Tracing the History of Community Development Credit Unions

Introduction and Early History

When the Community Reinvestment Act was passed in the late 1970s, Congress tasked the 12 Federal Reserve Banks with ensuring that supervised financial institutions meet the credit needs of the communities they serve. Community development financial institutions (CDFIs) are mission-driven lenders that help provide credit in underserved areas. As we gather information on CDFIs through the 2025 Federal Reserve CDFI Survey, we want to examine the roots of community development finance and the evolution of CDFIs.

This post focuses on the history of one type of CDFI: community development credit unions (CDCUs). Credit unions, broadly, are cooperative financial institutions — one member, one vote — that provide both financial and depository services to their members. Credit unions in North America have origins in both mutual aid organizations and the Cooperative Movement in Europe. Mutual aid organizations have long-standing roots in West African societies and were originally organized to provide burial funds and welfare for widows and orphans. This tradition continued for Africans who were enslaved and transported to North America, and some of the earliest mutual aid and benefit organizations in the United States were founded within Black communities in the late 18th century. The Free African Society (1778 in Philadelphia, Pa., and 1780 in Newport, R.I.) and Free African Union Society (1787 in Boston, Mass.) were the first on record and served as "quasi-financial organizations" for free Black communities who were otherwise unbanked. The Cooperative Movement in the financial sector first appeared as "people's banks" in Germany and soon took hold in the United States.

Credit Unions Gain Popularity Through the Mid-20th Century

In 1908, the first credit union appeared in the United States: St. Mary's Cooperative Credit Association in Manchester, N.H., which primarily served immigrants from France and operated through volunteer labor out of its president's home. This inspired the adoption of the nation's first credit union laws in Massachusetts in 1909. The movement spread rapidly; in 1925, 15 states had a total of 419 credit unions and by 1929 that number had ballooned to 974 credit unions in 40 states.

The Great Depression provided an opportunity for credit unions to show their worth. Liquidations were not as common for credit unions as for banks, and fewer members lost their deposits. The industry continued to expand and in 1934, a formal national league known as the Credit Union National Association (CUNA, now America's Credit Unions) was established and the Federal Credit Union Act was signed into law by President Roosevelt. This legislation authorized the formation of federally chartered credit unions in all states and established a supervisory agency known as the Bureau of Federal Credit Unions (BFCU).

During World War II, some smaller credit unions were liquidated and loan demand decreased significantly. The industry recovered after 1945, and the number of credit unions more than doubled by the end of the 1950s.

Credit unions that served Black populations also grew through the 1950s. This was particularly true in the Fifth District; for example, North Carolina contained 55 Black-serving credit unions by 1950, representing half of all Black credit unions in the United States at the time.

The Rise of Community Development and A Renewed Focus on Community-Oriented Credit Unions

Although credit unions were a lifeline for many through the turbulent first half of the 20th century, by the early 1950s, there was concern that credit unions were drifting from their original purpose of serving the working poor. The 1950s had brought prosperity, but inequality was growing and credit unions began to shy away from offering low-dollar loans. The 1960s ushered in the War on Poverty, which brought low-income communities back to the forefront of policy discussion and action.

The U.S. government saw value in credit unions, noting that they had shown "that a group of people can improve their economic lot through cooperation," and reinvigorated the industry as part of its effort to expand credit and services to those underserved by mainstream financial institutions. In 1963, the BFCU conducted a study that identified more than 400 credit unions specifically serving limited-income communities and in 1964, Economic Opportunity Act created the Office of Economic Opportunity (OEO), which made the creation of new limited-income credit unions a major priority.

At this time, there were two distinct types of OEO credit unions: those chartered for a field of membership based on residence or employment in a designated neighborhood (place-based) and those with fields of membership restricted to people participating directly in a Community Action Program (person-based). Additionally, OEO organized technical assistance programs to help train credit union leadership.

