So you received your NCUA low-income designation ... now what?
If yours is one of the NCUA's newly designated low-income credit unions, congratulations!
You've just received access to important tools that can be leveraged for growth, tools and options that aren't available to all credit unions. If fact, if you attended this year's Governmental Affairs Conference, you probably hiked the hill and asked your representative for much of what this designation now offers you, namely access to secondary capital and relief from the MBL cap.
Who are these newly designated credit unions?
The approximately 1,000 newly designated credit unions represent all of us. They are small, mid- sized and large credit unions. Twelve have more than $1 billion in assets, and more than a quarter are considered medium to large credit unions.
The group includes credit unions from across 41 states, plus the District of Columbia. Field of membership at these credit unions is diverse, ranging from community to associational. These credit unions serve everyday Americans: teachers, veterans, electricians, state employees, factory workers and fire fighters, just to scratch the surface.
A wakeup call
It shouldn’t be surprising that nearly one-third of all credit unions are now designated as low-income by the NCUA. The Great Recession has taken a toll on Americans across this country. According to the CUNA 2012-2013 Environmental Scan, a record one in five U.S. households experienced a one-year decline of income of 25% or more between 2008 and 2010.
The economic realities facing consumers and the regulatory relief available to the credit unions that actively serve low- to moderate-income consumers represent an opportunity for growth and social impact.
Here are a few suggestions for newly designated credit unions (and also for those who have been LICU designated for years, but still don’t know much about it):
Understand the benefits
It’s more than just the ability to accept secondary capital and the MBL exemption. Benefits include: the ability to accept non-member deposits from any source; NCUA grants; low-interest loans and for small credit unions; and consulting services from the NCUA's Office of Small Credit Union Initiatives. See the NCUA's Low Income Fact Sheet and Section 701.34 for more information.
Most low-income designated credit unions are likely to qualify for the U.S. Treasury’s Community Development Financial Institution designation as well. This certification opens up a whole new level of benefits ranging from CDFI grant dollars for capital and loan loss reserves (yes, I did just say loan loss reserves), to the New Market Tax Credit program designed to spur investments into operating businesses and real estate projects located in low-income communities.
Go online for more information on CDFI grants. Contact the National Federation of Community Development Credit Unions or the CDFI Fund for more information on how to become CDFI-certified.
Understand the business model
As you might guess, credit unions that serve a lower-income target market tend to have higher operating and provision expenses. However, what you might not guess is that successful low-income designated credit unions have significantly higher average loan yields and fee income.
It’s been my experience that these credit unions typically generate higher return on assets than their non-designated credit union peer group. At the end of the day, isn’t it ROA and net worth that we are really interested in? It is also worthy to note that as a group, low-income designated credit union loan growth is significantly higher than non-designated federal credit unions.
Seek out best practices by researching articles relating to low-income designated or CDFI-certified credit unions. Look up NCUA call report data, which identifies whether or not a credit union has the designation. Contact the National Federation of Community Development Credit Unions, a credit union trade association that specifically serves credit unions dedicated to the lower-income consumer market, or just send me an e-mail and I will direct you to some incredible best practices.
Understand the financial needs of your membership and community
It’s important for low-income designated credit unions to understand what financial services their members (and potential members) need and are already using. Don’t fall into the trap of thinking “they should be using ...” Far too many of us are way too judgmental when it comes to understanding what consumers should be doing to manage their finances. No doubt, our members can learn a lot from us on how to best manage their financial resources. But we may never get the opportunity to educate them if we fail to provide the services they are currently using.
We can complain about the use of alternative financial products such as payday loans and check cashing. After all, smart consumers would never go to a payday lender. But, if we fail to provide the services these consumers need, we may never get the opportunity to speak to them and educate them on a better way. Now I’m not advocating predatory services to our members. But I am suggesting that there is a big opportunity for low-income designated credit unions to provide affordable alternatives that create human touch-points for one-on-one financial education and adoption of more desirable consumer financial products.
Don’t make assumptions
Educate your team on what the designation really means. Some who don’t fully understand the designation may feel there's a stigma that comes with it. In their mind, it may not reflect what they want to reflect to their membership. Credit unions that qualify for the designation have already demonstrated that more than 50.1% of their members fall in the low-income category as defined by the NCUA. Remember, we are talking about good, hard-working Americans who need our help. Low-income designated credit unions don’t have to rebrand – it’s just a designation that represents a majority of their membership.
Improve your strategies
Incorporate the low-income designation benefits, credit union best practices and unique financial needs of this group into your strategic plans. These are important strategic considerations that should be part of the planning process and the credit union's strategic priorities. To maximize the financial and social benefit of this designation, the credit union’s strategic focus, business model, product and service offerings should be specifically designed to effectively serve its low-income members. Strategic planning facilitators should be experienced and knowledgeable about community development and lower-income consumers.
Why does it matter?
We’re all looking for opportunities for growth, revenue and greater relevance in the lives of our members and the communities we serve. The NCUA's low-income designation provides tangible benefits that help credit unions accomplish these objectives.
It’s more than regulatory relief and grant dollars to fund loan loss reserves; serving lower-income consumers provides credit unions an expanding venue to more effectively compete and grow. Finally, serving consumers of modest means strongly resonates with our philosophy of people helping people.