- 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.
- 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, CDCU's generally provide services at lower rates than
do for-profit financial institutions.
- How do community development credit union differ from other credit unions?
Both state and federal law authorizes the chartering of community development
credit unions. CDCU's 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 which resides 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: CAP's are administered by community-based organizations and are
funded through community service block grants. Programs include day care,
head start, job placement, and weatherization.
- 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 CDCU's
must raise all of their capital directly from their members.
- 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
CDCU's 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.
- Are the funds deposited in CDCU's insured by the federal government?
Yes. All State and Federal CDCU's 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 $100,000. The insurance also
covers deposits made by non-members (e.g. financial institutions
which have deposited funds in the CDCU to assist in its early years).
- 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.
- How many potential members does a CDCU need before it can commence business?
There is no set number of potential members which are required before
a charter application will be approved. However, our experience indicates
that institutions need at least 350 members to be viable.
- 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 CDCU's 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.
- 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 Dave Weikert of the Division of
Banking. He will see that a package is mailed containing charter application
materials. His telephone number is (609) 292-7272 Ext. 50438 and his mailing
address is Division of Banking, CN-040, Trenton, N.J. 08625-040. To apply for a federal charter, you should contact the National Credit
Union Administration for an application form. The address of that agency
is 1775 Duke Street, Suite 4206, Region II, Alexandria, VA 22314-3437.
- What is the approximate time frame for organizing and starting a state-chartered
credit union?
The entire procress 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 involves filling out the application form which is 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 to, and Review by, NCUA
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.
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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.
- What are the benefits to the community of having a CDCU?
The benefits of having a CDCU can be considerable. First, it provides
a safe place for keeping money. Second, CDCU's generally provide financial
services more cheaply than do other types of depositories, and certainly
more cheaply than check cashers do. Third, CDCU's provide financial services
in center city areas where other types of financial institutions may have
closed branches. Finally, CDCU's 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,
CDCU's can be a valuable financial component of an effort by the community
to help itself.
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