In 1971, a General Accounting Office (GAO) report acknowledged the success of OEO credit unions in filling gaps in credit access, including that "delinquency was not a major problem" and "few loans had been written off as uncollectable." However, the report highlighted the fact that OEO credit unions were not self-sufficient: they had operational deficits, faced insufficient growth of shareholder deposits, had significant difficulty attracting capital, and lacked formal goals.

Two Decades of Industry Shrinkage

New regulations and industry organizations in the 1970s and 1980s brought changes to what would become known as low-income and community development credit unions (LICUs and CDCUs).

In 1970, Congress significantly amended the Federal Credit Union Act, creating the National Credit Union Administration (NCUA) to supervise credit union supervision, manage the newly created Shared Insurance Fund (SIF), and set capital requirements. Although the 1971 GAO report indicated that SIF, which provided $20,000 in deposit insurance for credit unions, would enhance LICUs' ability to attract the capital they needed to achieve self-sufficiency, the newly instituted reserve requirements led to the revocation of charters for over 100 credit unions and the merging or liquidating of even more.

Help came from the establishment of the National Federation of Community Development Credit Unions (now Inclusiv) in 1974. The Federation provided capital access, technical assistance, and training to credit unions whose missions revolved around promoting financial inclusion and community development, and it helped secure federal resources such as the Community Development Revolving Loan Fund (CDRLF) in 1979.

Legislation was passed throughout the late 1970s and early 1980s that reduced some regulatory burden for these institutions. For example, new laws allowed for deposits from philanthropic organizations and expanded the services that LICUs and CDCUs were allowed to offer, such as shared drafts, check writing capabilities, and mortgage lending.

Throughout the 1980s, macroeconomic factors such as inflation, unemployment, and a financial crisis took their toll on CDCUs. The number of credit unions with smaller assets — a category CDCUs tended to fall into — plummeted, while the number of larger-asset credit unions rose.

The 1989 Financial Institution Recovery, Reform, and Enforcement Act — which was enacted in response to the savings and loan crisis — increased regulatory scrutiny of credit unions and imposed a 20 percent cap on nonmember deposits, diminishing their ability to boost their capital base. This had a disproportionate impact on LICUs and CDCUs whose members had limited disposable income to deposit, leaving them reliant upon higher-income nonmembers to meet their capital needs.

In the late '80s and early '90s, the regulatory climate and changing attitudes toward these types of organizations led the NCUA to informally freeze the creation of credit unions in low-income areas — and CDCUs, by extension. Though 57 CDCUs were chartered from 1980-1986, only 19 new charters were issued between 1987 and 1993.

The 1990s and Early 2000s

Entering the 1990s, newly generated interest in community development finance began to build wider support for CDCUs and LICUs. NCUA began designating LICUs more regularly and dispersing CDRLF funds again, with a big push in 2000. The number of new LICU designations continued to rise through the early 2000s.

More recent events, such as the Great Recession and COVID-19 required quick thinking and innovation on behalf of CDCUs. However, those events also offered them an opportunity to grow, fulfill their missions, and become even more well known to the public.

Conclusion

Since its inception, the credit union industry has helped expand banking access to underserved individuals and communities. Within the credit union industry, CDCUs have been a key player in ensuring access to credit for low- and moderate-income communities. For more on CDFIs and the credit union role in CDFIs, stay tuned for our 2025 CDFI Survey Key Findings Report, to be released this fall, and please be sure to take the survey by May 30, 2025, if your organization considers itself a mission-driven lender.

Readings

Fairchild, Gregory B., and Robert N. Smith. "The Dime that Started a Movement: The History and Development of Credit Unions." University of Virginia Darden School of Business Technical Note ENT-0103, Dec. 11, 2008.

Lune, Howard, and Miranda Martinez. "Old Structures, New Relations: How Community Development Credit Unions Define Organizational Boundaries." Sociological Forum, December 1999, vol. 14, no. 4, pp. 609-634.

Rosenthal, Clifford N. Democratizing Finance: Origins of the Community Development Financial Institutions Movement. Victoria, B.C.: Friesen Press, 2018.

Williams, Marva. "Credit to the Community: The Role of CDCUs in Community Development." Woodstock Institute, September 1997.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.