Saturday, July 13, 2024

NC banking: Self-Help Federal Credit Union goes national

By Pam Kelley

At the Feb. 8 board meeting of the Center for Community Self-Help in Durham, Chief Executive Officer Martin Eakes described an offer seemingly easy to refuse. The center’s credit union had an opportunity to acquire part of a failed bank — about $200 million in deposits, plus eight branches serving Chicago’s South Side.

With directors gathered around folding tables in the office lobby that doubles as Self-Help’s boardroom, Eakes explained that they’d be assuming the costs of running the offices while not receiving any profit-generating loans. But the acquisition involved a greater good: preserving some of the few remaining bank branches in several low-income neighborhoods. The board unanimously approved the purchase. On May 1, Self-Help Federal Credit Union began operating Chicago’s Seaway Bank & Trust, once the largest black-owned bank in the Midwest.

The deal is the latest example of Self-Help’s strategy of making investments spurned by traditional banks and lending to individuals, many of them people of color, who often get pegged as bad credit risks. Since its 1980 start, Self-Help has built a national reputation for working with low- and moderate-income borrowers, investing in communities and, more recently, leading research and lobbying efforts to fight predatory lending. With the Seaway acquisition, its assets stand at about $2.3 billion, including a venture unit that makes higher-risk business loans. Overall, Self-Help is among the dozen largest U.S. community-development credit unions, institutions that focus on customers of limited means.

Last year, Eakes was listed among 25 “disruptive leaders” working to improve the lives of low-income people in America’s cities. Also cited by Living Cities, a nonprofit created by various foundations and financial institutions, was Mark Zuckerberg. Unlike the Facebook CEO, the 62-year-old Greensboro native is hardly a household name.

“He’s never been one to put himself out front,” says Greensboro writer Howard Covington Jr., whose book on Self-Help’s history will be published by Duke University Press this fall. “People don’t know how important he is.”

The Seaway acquisition is the latest move extending Self-Help’s brand beyond North Carolina. “I tell this joke about myself,” Eakes says, “that when we were in our early planning in North Carolina, I had two rules. One rule was that we would never have a teller, which meant we’re going to be focused on doing the one thing we know how to do, which is to make business loans and home loans to people who need it. The second thing I said is we’re not going to have a staff person outside the state of North Carolina.”

Today, more than half of Self-Help’s 660 employees work in California, Florida, Illinois and Washington, D.C., while a third are customer-service representatives — including tellers — in its 52 branches. Two-thirds of its members are minorities, while a third live in rural areas.

Self-Help is headquartered on West Main Street in downtown Durham in an eight-story building purchased in the mid-1990s. Initially leasing half the building to others, it now occupies the entire space. Eakes meets me in his office, a modest space with metal filing cabinets and fluorescent ceiling lights. His bookshelf holds a selection of works exploring race and poverty, and “The Art of War,” the ancient Chinese military treatise with timeless advice for leaders. For Eakes, doing battle means fighting for good against “forces that want you to keep the status quo.”

The man has a no-frills style. He’s trim, with wire-rimmed glasses and white hair that was once red. On a recent afternoon, he wears all black — shirt, pants and jacket, but no tie — and sandals with socks. When The Wall Street Journal profiled Eakes in 2005, it photographed him with his car, a 1992 Chevrolet Corsica with a cracked windshield. He now drives a Chevrolet Impala, a company car that had 180,000 miles when he inherited it. His pay is $84,000 a year, which is Self-Help’s North Carolina salary cap. Top execs in higher-cost California and Washington, D.C., make about $120,000 a year. Directors of the group’s credit union, venture and real-estate units are unpaid.

Eakes traces his interest in economic justice to his upbringing in Greensboro in a large white house abutting the black Marytown neighborhood. He spent his childhood playing with black friends, most lacking the advantages of his white family. His father, a staunch conservative who owned a heating and air-conditioning business, once chaired the Greensboro Chamber of Commerce. His mother taught him that anyone with the vision to see a problem had a duty to solve it.

