Banking for the 'Unbankable' 

A new credit union's first anniversary begs the question: Which left West Oakland first, the banks or their customers?

The birthday party featured a blues band, cake, balloons, and a bounce castle as several hundred guests mingled in the parking lot. It was an extravagant party for a one-year-old, but then the first anniversary of the only financial institution currently doing business in West Oakland merited some celebration.

Founded after a grassroots organizing campaign supported by many area residents, the People's Community Partnership Federal Credit Union was designed to accommodate the needs of low-income clients. But the fledgling credit union's success -- positive reviews from regulators, coupled with permission to expand the scope of its services -- remains qualified. In a neighborhood with about 22,000 residents, the credit union currently serves just 350 of them. That only a handful of West Oakland residents bank locally is symptomatic of a problem shared by many low-income areas, where the exodus of mainstream lenders has forced residents to bank in other neighborhoods, or not bank at all.

A national study last year by the Fannie Mae Foundation found that one in four low-income households -- or twelve million nationwide -- don't have accounts with a formal banking institution. And a credit union survey of a thousand low-income Oakland residents showed that a staggering fifty percent had no bank account. Instead, such residents manage their finances at pricey pawnshops, check-cashing facilities, or payday loan vendors.

The new credit union is at the heart of an ongoing debate over whether residents of such neighborhoods are merely "unbanked" -- that is, underserved by lenders -- or "unbankable" -- that is, unprofitable for lenders to serve. It's a chicken-and-egg question -- did banks move out of West Oakland because residents didn't use them, or did residents stop banking because there weren't enough facilities?

David Glover, executive director of the Oakland Citizens Committee for Urban Renewal, blames much of the neighborhood's predicament on poor city planning. "The Cypress freeway bifurcated West Oakland and made it less viable as an economic engine, the Post Office and BART projects' construction took away a lot of the commercial and residential viability of 7th Street, and the divestment of businesses and suburban flight left a lot of the business infrastructure in a shambles," he says. Beginning in the 1960s, retail businesses moved out, most noticeably shopping center anchors such as grocery and clothing stores. The two industries feed off each other. "You want them not only for getting loans but for deposits," says James Ballentine, director of community development for the American Bankers Association. "It's what kept the doors of the bank open."

Moving back into West Oakland would mean overcoming decades of inertia, a risk no mainstream retailer or bank has been willing to take so far. "Being first and failing means that somebody gets fired," Glover says.

West Oakland is a dramatic example, but it's hardly unique. According to the credit union's business plan, only two bank offices serve the 55,000 residents of Oakland's San Antonio district, and only two banks serve the 91,000 residents of Central East Oakland and the Elmhurst district. By way of comparison, the highly bankable residents of North Oakland can choose from nine banks, five in Rockridge alone.

The closure of bank branches in poor neighborhoods is also the result of changes within the banking industry itself. Industry watchers say banks aren't opening up new branches in urban areas because it's too costly. Even in affluent neighborhoods, mergers between banks have resulted in the closure of branch offices deemed to be too close to one another. "Banks want to have the highest volume they can running through their branches," says Roy Schweyer, director of housing and community development for Oakland's Community and Economic Development Agency. And if a branch isn't contributing to the bottom line, there's pressure to close it -- although this can be difficult to accomplish without provoking public outcry or running afoul of 1978's Community Reinvestment Act, which requires that banks demonstrate that they are meeting the credit needs of low- and moderate-income consumers.

Consequently, a variety of "alternative" operators have moved into West Oakland's financial services void, attracting underserved customers with their convenient hours and minimal demands for photo identification. These services take on customers that mainstream lenders may deem too risky, and extend modest short-term loans that formal banks won't consider. But customers pay dearly for their services. Check-cashing facilities are allowed to charge as much as twenty percent for personal checks, although on average they charge one to three percent per transaction. State-imposed interest-rate caps for pawnshops can be as high as 25 percent. And unlike banks, thrifts, and credit unions, these institutions provide no financial counseling to their customers and are not required to reinvest locally. "The thing about those check-cashing places is that they don't put anything back in the community," says Ricky Pierre, a member of the credit union's board of directors. "They charge the fees and that money moves elsewhere."

