragan said. With a stamp of approval from the federal government, the institution opened its doors in 2005, offering car loans, consumer loans and savings accounts. The credit union remained affiliated with the VEDC for 10 years, during which it enjoyed a below-market lease rate on its building and annual grants of up to $50,000. The organizations separated in 2013, though the development center gave two additional loans of $75,000 apiece to the credit union in 2012 and 2015. “Besides being paperwork, it wasn’t a huge issue,” Barragan said. “At the time, though, it did begin to create some financial strain.” The VEDC did not return a request for comment by press time. During an audit of the credit union in 2016, regulators found that a high-level manager had made conflict-of-interest loans to family members that cost the institution around $28,000, according to Barragan. That, in combination with poor operational decisions and unwise spending, put the credit union in deep financial trouble by the time Barragan rejoined its board in December that year. “At that point the examiners said you have these problems with the manager over here, your reserves are inadequate over there,” Barragan said. “We’re going to have to push $100,000 of your cash into reserves in order to support your business loans.” The move dropped the credit union’s capital ratio from above 6 percent – considered well-capitalized – to below 3 percent, or undercapitalized. Even as new management worked to clean up the mess, the National Credit Union Administration pushed the credit union to find a merger partner. While about half the prospects Barragan contacted were interested in merging, none of them would agree to allow the Pacoima location to remain. “That was the whole point,” Barragan said. “That was the only requirement the board had for a merger candidate was that you have to commit to staying in this location.” Fortunately, the three board members of the Valley Economic Alliance shared Barragan’s view on the community’s need for the credit union. The organization agreed to take over as its new sponsor, starting with a $50,000 grant. “Thankfully for the alliance they stepped up, because if they didn’t, we might not be here today,” Barragan said. The partnership makes sense for the alliance because the credit union is valuable to the Pacoima community, organization Chief Executive Kenn Phillips explained. “We’re generally concerned about resources and infrastructure that affect people who live here,” he said. “Without the federal credit union, you lose a great resource for the people who live in the region and specifically the east San Fernando Valley.” Looking ahead Between the money from the alliance and funds collected on a major loan, the credit union now exceeds the National Credit Union Administration’s capitalization requirements, Barragan said. He hopes to bring its net worth up by another 2 percent by early next year. “The goal is to get back to 6 percent – then we’ll be well-capitalized again,” he said. He is reaching out to banks again for support – a mutually beneficial arrangement, as they can earn Community Reinvestment Act credits by making deposits at the credit union, he explained. “The banks have an affinity to understand what we do here,” Barragan said. “And our credit union is a great place for a bank to meet its CRA obligations – that’s why they’ll put grant money into us.” The credit union will work with the alliance to expand its business micro-loan program through joint marketing efforts, Barragan said. Business loans backed by the Small Business Administration are already the credit union’s most popular product; the resources afforded through its partnership with the alliance will allow it to tap into new markets of entrepreneurs. Micro-loans – defined as loans under $50,000 – are particularly important to small businesses because they enable them to make minor purchases without taking on extensive debt, Phillips explained. “In the micro-lending space, specifically here (in the San Fernando Valley), very few people are lending at a reasonable rate,” he said. “Micro-loans allow many of our clients to get financing for inventory and marketing their business.” Pacoima residents feel fortunate that the institution will be around to serve not only their financial needs, but those of the next generation. “The personal growth for my family has been awesome,” said Lazalde, whose three young adult children are also credit union members. “And working with and knowing the community, the savings it has brought have been amazing.”

Featured Articles

Related Articles