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Sponsored 20 conferences and workshops on the Bank for co-ops
and low-income community organizations around the country
that were attended by representatives of over 1300 organiza-
tions.

Pressured the Interagency Task Force to hold public hearings on the Bank's start-up and assisted co-ops and community organizations to develop their comments for those hearings; Published the Co-op Bank Monitor, a newsletter that went to over 14,000 cooperatives, community organizations, and activists, to give them timely and important information about the Bank that was available at that time:

Assisted low-income co-ops in presenting loan applications to the Bank;

Worked, as a member of the Friends of the Co-op Bank, to save the Bank when it was threatened during the 1981 budget battle; Worked actively to encourage broad-based participation by coops in the election of the co-op controlled Bank Board; Developed policy options and recommendations for that Board;

and

Conducted an independent investigation into administrative procedures at the NCCB. We shared this report with both the FCA, the GAO and the staff of this Committee, and they incorporated it into their work.

That

This summarizes the Project's history with the Co-op Bank. experience has lead us to focus on the two specific critical areas we are here today to testify about: (1) how the Bank has failed to develop and support low-income cooperatives, and (2) how the Bank has thwarted co-op participation and member control.

Let me start again with some history--or, in this case, some horror stories--about co-ops who received Title II low-income and development funds from the Co-op Bank.

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In 1980 a group of minority, elderly and low-income people in California organized to start a food co-op when large chain supe markets abandoned their community. They approached the NCCB for finanical and technical assistance. Without any signed agreement, the Bank supplied initial TA to develop a comprehensive loan package. When the co-op applied for additional TA, the Bank required a 50 percent payback, and hired the TA providers, who reported directly to the Bank.

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The co-op wanted TA providers with experience working with food co-ops in minority communities--who would understand, for example, that the timing for ordering perishable food must be tied to the pay schedules of working class and fixed-income customers. The Bank rejected the co-op's recommendations.

The co-op ended up dissatisfied with the TA provided, and
the Bank refused to let them see the TA reports they received
on the co-op. Regardless, the co-op was obligated to pay the
TA loan without any control of the quality of the TA or the
opportunity to evaluate the technical assistant's performance.

A low-income housing developer in Connecticut applied to the
Bank for an acquisition loan on two buildings in a 200-unit
complex. The Bank granted them a $200,000 "predevelopment
loan out of Title II funds, with an understood committment
for a permanent loan. While one Bank department assured them
of permanent financing, another department changed personnel
and policies, which resulted in the Bank, finally, denying
the critical permanent financing--without which the housing
co-op was not feasible.

A community organization in Illinois with 10 years of experience helping to start food buying clubs in low-income, black neighborhoods applied to the Bank to buy a building and start up a cooperative distribution center to service the buying clubs. The co-op had an option to buy the warehouse they had been using for the past two years. The Bank approved a $205,000 capital advance from Title II with the condition that the co-op present an acceptable business plan. The Bank contracted with a consultant to prepare the plan. The Bank subsequently rejected their own consultant's plan, and before another business plan could be done the co-op lost the option on their building.

A successful food co-op in Pennsylvania decided that, rather
than expanding, they would open a second store in a predominantly
black, lower-middle class neighborhood. Through a membership

drive and private loans they raised the downpayment on a
building for the new co-op. The new co-op later received
a loan from the Co-op Bank to refinance their original loan
with better terms, purchase equipment, and provide working
capital. The Bank did not require any technical assistance
although the new co-op and another TA provider wanted and
recommended it. The co-op was not aware that it could apply
to the Bank for TA money.

Only when the co-op tell behind in its payments did the Bank recognize any problems. The Bank assessed the situation and demanded that the new co-op raise $10,400 in four weeks. The Bank did not offer to loan any additional funds or suggest where the co-op could secure loans or grants. The co-op shut

down two months later.

These stories show how the dream of the National Consume r Cooperative Bank has become a nightmare for many low-income co-ops. Of the few the Bank has tried to help, many have, in fact, been hurt. In general, the Bank has not done much for low-income cooperatives-and considering the Bank's track record this may be an ironically lucky break.

This failure contradicts the very reason that Congress created the Bank. The NCCB Act and the legislative history clearly mandate that the National Consumer Cooperative Bank develop and finance low-income cooperatives. According to the NCCB, the Bank's purpose is to "make available necessary financial and technical assistance to cooperative self-help endeavors" as a means of "broadening ownership and control of the economic organizations, increasing the number of market participants, narrowing price spreads, [and] raising the quality of goods and services available to their membership," particularly "the elderly, the poor and the inner-city resident." The requirement that the Bank should aim to invest at least 35 percent of its loan portfolio in low-income cooperatives and the establishment of a separate fund to assist in the development of low-income cooperatives are specific evidence that a principal goal of the Bank was to help low-income cooperatives.

Chairman St Germain has been eloquent and decisive in support of low-income development as a critical function of the Bank. He stated at the time the legislation was introduced before this committee that "there is no doubt [the Bank Act] was proposed by and for the benefit of consumers who do not have leverage and all too often are denied access to credit at reasonable rates." In specific reference to the Self-Help Development Fund (which has now been replaced by the Consumer Cooperative Development Corporation), the Chairman stated that "the technical self-help development fund will be especially important to new and small cooperatives by providing equity capital in newly formed cooperatives to serve low-income people and by providing essential technical assistance for management and financial training. More recently, in a letter to the chairman of the Board of Directors of the National Consumer Cooperative Bank on May 19, 1982, Chairman St Germain described the necessity for special emphasis on low-income cooperatives under Title II of the Act, stating that he felt strongly that "a clearly identified structure for low-income and fledging cooperatives is very important in broadening the participation in NCCB and in attracting new members to the cooperative family, another key intent of the legislation."

