New credit union set.

Back when he was working out of the Valley Economic Development Center's offices in Pacoima, Roberto Barragan, now VEDC president, realized that there were 15 check cashing stores in Pacoima and only one bank.

It's taken more than six years, but Barragan and the VEDC are finally headed toward evening out those odds.

Today the agency announced it has received a federal charter to open a credit union in Pacoima, the first of its kind in the San Fernando Valley and one of only four operating in Los Angeles.

"Our purpose is to make loans that will revitalize the area," said Barragan.

Community development credit unions are specifically targeted to low-income areas for the purpose of providing financing and services to assist with economic development. Unlike banks, they offer checking and savings accounts with no minimum balance requirements and loans of as little as a few hundred dollars.

Many also provide additional services that are sorely needed in largely ethnic low-income areas including low cost money transfers to other countries, check cashing and even payday advance programs in some cases.

Pacoima Development Federal Credit Union, slated to open on Cinco de Mayo, a holiday that commemorates the victory of the Mexicans over the French incursion, will be located on Van Nuys Boulevard in, ironically enough, a building that once housed a pawn shop.

It will service an area of about 200,000 residents that includes Sun Valley, Sylmar, Mission Hills and Pacoima. As with other credit unions, membership will be open to residents as well as those who work in the area and members of the Valley Industry and Commerce Association and the Pacoima Chamber of Commerce.

The credit union will provide checking and savings accounts and personal loans and plans include offering business loans within a year.

"We will not do first mortgages," said Barragan. "I'm looking to be a bridge to the banks. We're looking at cashing people's checks so they don't need to spend 1 percent every time they get a paycheck."

It is estimated that workers earning $12,000 a year spend about $250 annually just to cash their paychecks.

The paucity of financial services for these low income earners led several trade groups, foundations and private corporations along with the federal government to step in over the last decade and assist communities in setting up these types of credit unions.

But the task of establishing and retaining these community development credit unions has not been easy.

Too few established

The National Federation of Community Development Credit Unions figures that, based upon demographics, there should be at least 2,000 such credit unions nationally. But with a failure rate of about 50 percent for these startups, it is estimated that about 1,000 such credit unions are currently in operation across the country.

A report by The Brookings Institute points out that the failures of these banks are not typically due to bad loans, but rather a series of reasons ranging from under-qualified management and boards, poor pay scales for credit union managers resulting in high turnover rates, inadequate capital and inadequate economies of scale.

The sheer complexity of the charter process in many cases undermined the effort before it even got off the ground, the report said.

"Forming and operating a new CDCU can be a difficult proposition without start-up capital," said Clifford N. Rosenthal, executive director of the National Federation of Community Development Credit Unions, a trade group in New York.

"The more a new CDCU is able to raise grant funds to sustain it during the first several years, when it has not yet developed a loan portfolio sufficient to sustain its operations, the better its chances of success."

Barragan had tried for a number of years to garner support to open a bank in Pacoima, but "no one would listen to me," he said.

Traditional banks believed that income levels in the area were insufficient to support a bank branch.

Backed by census data that showed the average household income in the area was $40,000, the VEDC even thought about opening its own bank.

But when Wells Fargo announced that it would open a bank branch in Pacoima, the VEDC turned its attention to a credit union instead.

The agency reasoned that one additional bank would still fall short of meeting the needs in the area, and opening a credit union would be more feasible from a financial standpoint.

Lower requirements

Funding requirements for opening a credit union are far lower than what's required to open a bank, but the requirements for capitalization and for initial deposits were nonetheless considerable.

The VEDC had to raise at least $500,000 to capitalize the effort and $2 million in initial deposits.

To capitalize the bank, the VEDC secured grants from Citibank, Wells Fargo, Los Angeles Funders and Local Initiatives Support Corp. and Los Angeles City Councilman Alex Padilla, whose district includes Pacoima, helped to secure a $200,000 grant from the city.

Next, Barragan approached a number of companies to get pledges for deposits. Among the pledges, Wells committed to five years at zero interest.

"What I think makes this particularly unique Is you've got the VEDC, which has a longstanding track record of serving Pacoima and the Valley region and they're looking at using a depository tool to complement what they've done for many years," said Greg Morishige, fund advisor to the National Community Investment Fund, a group that provided seed capital for the Pacoima credit union. "To the extent that you've got a strong existing player, it will contribute to their SUCCESS.

The VEDC submitted its application for a charter in 2003, including among its arguments, the severe lack of financial services in Pacoima and the Northeast Valley.

According to the agency, 332 check cashers operate in the San Fernando Valley compared to 88 bank branches.

The cost to cash a $200 payroll check at these check cashing outlets ranges from about $2 to $6.

The interest cost for a payday advance loan, a two-to four-week loan backed by a postdated personal check a borrower promises to pay from the next paycheck, can range from 200 percent to 900 percent.