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Background
One of the primary reasons the credit union movement was founded was to make credit available to people of modest means for productive purposes. Credit unions accomplish this objective through numerous avenues. One avenue used by approximately 1,100 credit unions is the low-income designation. Multiple common bond credit unions can also add underserved areas to their field of membership to better serve people of modest means.
In 1970, the Federal Credit Union Act was amended to authorize the NCUA Board to define “low-income” and designate credit unions meeting the definition. That low-income designation criteria was further amended in 2008 to use median family income as a determinant on whether a credit union qualifies for a low-income designation and potential assistance from the Community Development Revolving Loan Fund (CDRLF). This amendment also helped better align the low-income designation criteria with that of adding an underserved area to a federal credit union’s field of membership. With the enactment of the Credit Union Membership Access Act (CUMAA) of 1998, NCUA was granted authority to add underserved areas to a credit union’s field of membership, and since the signing of this act, NCUA has granted underserved areas to more than 750 credit unions.
The only credit union movement trade association focused on the needs of credit unions serving low- and moderate-income communities, the Federation has sought to address examinations discrepancies reported by our member CDCUs and LICUs. The central issue is that CDCUs are routinely compared to credit unions that are not truly their peers. CDCU characteristics differ significantly from the average credit union, and even from other low-income designated credit unions, yet examiners historically compared credit unions in peer groups that did not necessarily take into account the economic or demographic trends in the local communities being served. This resulted in peer ratios, that skewed favorably towards non-low-income or non-CDCU credit unions of similar size who served wealthier memberships.
As such, the Federation has for years been engaged in advocacy with NCUA to help train their field examiners on the differences between CDCUs, LICUs, community credit unions, and all other credit unions. This is an area we continue to focus on as examinations practices tend to vary by region as well as by individual examiners. The Federation is committed to helping CDCUs serve their low- and moderate-members effectively, and integral to this is helping regulators understand the systematic differences between CDCUs/LICUs and other credit unions.
Examinations Advocacy
In February 2005 following a series of intensive discussions between CDCU and NCUA leaders, NCUA published its CDCU/LICU Examinations White Paper, which provided guidance to examiners about the unique operating characteristics of credit unions serving low-income memberships. However, many CDCUs reported that examiners and supervisors were not even aware of the White Paper, much less follow its guidance.
A central issue is that CDCUs are routinely compared to credit unions that are not truly their peers. CDCU characteristics differ significantly from the average credit union, and even from other low-income designated credit unions, which are much more likely to have employee payroll deduction groups. Many CDCU members handle all their transactions in person, making many CDCU’s operations much more labor intensive.
In 2006, NCUA released its Member Service Assessment Pilot Program: A Study of Federal Credit Union Service (MSAP). MSAP was compiled in response to a request from the Government Accountability Office and the House Ways and Means Committee.
MSAP recommended that the NCUA:
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Evaluate the effectiveness of NCUA programs focused on assisting low- and moderate-income individuals
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Consider the enhancement and full utilization of the system to monitor federal credit unions receiving benefits under the loan program program
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Consider reassessment of NCUA’s formula for determining if an federal credit union qualifies for low-income designation.
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The Federation followed-up NCUA’s study by releasing its own analysis of the MSAP in a white paper titled: Serving Low-income Communities: Recommendations for the NCUA Outreach Task Force.
In its analysis, the Federation found that:
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The current definition of “low-income” does not seem to be broken, so there is no obvious need to either enlarge or restrict it.
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NCUA policies have inappropriately restricted access to capital for low-income credit unions.
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NCUA examination and supervision practices often undermine the goal of expanding credit union services to low-income people.
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The Community Development Revolving Loan Fund (CDRLF) administered by NCUA underperforms because of the structure and permissible uses of funding.
Our recommendations to the MSAP study are available by clicking here.
We continued to work with NCUA to address inconsistencies in guidance being reported by CDCUs across the nation, and in January 2010 the agency released a Letter to Examiners, providing new guidance to examiners adding weight to the previous white paper and providing concrete, affirmative direction to examiners working with credit unions serving low-income populations.