He was 25, a Davidson College graduate with a law degree from Yale, when he and his future wife, Bonnie Wright, launched Self-Help. His Volkswagen Beetle served as their first office. The company’s initial capital was $77 that a client raised with a bake sale.

At first, Self-Help focused on helping displaced factory employees in eastern North Carolina become owners of small businesses, including a bakery in New Bern and a sewing business in Windsor. The effort wasn’t very successful, Eakes says, because he hadn’t fully comprehended the financial legacy of slavery and race discrimination: The net wealth of white families is 13 times more than African-Americans, according to Pew Research Center data. Often, a startup loan from Self-Help could not sustain a business that lacked the access to savings, home equity or family wealth held by white-owned businesses.

Eakes came to see home ownership as a remedy, a way to build equity that could launch a business, pay for college or allow a family to co-sign for their own children’s first homes. “Income gives a family the ability to make short-term choices,” he says. “But family wealth gives you the ability to make long-term choices.”

In the mid-1980s, Self-Help dove into the mortgage business, lending $100 million during its first decade. Many of the home loans went to black single mothers who didn’t qualify for conventional mortgages. While some borrowers struggled to make payments, the overall program “had not one penny of loss,” Eakes says.

The organization’s strategy attracted interest from national groups devoted to improving blighted neighborhoods. Eakes’ work won him a $500,000 MacArthur Foundation “genius” grant in 1996. Two years later, backed by a landmark $50 million Ford Foundation grant, Self-Help accelerated its home lending, partnering with banks nationally to start the Community Advantage Program. The banks made loans, then sold them to Self-Help, which in turn sold them to Fannie Mae, the government-based secondary mortgage lender. Self-Help covered the loss if buyers defaulted, while banks reinvested their proceeds into more home loans for lower-income families.

Borrowers often had spotty credit, earned less than the median income and were not able to make down payments of more than 5% of home values. Financially, they looked a lot like the subprime loan recipients who defaulted in droves during the recent mortgage crisis. But Self-Help’s interest rates were only about one-third of 1 percentage point higher than conventional mortgages. Loans were 30-year fixed-rate, not adjustable. Fees were easy for borrowers to understand, there were no prepayment penalties and borrowers received financial counseling. The format has limited loan losses and created a sustainable business.

Through 2016, about 7% of Community Advantage’s 46,000 mortgages resulted in foreclosure, well below the level of losses incurred in the subprime debacle that ravished the U.S. housing market, according to UNC Chapel Hill’s Center for Community Capital. The rate of borrowers missing payments for at least three straight months was closer to that for conventional mortgages than for subprime ones, and borrowers had accumulated a median home equity of more than $47,000. Considering that the loans were made or held through the worst housing crisis since the Great Depression, “these outcomes are remarkable,” the center concluded.

Last year Self-Help made $266 million in home loans, averaging about $145,000 per home. Its lending included partnerships with Bank of America, Wells Fargo and other institutions.

Eakes’ initial vision didn’t include a consumer advocacy arm. He started the Center for Responsible Lending in 2002 after successfully lobbying the N.C. legislature to pass the nation’s most stringent anti-predatory lending law a year earlier. The law, which bans companies from packing loans with hidden fees, shrunk the payday lending industry in North Carolina and became a model for other states. The center also raised Eakes’ national profile, cementing his reputation as a nemesis of payday lenders and a tough-talking consumer advocate with sufficient finances to further his goals. Eakes’ views on the dangers of subprime loans proved prophetic. In a 1999 meeting with Freddie Mac officials, Eakes’ “voice rose and fell like he was preaching on damnation” as he intoned against the loans, listing features — aggressive marketing, prepayment penalties, credit life insurance — that made them dangerous, according to Susan Wharton Gates’ new book, Days of Slaughter: Inside the Fall of Freddie Mac and Why It Could Happen Again. The former Freddie Mac vice president recalled Eakes saying, “If you buy these loans as they are now, you give those damn predatory lenders the seal of approval. And then there will be no telling where it will all end.”

When someone in the group suggested Eakes was being judgmental, Gates recalls his reply: “I’m not judgmental. I am right!”