* (Upening statement before the Subcommittee on Financial Institutions. Supervision, Regulation and Insurance of the Committee on Banking, Currency and Housing, June 29, 1976).

To date the Bank has failed to meet its legislative promise and the expectations of the low-income co-ops and community organizations. A major reason that the Bank failed to live up to its potential is the way that the Self-Help Development Fund was operated and administered. Regrettably, the Bank has not, since its inception, made the Fund a priority or designed the structure and operations of the Fund to enable it to be an efficient development vehicle for low-income and new cooperatives. The lack of a coherent and comprehensive strategy has made the low-income development goals impossible to achieve.

Congress designed the Bank so that projects would be developed with the Self-Help Development fund money and technical assistance. When these projects became sound and creditworthy, they were to be sold to Title I. In this way, Title was to be the secondary market for developing Title II co-ops.

That was the dream. In reality, the opposite has happened. The Bank has turned to the Fund to bail out its problem loans. For example, in January and February of 1981, the Bank used Title II to buy twelve loans totalling $3.4 million from Title I. The Bank claimed that these loans were shifted because they were "start-ups or would have qualified for Title II." This clearly contradicts the purpose of the Fund.

The Co-op Bank reports that total Title I and Title II loans to low-income co-ops were almost 63 percent of their total portfolio, or $40.7 million as of March, 1981. As of April 30, 1983, the Bank's figures indicate that 59 percent of their loans go to low-income borrowers. The CDAP has found, repeatedly, that comprehensive Bank data is only irregularly provided, even to Bank members, and is usually inadequate. So while the Bank's figures here sound impressive, a closer look look at the loan portfolio shows that the numbers are misleading.

A first major problem here is the Bank's definition of a "lowincome." An ongoing debate has questioned whether the Bank's definition, based on the Bureau of Labor Statistics Tower Family Urban Budget, is appropriate, accurate, or restricted enough to be useful. In any case, the Bank's low-income verification methods are inconsistent and occasionally arbitrary. I will be happy to discuss this problem in more detail later.

The second major problem is that almost all of these so-called low-income loans are in the housing sector. As of March 24, 1981, the Bank had made 96.1 percent of its low-income loans in housing, and that percentage increased to over 97 percent as of April, 1983. This startling concentration might be explained by relatively few existing low-income food and consumer goods co-ops requesting loans from the Bank and by the difficulty associated with packaging and analyzing the loans. However, the Bank has had considerable resources and time in the last two years to improve their initial housing concentration and to assist in the development and training

of low-income cooperatives. From our experience, many non-housing low-income cooperatives exist and would be interested--if the Co-op Bank had marketed their services in an appropriate manner.

Instead,

the Bank has not had or followed any clear-cut low-income development or marketing strategy. For example, community development organizations would have been willing to "spin off" their enterprises as cooperatively owned businesses if the Bank had offered adequate financing terms and technical assistance. The Bank's inaction in the area of low-income cooperative development has caused unnecessary hardship for low-income communities who need a cooperative solution to their problems.

Let's look more specifically at the Bank's Title I loan portfolio to see how the figures hold up. Congress required the Bank to make its "best efforts" to make 35% of the Title I loans to low-income borrowers. Using the Bank's statistics, 58.8% of the Title I loans to borrowers classified as "low-income" as of March, 1981. Over the last two years the Bank claims that Title I low-income loans increased to $54.2 million or 57.2% of the loan portfolio.

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Again, however, the Bank's data do not tell the entire story about its Title I low-income performance. The Bank's definition and verification of low-income loans are certainly open to question. In addition, the Bank's Title I lending mirrors its total loan portfolio, and is concentrated in the housing sector, virtually ignoring other low-income cooperative lending opportunities. From 1981 to 1983 housing loans increased from an incredibly high 98 percent to over 99 percent of low-income loans. In spite of two additional years of experience, the Bank has made no perceptible effort or headway in diversifying and balancing its low-income portfolio by investing in consumer goods or services. Although the Bank showed a net profit of over $10 million in 1981 that could have been used to develop new low-income lending opportunities, the Bank has not been able to assist in the development of solid non-housing loans. This is demonstrated by the fact that, as of last month, there were no low-income food, consumer goods or consumer service loans in the Title I portfolio.

The Bank's own data also show that their low-income lending has slowed over the last few years. During 1982, they made only six low-income Title I loans, and from January 1, 1983 to April 30, 1983, they made only one. of these six low-income loans during 1982-83, all but one was for housing.

Given the Bank's emphasis on the housing sector, one might assume that it had developed the necessary expertise to perform well in this area. Such an assumption would be wrong if we look at the quality of the loan portfolio, since the portfolio largely consists of housing loans. According to the evaluation of the Farm Credit Administration, at least 25 percent of the loans was classified as problem or nonperforming loans. This figure represents an extremely weak performance, since the major commercial banks have an average problem loan percentage of less than 4 percent.

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