If banks are leery of low-income communities, many residents don't trust banks, either. Kevin Stein, associate director of the California Reinvestment Committee, says many unserved consumers are wary because they were once turned down for a loan or otherwise made to feel unwelcome. Check-cashing stores and subprime lenders, on the other hand, aggressively target clients with less-than-perfect credit. And subprime lenders have flourished in Oakland's low-income communities by launching aggressive phone and flyer publicity campaigns, or sending brokers door-to-door to personally chat with residents about refinancing their mortgages.

This go-to-the-people strategy works -- but sometimes to the borrower's disadvantage. Last year's Fannie Mae Foundation study found that 35 to 50 percent of borrowers who obtained a subprime loan would have qualified for a prime-rate loan elsewhere. Subprime loans have an average interest rate that is 2.5 to 4 percentage points higher than prime rates, often with an additional 1.5 to 3 percentage points in fees tacked on. The Oakland office of the Association of Community Organizations for Reform Now has documented mortgage rates as high as 22.4 percent in the Oakland flatlands.

That people are willing to apply for and pay off such exorbitant loans is proof of their need for banking services, credit union founders say. But mainstream bankers are losing these clients to alternative lenders. The Fannie Mae Foundation estimates that the check-cashing industry has gross revenues of about $60 billion a year, the payday loan industry another $10-$13.8 billion, and pawnshops about $3.3 billion. That's a huge slice of business that banks are ignoring.

Why haven't traditional banks gone into the check-cashing business? Ballentine says that while some banks will cash checks for people who don't hold an account with them, their ultimate goal is to make a long-term investment in the community. The industry, he adds, is attempting to make having an account easier for low-income residents, and to win back customers who previously found banks too intimidating. "I think if you walk into a bank right now, you see a very open environment," Ballentine says.

Of course, none of these businesses help people save or invest their money. How do unbanked people in West Oakland squirrel away funds for a rainy day? "They're putting their money under their mattress," says Asali Edwards, the coordinator for the credit union's outreach program.

People's Credit Union was founded in an effort to provide an alternative to these "alternative" financial services. Members can open an account with as little as $25 and a promise that they live, work, worship, or volunteer in Oakland. Like all credit unions, it pays dividends to members, rather than shareholders, making it easier for credit unions to prosper in an area where banks don't have offices. "A bank is going to be focused on profitability, and that might explain why they might be reluctant to go into a low-income area, because they're going to be looking for a fairly quick return on their investment, whereas a credit union is going to be providing a service for the community," says Mark Lowe, spokesman for the California Credit Union League.

The credit union's founders emphasize its willingness to take on clients who have been turned down at bigger banks. "They don't want to spend an hour talking to somebody who has bad or iffy credit," says Maeve Elise Brown, chair of the credit union's board of directors. "We think it's worth the time and education because people screw up their credit for so many reasons that are so really incredibly understandable."

Although the National Credit Union Association, which insures People's Credit Union, declined to comment specifically on its most recent review, Brown says the credit union received many kudos during its first-anniversary review. She points to another sign of regulator satisfaction: the credit union will soon be allowed to carry cash -- typically the next step in the normal development of a new credit union, whose primary purpose is to encourage savings. Other planned improvements include issuing members personal checks (members are now allowed five teller's checks a month), installing an ATM machine, and boosting membership to eight hundred by the end of the year. And as part of a state pilot program, this August Alameda County will be one of two counties to implement the Electronic Benefits Transfer program, allowing CalWorks and general assistance recipients to have their funds automatically deposited in a bank account. People's Credit Union will participate in the program, allowing recipients to access this money without a surcharge, which will essentially cut out the neighborhood's middleman -- the check-cashers.

In the meantime, the credit union's supporters hope that its successful first year will convince other businesses that they can profit by moving into the area. "Banks and retailers like to see proof that is undeniable, and a credit union helps to build that case," says Glover. For West Oakland, that may mean building the neighborhood's financial stability one savings account at a time.

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