Eakes keeps a Harry Truman quote on his desk: “I never give ’em hell. I just tell the truth and they think it’s hell.” He once accused Citigroup of exaggerating the extent of its minority lending, and he told Fannie Mae’s chief executive that he paid his senior staff too much. “I’d like to think I was a little more diplomatic than what Susan Gates describes,” Eakes says, “but I probably wasn’t.”

Self-Help Credit Union’s expansion outside North Carolina began in 2008 and was aided by a $30 million Ford Foundation investment that allowed Self-Help to gain control of seven struggling credit unions in low-income California communities. The unified credit union now has 19 branches and has reported a combined profit of more than $29 million over the last three years.

When Chicago’s Seaway Bank & Trust failed in January, the institution was a shadow of its former self. The bank opened in 1965 to counter discriminatory lending practices on the city’s South Side, a once-thriving area hit by the loss of thousands of manufacturing jobs over the last two decades. Like many peers, Seaway had struggled since the 2007-09 recession, losing a combined $40 million over the last three years, federal filings show.

When the FDIC stepped in and sought a new owner, credit unions couldn’t bid. But once the State Bank of Texas bought Seaway, Self-Help was allowed to acquire its deposits and branches. The Texas bank specializes in hotel financing and wanted Seaway’s loan portfolio, not its Chicago retail branches. The purchase price for Seaway’s deposits was about $4 million, public records show, while Self-Help also will pay the FDIC at least $8 million for the branches and equipment, Eakes says. It supplements Self-Help’s existing Chicago business developed through the 2012 acquisition of Second Federal Savings & Loan, which serves mostly Mexican immigrants. Chicago leaders have lauded that rescue for preventing hundreds of mortgage foreclosures. When the bank reopened as a credit union, mariachis paraded through the southwest-side neighborhood to celebrate.

Self-Help’s Seaway buy also has sparked local enthusiasm. “With a focus back on underserved neighborhoods, Seaway’s fortunes could match those of its glory days,” the black-owned Chicago Crusader newspaper wrote. The branches will retain the Seaway name.

If Self-Help had not stepped up, “I believe a number of branches would have been closed or minimized,” says Norman Bobins, a Chicago bank executive who encouraged Eakes to acquire Seaway. Self-Help will turn a profit as Seaway builds a loan portfolio, he says. Eakes “believes in the profit motive,” but he’s not driven by short-term profits. “He sees the big picture.”

At 62, Eakes, partly joking, says he plans to retire “sometime within the next 20 years.” His friend Jim Blaine, retired CEO of North Carolina’s State Employees’ Credit Union, doubts it. “Somebody like Martin Eakes never retires,” Blaine says. “He’s going to die at his desk, I can promise you.”

Eakes’ to-do list remains long. He anticipates a battle if President Donald Trump’s administration follows through on proposals to weaken the Consumer Financial Protection Bureau. The Center for Responsible Lending advised Congress and the Obama administration when the federal agency was created in 2011. “To have a neutral forum that is evidence-based, that puts protections in place for ordinary working people in America is a good thing, hands down,” Eakes says. If the administration goes after it, “we will need to fight that at every turn, every corner.”

In the longer term, he views Self-Help as a laboratory that tests and tailors financial products for different populations. “Yes, it’s different in the Central Valley of California with a predominantly immigrant population than it is in eastern North Carolina with a predominantly displaced manufacturing workforce. So we’re trying to learn what will work.”

The goal isn’t to become “the McDonald’s of community-development branches,” Eakes says, but he foresees out-of-state growth that will include offices in several more Florida cities. “We will continue, I’m sure, expanding gradually in areas where we are. I don’t have plans to go to New York or Texas anytime soon, but it wouldn’t shock me 20 years from now if we were in a few other states.”

Today, Self-Help bears no resemblance to the shoestring operation Eakes once ran from the back of his VW. But its mission hasn’t changed. If a policy benefits Americans who are in the bottom half economically, he says, “I hope we’ll be a voice in there fighting for it.”

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