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Home > Banking Division > Office of Depositories > Organizing a Community Development Credit Union
Organizing a Community Development Credit Union
Based on our past experience, the Division of Banking believes that community development credit unions ("CDCUs") can be of great benefit to certain communities.

Below is some basic information about credit unions in general and also about CDCUs. There is also guidance on how to organize a CDCU.
  If you have additional questions about establishing a CDCU, please contact the Department at (609) 292-7272.
1. What is a credit union? Answer
2. How do credit unions differ from other chartered financial institutions? Answer
3. How do community development credit unions differ from other credit unions? Answer
4. What is the effect of a CDCU designation? Answer
5. Why would a depository institution help a CDCU to form? Answer
6. Are the funds deposited in CDCUs insured by the federal government? Answer
7. How much capital does a new CDCU need before it can commence business? Answer
8. How many potential members does a CDCU need before it can commence business? Answer
9. What other things does a CDCU need to begin business? Answer
10. Whom should interested parties contact to start the application process? Answer
11. What is the approximate time frame for organizing and starting a state-chartered credit union? Answer
12. What should one expect from the first years of experience? Answer
13. What are the benefits to the community of having a CDCU? Answer
 
1. What is a credit union?
Credit unions are chartered financial institutions which are authorized to accept deposits, cash checks, make loans, issue credit cards and provide many other financial services to their members. They can provide all of the basic financial services which can be provided by banks, savings banks, and savings and loan associations. In New Jersey, both the federal and state governments charter these institutions.
 
2. How do credit unions differ from other chartered financial institutions?
Credit unions serve defined fields of membership, for example, the employees of a particular business. There are also community-based credit unions which serve geographic areas and do not have CDCU designation. Credit unions cannot serve those outside their fields of membership. Reflecting this emphasis, credit unions set up their accounts for "members" rather than "customers". Once the institution is established, it can apply to its appropriate chartering authority to expand or to add fields of membership. Because they are cooperative, non-profit organizations run for the benefit of their members, credit unions are exempt from taxation. In part because of this exemption, CDCUs generally provide services at lower rates than do for-profit financial institutions.
 
3. How do community development credit unions differ from other credit unions?
 

Both state and federal law authorizes the chartering of community development credit unions. CDCUs are a special type of credit union intended to serve specific communities. In order to attain CDCU designation, those organizing the CDCU must define a field of membership in which over half of its members (or prospective members) fall into at least one of the following four categories: A member of a household which has an income less than 80% of the median household income for the nation;

  • A member of a household residing in a public housing project and has qualified for such residency on the basis of income;
  • A recipient in a community action program* ("CAP"); or
  • A full-time or part-time student in a high school, vocational school, college or university.

*Note: CAPs are administered by community-based organizations and are funded through community service block grants. Programs include day care, head start, job placement, and weatherization.

 
4. What is the effect of a CDCU designation?
  Being designated as a CDCU allows the institution to accept non-member deposits from institutions such as banks, insurance companies and utilities. Such deposits are especially beneficial during the early years of the institution while it is building up its deposit base. Credit unions which are not CDCUs must raise all of their capital directly from their members.
 
5. Why would a depository institution help a CDCU to form?
  The federal Community Reinvestment Act requires all FDIC-insured institutions (banks, savings banks, and savings and loan associations) to engage in lending, service and investment activities within the area where it has its offices (and therefore collects deposits). Such institutions will get CRA credit for assisting a CDCU, while assistance may take the form of pledging deposits for a period of time, making grants (commonly to cover the CDCU's operating expenses), donating equipment (for example, furniture or older models of computers), or donating the services of personnel to provide guidance to the CDCU.

Although there is some difference of opinion, most analysts agree that CDCUs do not compete with other types of financial institutions because of the different lines of business which the respective institutions engage in. CDCU's generally provide basic financial services and make small loans while large banks, for example, make large commercial loans and mortgage loans.
 
6. Are the funds deposited in CDCUs insured by the federal government?
  Yes. All State and Federal CDCUs in New Jersey are required to secure federal deposit insurance from the National Credit Union Administration (NCUA) prior to commencing business. (The NCUA performs the same function for credit unions that the FDIC performs for the other types of depositories.) The deposits of each member are insured up to $250,000. The insurance also covers deposits made by non-members (e.g., financial institutions that have deposited funds in the CDCU to assist in its early years).
 
7. How much capital does a new CDCU need before it can commence business?
  Unlike other types of depositories, there is no minimum level of capitalization which is required to start a credit union or a CDCU. Nevertheless, our experience indicates that credit unions need at least $150,000 in deposits in order to be viable. This expected level of deposits has to be pledged in writing by prospective depositors, and the pledges must be submitted as a part of the application. The size of the capital requirement is why securing non-member deposits can be very important in the early years.
 
