Ins and Outs of Using Low-Income Designation
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 like access to secondary capital and relief from the member business lending cap.
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. 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 designated for years but still don’t know much about it.
The benefits include more than the ability to accept secondary capital and the MBL exemption. Benefits include the ability to accept nonmember deposits from any source, NCUA grants, low-interest loans and consulting services from the NCUA’s Office of Small Credit Union Initiatives. See the NCUA’s Low Income Fact Sheet at NCUA.gov. 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 to the New Market Tax Credit program designed to spur investments into operating businesses and real estate projects located in low-income communities. See CDIFund.gov for more information.
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 nondesignated credit union peer group. At the end of the day, isn’t it ROA and net worth that we are really interested in?
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.
It’s important for low-income designated credit unions to understand what financial services their members and potential members need and are already using. Far too many of us are 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. 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.
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, hardworking Americans who need our help.
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 offering should be specifically designed to effectively serve its low-income members.
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.