benefits of low-income designation & how to apply

NCUAEDS Carl Banks

A low-income (LI) CU is one that serves predominantly low-income members. “Predominantly” is defined as a simple majority (over 50% of your members).

Section 701.34 of NCUA Rules and Regs. defines LI members as those members who earn 80% or less than the median family income for the metropolitan area where they live or national metropolitan area, whichever is greater.

A regional director may use total median earnings for individuals instead of median family income if it is more beneficial to a federal credit union when determining if the credit union qualifies for a low-income credit union designation.

The low-income designation must be given to a credit union by the NCUA Office of Consumer Protection.

A regional director will use the statewide or national, non-metropolitan area median family income instead of the metropolitan area or national metropolitan area median family income for members living outside a metropolitan area. Member earnings will be estimated based on data reported by the U.S. Census Bureau for the geographic area where the member lives.

The term “low-income members” also includes members who are enrolled as full or part-time students in a college, university, high school or vocational school;

However, student CU’s cannot participate in the Community Development Revolving Loan Fund Program (CDRLP);

Student CU’s are not considered low-income credit unions.

State law and state supervisory authority (SSA) govern the level of participation in the CDRLP.

If NCUA approves a state chartered CU as a low-income designated CU, SSA must concur for CU to be designated as low-income.

Can accept Non-Member Deposits

Participation in Comm. Development Revolving Loan Program

Can Accept Secondary Capital

Special FOM Rules Certain regulatory

exemptions apply to LID credit unions

LI credit unions can receive non-member shares or certificates from any source in addition to public unit accounts and accounts of other credit unions.

Aggregate of such accounts cannot exceed 20% of total shares or $1.5 million, whichever is greater, without a waiver from the NCUA Regional Director or SSA (for federally insured state-chartered CU’s).

Before a LID CU accepts any public unit or nonmember shares in excess of 20% of total shares, the board of directors must adopt a specific written plan concerning the intended use of these shares and forward a copy of the plan to the Regional Director for review and approval.

The plan must include: (i) A statement of the credit union’s needs,

sources and intended uses of public unit and nonmember shares;

(ii) Provision for matching maturities of public unit and nonmember shares with corresponding assets, or justification for any mismatch; and

(iii) Provision for adequate income spread between public unit and nonmember shares and corresponding assets.

Governing rule is Part 705 of NCUA Rules and Regulations;

LI credit unions are eligible to participate in the CDRLP;

The CDRLP may approve loans/deposits to a low-income CU in an aggregate maximum of $300,000; Rate this year is only 0.40%.

In addition, LI credit unions are also eligible for Technical Assistance (TA) grants to improve member services and increase the efficiency of credit union operations;

Funds for TA grants are provided by Congressional appropriation, and also from interest NCUA earns on CDRLP loans;

TA grants for 2012 are available to LID CUs in an aggregate amount of $25,000.

Relatively simple application process;

Online application for 2012 funding round.

Must apply through NCUA’s Office of Small Credit Union Initiatives (OSCUI).

Key Rule: The FCU Act,

Section 1790d(o) permits only low-income credit unions to include secondary capital accounts in their computation of net worth.

Section 701.34(b) of NCUA Rules and Regulations discusses the requirements for secondary capital.

To enable those credit unions designated as low-income to support greater lending and improve other financial services for the limited income groups and committees they serve.

Secondary capital is an uninsured obligation that is offered only to organizational investors;

It must take the form of subordinated debt (like a borrowing transaction that must be repaid over time);

Subordinated” means the secondary account holder’s claim must come AFTER any other claims from shareholders, creditors or the NCUSIF.

Therefore, it is considered a somewhat risky investment for an organization to make.

Usually provided to well-managed financial institutions.

Secondary capital is uninsured and cannot be shown as a share account—It is subordinated debt;

Funds must be available to cover losses after reserves and UE, but prior to liquidation.

The accounts must have a minimum maturity of 5 years;

The accounts may not be used as security on other obligations of the account holder; &

The accounts will not “carry over” as secondary capital in the event of merger into a CU that is not LI- designated.

NCUA has adopted special rules that pertain to low-income credit union charters as well as FOM additions;

These special rules provide additional latitude to enable underserved, low income individuals to gain access to CU service.

Any multiple common bond credit union can add low-income associations to their fields of membership;

A LI-designated community FCU has additional latitude in that it may also serve persons who perform volunteer services, participate in programs to alleviate poverty or distress, or who participate in associa- tions headquartered in the community.

Must submit written request to NCUA Office of Consumer Protection;

Request must contain appropriate documentation supporting that majority of members or potential members meet the LIT designation req.

Zip Code: This is the most common & easiest method to determine eligibility;

Zip codes of 100% of the credit union’s members of record as of a particular date will be complied and aggregate # of members residing in each ZIP will be determined. Either median family income, total median earnings or statewide or national non-metropolitan area median family income will be analyzed to determine eligibility.

NCUA and EDSs will utilize automated Low-Income Designation Assessment Tool to determine if a CU qualifies for the LID.

More than 50% of the credit union’s current members must reside in defined low-income ZIP codes, based on Median Family Income Statistics or other data as previously explained.

This method can be used to establish that members and potential members meet the low-income test.

If CU does not qualify using Zip Code analysis, a CU can use other methods to try to qualify for the LID.

Credit unions may provide actual member income from loan applications or surveys to demonstrate a majority of their membership is low-income members.

Loan Survey: Review 100% of outstanding loans (can also include paid-off and charged-off loans if within last two years) and submit income data to NCUA. More than 50% of the borrowers must meet the Low-Income Test (LIT).

You can try loan method if the Zip code method does not work.

Membership Survey: Survey must include 100% of credit union’s members as of a particular date (or conduct a statistically valid survey acceptable to NCUA).

A simple majority of the members must respond and qualify under the LIT.

This method is rarely used for LID qualification.

U.S. Census Bureau Block Group Information: This method could be used to determine a community credit union’s eligibility for LI designation or non-designated LICU’s FOM expansion request into a low-income community. This method will determine a defined community’s median family income.

Information for this method can be obtained from the U.S. Census Bureau’s website;

WWW.Census.Gov , or Researching information at your local

library.

Other Supportive Statistical Data: Other statistical data provided by reputable

organizations may be used if the NCUA is satisfied that the data presented is customary and uniformly accepted demographic information. If more than 50% of the members meet the LIT, then the CU or the FOM expansion group qualifies as LI.

Applying for LI designation is not that difficult;

Please make arrangements with the EDS for assistance in applying.

That’s All Folks!!

THANK YOU

CARL BANKS cbanks@ncua.gov 1-210-859-9713