3,646 Abibisika (Black Gold) Points

Rank: Unranked Newbie

Lender to Poor Lands in Trouble; High Hopes and Low Revenues Crippled Credit Union

By Jim Yardley
Feb. 28, 1999

With only a handmade sign taped to its storefront window, the Central Brooklyn Federal Credit Union looks more like the delis and discount stores on Fulton Street than a financial institution. It has irregular hours, and when it is open, customers are not allowed to withdraw cash. The cash machine works, but the credit union has not issued any cards.

Convenience, however, is not the reason that Central Brooklyn’s 2,700 members have remained loyal. Founded six years ago by two home-grown Ivy League graduates, Central Brooklyn became nationally recognized as the fastest-growing black-owned urban credit union in the country. Welfare mothers and homeless people opened accounts, as did doctors, lawyers and merchants. Central Brooklyn, in return, provided loans in struggling neighborhoods ignored by most banks.

One of a handful of credit unions chartered in low-income areas in the early 1990’s, including one that opened in South Central Los Angeles after the 1992 riots, Central Brooklyn made for a tidy urban fairy tale of downtrodden people empowering themselves, and its young founders were invited to the White House.

But the fairy tale did not last. Central Brooklyn’s heady beginning gave way to nagging deficits and, finally, a Federal takeover. Now, after a 15-month conservatorship, regulators must decide Central Brooklyn’s fate.
For its members, Central Brooklyn is particularly important because of banks’ history of neglecting the poor. With less than $4 million in deposits, the credit union is a speck compared with even small financial institutions. But for the minority neighborhoods it serves, Central Brooklyn represents a measure of self-determination, and its members have organized petition drives and protest groups to regain ownership.

”People have a great interest in it,” said Monifa Akinwole, a Bedford-Stuyvesant resident who has led one of the petition drives. ”The institution addressed the needs of the community, which the banks hadn’t done.”

You have 5 free articles remaining.
Subscribe to The Times
The rise, fall and uncertain future of Central Brooklyn is a reminder not only of how few financial institutions choose to aggressively serve poor urban neighborhoods, but also of the undeniable difficulties faced by those that do. The credit union’s problems also raise questions about the Federal agency that oversees Central Brooklyn and whether it is willing to, or even should, nurture small institutions that serve low-income areas that other banks largely ignore.

For members of Central Brooklyn, the fundamental issue now is control. By March 23, a newly formed board of credit union members must present a business plan to regulators. At least two other larger credit unions are expected to submit competing merger proposals. Members fear that an outside institution might not heed the credit union’s original mission of community reinvestment.

‘It was a very exciting notion, and still is, the idea that we would have our own funding institution, the idea that we could have our own economic engine in the neighborhood,” said Mark Winston Griffith, 35, the Brown University graduate who helped found the credit union and became its first chairman.
National studies continue to show that black people are denied home and business loans far more often than white people. A 1998 National Bureau of Economic Research study showed that black-owned businesses were 2.4 times more likely to be denied a loan than white-owned companies. A 1998 study by the low-income housing advocacy coalition Acorn found that black applicants for home loans in New York City were rejected 2.3 times more often than white applicants.

In the early 1990’s, Mr. Griffith was working on community revitalization projects for a nonprofit agency. He and a friend, Errol T. Louis, a Harvard graduate, began to organize Central Brooklyn to serve Crown Heights, Brownsville, Bedford-Stuyvesant and other minority neighborhoods. The two men evaluated the 14 banks serving central Brooklyn and found that they spent only 7.5 cents in home loans for every dollar deposited. Then, in November 1991, Federal regulators closed Freedom National Bank, a Harlem-based black-owned savings bank that had a branch in Bedford-Stuyvesant.

”It helped us draw this picture that we were a neighborhood and a people under siege,” Mr. Griffith said. ”We were being stripped of any ability to build wealth and build the economic infrastructure of our neighborhood. What was really appealing about Central Brooklyn Federal Credit Union was that it would be owned by the people who were its shareholders, its customers.”

Credit unions must be formed around a group of people with a commonality, such as geography, employment or membership in some sort of association. In the case of Central Brooklyn, the pool of potential customers was the 750,000 residents of central Brooklyn’s low-income minority neighborhoods.

Federally chartered in January 1993, Central Brooklyn became an instant success. Large banks like Chase, Chemical and Manufacturer’s Hanover pledged ”nonmember” deposits. By 1994, membership had risen to 1,000 people, then passed 5,000 by 1996 as deposits exceeded $5 million. It cost $5 to join, and members were required to keep a minimum balance of only $10. The credit union made loans as large as $10,000, and as small as $150 to a homeless man for a security deposit on an apartment. The symbolic high point came in May 1994, when Central Brooklyn moved into a bank branch in Bedford-Stuyvesant donated by Chemical Bank.