8. How many potential members does a CDCU need before it can commence business?
  The law requires a minimum of 30 members at incorporation.  Beyond that floor of 30, there is no set number of potential additional members that are required before a charter application will be approved. However, our experience indicates that institutions need at least 350 members to be viable.
 
9. What other things does a CDCU need to begin business?
 
  • Widespread support for a credit union in the defined community.
  • A dedicated core of volunteer organizers who are willing to commit the time necessary to organize the CDCU.
  • A suitable location for conducting the business of the credit union. Many starting CDCUs use a designated room in a church or community development corporation facility. The room does not have to be large. Adequate provisions must be made for the safekeeping of funds.
  • Basic equipment, among the most important of which is a computer which can keep the financial records of the institution.
 
10. Whom should interested parties contact to start the application process?
  In order to begin the application process for chartering a State-chartered CDCU, interested parties should contact the Division of Banking for charter application materials. Contact (609) 292-7272, ext. 50108, or the Department of Banking and Insurance, Division of Banking, Office of Consumer Finance, PO Box 040, Trenton, N.J. 08625-0040; Attention:  Credit Union Applications. To apply for a federal charter, you may contact the National Credit Union Administration for an application form. The address is National Credit Union Administration, Region 2 – Capital, 1900 Duke Street, Suite 300, Alexandria, VA 22314.
 
11. What is the approximate time frame for organizing and starting a state-chartered credit union?
  The entire process of chartering a CDCU takes about 18 months. Note that this is only an approximate time. The time required in specific cases may vary considerably.

Completing the Application
This process involves filling out the application form available from the Division. This portion takes about 2 months.

Development of the Business Plan and Pro Forma Projections
This is the most time consuming part of the application process. The organizers are expected to meet on a regular basis and develop a thorough business plan for the CDCU which accurately and realistically projects the expenses and revenues of the institution during the first three years of operation. The plan will be scrutinized carefully by both State and federal regulators and weighs heavily in the decision of whether to approve the charter application. The Division can provide examples of previous plans to use as models. The organizers must define the field of membership and provide evidence that at least half of the members or potential members from that field are in one of the four categories set forth in number 3 above. Sometimes this can be done on the basis of census tract data, but in other cases, a survey of the prospective members is required. The organizers must secure written pledges of deposits from their potential members and from non-members in an aggregate amount that will give the institution reasonable prospect for success. The organizers must document that they have made adequate arrangements to cover their operating expenses. The organizers must document that they have made adequate arrangements for space and equipment. The organizers must identify a management structure which is competent to run the CDCU. Usually, the development of the business plan requires regular communication between the organizers and the Department. The Department is available to provide assistance and guidance through this process. This portion takes about 12 months.

Approval by the Department of Banking and Insurance
Once the application has been completed and submitted to the Department, it is reviewed internally and, if satisfactory, the chartering order is signed by the Commissioner. At this point, the organizers will call a meeting at which the Board of the CDCU will be elected and will replace the organizers in carrying the process forward. This portion takes 1 1/2 months.

Submission for NCUA Review
The approved application is sent to NCUA for review for purposes of federal deposit insurance. Once that agency has determined that the application meets its standards for insurance, it issues a certificate of insurance. This portion takes about 1 1/2 months.

Preparation for Commencing Operations
The Board must prepare the location for commencing operation. For example, it must secure furniture and all the equipment which has been pledged, such as the computer. The Board must secure a fidelity bond which protects the institution against wrongdoing by the employees of the CDCU. The Board must secure a checking account with another depository in the name of the CDCU. This portion takes about 1 month.

Examination by the Department and Issuance of the Certificate to Commence Operations
When the Board is prepared to commence operation, it notifies the Department and we will send an examiner to confirm that everything is in order. If it is, within a day or so, a certificate to commence operations will be signed by the Commissioner and the institution may begin business. This portion takes about 2 days.

First Order of Business
As its first order of business, the CDCU should secure the pledged deposits from those who have pledged to support the institution.
 
12. What should one expect from the first years of experience?
  The first years of operations are the hardest. Particularly important is building up the deposit base to the point where it can cover the operating expenses of the institution. Initially, the CDCU may not be in a position to make any loans at all. Then it will begin to make smaller loans. Only after it has achieved substantial size can the institution consider making larger loans such as mortgages.
 
13. What are the benefits to the community of having a CDCU?
  The benefits of a CDCU can be considerable. First, it provides a safe place for keeping money. Second, CDCUs often provide financial services more cheaply than other types of depositories, and check cashers. Third, CDCUs provide financial services in center city areas where other types of financial institutions may have closed branches. Finally, CDCUs keep the money of an area within that area because the institution can only make loans to their members, and members must live, work, or go to school in the area served by the CDCU. Therefore, CDCUs can be a valuable financial component of an effort by the community to help itself.
 
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