Re-examine low-income designation to mitigate recession risk

Low-income credit unions (LICU) have benefits that help mitigate the impact of the COVID-19 recession while helping to serve members who need support the most. If you are not aware of where your credit union currently stands in attaining this designation, reach out to your examiner and review your AIRES file to see how close you are. It is important to understand what percentage of your current membership qualifies as low income in relation to the 50.01% threshold required by the NCUA. 

It is just as important to understand what goes into this calculation. The primary methodology for qualification is based on member address and if that address is within a low-income qualifying area. However, business addresses, Post Office boxes, and (until recently) Military Addresses do not qualify as low income. If a good percentage of your membership uses these address types as their primary mailing address, you may want to analyze whether you can achieve the designation through data enrichment or alternative LICU qualifying methodologies. The process can be quick. The NCUA developed a tool to allow them to quickly analyze and validate your credit union’s submission. 

Below is a list of LICU benefits and how they will help mitigate the risks of a COVID-19 recession:

Benefit: LICUs have an exception from the statutory cap on member business lending.

In CUNA Mutual’s Credit Union Trends Report for April, the association laid out a bleak picture for the economy and its impact on credit unions. Major takeaways included projections of the economy contracting at a 20% annualized pace in the second quarter, and the unemployment rate rising over 15%. With corresponding decreases in Americans ability and interest in purchasing cars and homes, CUNA is expecting loan growth of only 2% in 2020.

Lifting the member business cap (12.25% of assets or 1.75 times net worth) can help diversify your credit union’s loan portfolio and mitigate the decline in consumer loans. With recent reports that the PPP loan program will still fall well short of the small business demand, your credit union can fill an important community need in helping business owners stay open through the slow process of returning back to normal operating levels.

Benefit: LICU’s can accept non-member deposits from any source and create low-income associations.

As CUNA cited, Americans typically join credit unions to obtain credit. With loan growth expected to fall to 2% this year, CUNA projects membership growth will fall to only 1%. CUNA also cited job loss as another negative influence as single common bond, multiple common bond, and TIP chartered credit unions lose potential members who are unemployed and no longer eligible to join through their employer. 

The ability to accept non-member deposits could help mitigate challenges. Non-member deposits can offer creative opportunities for member and deposit acquisition strategies, lower cost of funds and make it easier for acquisitions. Additionally, low-income, multiple common bond credit unions can create low-income associations to help low-income people and add them as members. This can help grow membership and help new members in your community through times when they need it the most.

Benefit: LICUs are eligible for grants and low-interest loans from the Community Development Revolving Loan Fund.

As the Credit Union Times reported, early credit union call report data shows the extent to which net income and, as a function, operating budgets will suffer. In the first quarter of 2020, large credit unions already began to take hits to their investment portfolio and increase provision for loan loss to prepare for higher loan delinquencies.

Access to grants and low-interest loans can help your credit union continue to reach demographics hit hardest by the recession despite potential cuts to your operating budget. Credit unions receiving the LICU designation can receive grants from the Community Development Revolving Loan Fund. This NCUA administered program provides funds to help credit unions offer financial services to low-income members in an effort to stimulate the local economy. In 2019, $2M in grants and $3.5M in loans were made available for federal credit unions. Additional funds are also available via the Treasury Department’s Community Development Financial Institutions Fund, which in 2017, awarded more than $39 million to 56 credit unions

Benefit: LICUs have the authority to obtain supplemental capital.

Credit unions entered the COVID-19 recession well capitalized and ready to withstand damage caused by lack of profitability and balance sheet growth. The industry had a net-worth ratio of 11.14 percent, well above the 7% threshold considered to be well capitalized by the NCUA. No one knows how long the economic impact of COVID-19 and social distancing will last. Authority to obtain supplemental capital can help if your credit union is not as well capitalized and/or has a field of membership especially prone to the recession. Supplemental capital can also help your credit union be active in the wave of mergers that are likely to come as a result of COVID-19’s economic impact

There will be no “silver bullet” strategy to weathering the challenges ahead, but the low-income designation can add another set of options to your risk mitigation plan.  Most importantly, know that just because the NCUA has not proactively notified you that you qualify for a low-income designation, does not mean that you can’t qualify. To achieve the benefits listed above it is worth your time to at least know where your credit union stands and why you may not currently qualify. Keep your leadership team informed on a low-income designation and if/when it is reasonable to apply.