Mr. Griffith and Mr. Louis were featured in national publications and appeared on public television’s ”McNeil/Lehrer News Hour.” They met with Vice President Al Gore at the White House. But hints of trouble emerged in 1995 when Central Brooklyn failed to pay a dividend. Budget deficits began to follow. Regulators began applying pressure.

In hindsight, Mr. Louis, who oversaw daily operations, said Central Brooklyn grew too fast and tried to do too much. A staff of tellers accepted utility payments, sold money orders and subway tokens, cashed checks and offered youth accounts — consumer-friendly but unprofitable services. Expenses spiraled out of control, and a plan to compete with check-cashing shops failed miserably. But most of all, Central Brooklyn’s loan portfolio, the centerpiece of its empowerment mission, lost money as low-income customers fell behind on payments.
In November 1997, after Central Brooklyn’s deficit surpassed $360,000, the three-member board of the National Credit Union Administration placed the credit union under conservatorship. Lesia R. Bullock, an agency spokeswoman, said there were no allegations of criminal wrongdoing. But regulators faulted Central Brooklyn’s management for inadequate bookkeeping and high expenses, for not being careful enough with its loans, and for failing to aggressively collect them. Nonetheless, the conservatorship infuriated the credit union’s board, which had approved a plan to address the problems and to sell its branch building because it had become too expensive to operate.

”The community should have been given the time and space to work out its problems,” said Clifford Rosenthal, executive director of the National Federation of Community Development Credit Unions, an industry association group. ”We thought the credit union and its community board of directors had developed strategies to correct the problem.”

Once in control, regulators drew more criticism. They reduced office hours and prohibited cash withdrawals. (To withdraw money, a member must go to Central Brooklyn, have a teller write a check, then cash it at another financial institution.) Central Brooklyn was billed $3,000 a week to pay for a Boston-based consultant and would pay him more than $80,000. The branch building was hastily sold for $250,000, a price that was less than members hoped for. The transition from the branch building to Central Brooklyn’s current location two blocks away, on Fulton Street between Bedford Avenue and Franklin Avenue, was handled so clumsily that many depositors were not notified and could not find it. The deficit, meanwhile, has risen above $500,000 under conservatorship.

”Frankly, the sinister interpretation is that they are deliberately bleeding the institution and making it more difficult to save,” said Mr. Louis, 36, now a consultant who works with large corporations seeking to do business in the inner city. (One of his clients is The New York Times.) ”A less sinister interpretation, and probably more accurate, is that they are finding it very hard to run a banking institution in the inner city. Surprise, surprise.”

Norman D’Amours, chairman of the National Credit Union Administration, said conservatorship allowed Central Brooklyn to correct ”record-keeping errors,” shrink itself to a more manageable size and, for the first time, register three consecutive profitable months. Mr. D’Amours called the consultant’s fee ”an off-putting number,” but he attributed the increased deficit to existing problems. He acknowledged that two larger credit unions outside the neighborhood would like to merge with Central Brooklyn but said, ”Our primary aim is to return the credit union to its members.” Last week, the agency granted members an extension until March 23 to prepare their business plan.

But the agency is politically divided, and Central Brooklyn’s members are concerned. The agency charters and regulates 7,900 Federal credit unions and insures their deposits, as well as the deposits of 4,200 state-chartered credit unions. Earlier this month, Mr. D’Amours, regarded as a friend to institutions like Central Brooklyn, told a House subcommittee that his agency should encourage the chartering of new small credit unions that serve low-income people.

But the two other board members, Yolanda Townsend Wheat and Dennis Dollar, testified that the agency’s obligation is to protect its insurance fund by promoting the growth of large credit unions that are more stable. Such a 2-to-1 split could mean problems for Central Brooklyn.
”We have very serious concerns that N.C.U.A. has stepped up its campaign of merging these credit unions, particularly the smaller ones,” said Mr. Rosenthal. At least two of the other small credit unions founded during the early 1990’s have been taken over by other credit unions.

Central Brooklyn’s members created a seven-member board earlier this month to carry out the new business plan. Mr. Louis and Mr. Griffith continue to play unofficial roles, but they are not board members, partly because of their tense relationship with regulators. D. Akilah Pannigan, a former I.B.M. employee and the new chairman, said the new board would run the institution very cautiously.

”We envision initially a creep-before-you-walk attitude that says, ‘We’re going to do this slowly, but we’re going to do it right,’ ” Ms. Pannigan said.

For Mr. Griffith, the return of the institution is critical. He vividly remembers the loans that failed, but also loans that helped an elderly woman pay for her husband’s funeral or helped a homeless man get an apartment. He and Mr. Louis say they realize that they made mistakes, if well-intentioned ones.

”We served a lot of people who couldn’t go anywhere else, but there is a price to pay for all those expectations,” Mr. Griffith said. ”The bottom line is you can’t do everything.”

100,528 Abibisika (Black Gold) Points

Badges: UNIA Member – Powered by Abibitumi Abibitumi Mbôngi

Rank: Abibinwanwa Full Member

That will be halfway through our Mbôngi meeting