Since last Friday’s Client Update on the NCUA announcement that the agency is expanding its approach when considering military personnel in determining whether a credit union qualifies for the low-income designation, we have had a number of our credit union clients reach out with questions about how to utilize this policy change to help them gain the low-income credit union (LICU) designation or to support their efforts to retain the LICU designation long term.

So, with these questions in mind, we would like to provide some practical guidance on how your credit union might consider utilizing this NCUA policy change.

Again, let us go over the reasons why the LICU designation has value for some credit unions.

A low-income designated credit union is automatically exempted from the statutory member business lending cap of 12.25% of total assets. In addition, a LICU can raise supplemental capital through subordinated debt and count that supplemental capital as net worth. And, lastly, a LICU can take non-member deposits up to the regulatory limit of 50% of its total deposit base, plus reserves.

And remember that to qualify as a LICU a credit union must be able to document that over 50% of its members reside in CDFI designated low-income census tracts or are students regardless of residence – and, now, the fact that a member is a verified member of the US military also counts toward the 50%.

As of this writing, over 2600 credit unions have the low-income designation.

Our questions since last Thursday’s announcement from NCUA have largely focused on two situations: (1) How can this help me get the LICU designation? And (2) How can this help me keep the LICU designation that I already have?

Both questions are pertinent and make the case for our first piece of practical advice.

If you do not have a field for active military in your basic membership data on your core system, set one up and begin the process of indicating both new members and existing members as military if they are indeed active duty.

The most important thing that will be required for you to submit a request for a reconsideration of your LICU percentage to NCUA and/or your state regulator (if applicable for state charters) is that active duty military members be tracked within your system and able to be separated from those members already in your LICU calculation based upon their residence.

Begin this process now. And, while we are at it, if you don’t already have a student field delineated for those members that are students, you should set this up and begin compiling this data on each student member at the same time you are doing so for military members.

How do I know what my LICU number is?

This is really your starting point. You can contact the Office of Credit Union Resources and Expansion (CURE) at NCUA directly to get your credit union’s number as per their Aires data dump that they receive each time you have an examination.

The contact information for the CURE office is [email protected] or at 703.518.1150.

They have always been helpful in providing credit unions with this basic starting point information.

Recognizing that a credit union must have over 50% of its members either residing in low income census tracts, as students or now as active duty military, where this number stands lets you know whether you are even close to striking distance for the LICU designation.

If you are at 46% and have not begun to track military (or student) members, there is a very real possibility that you could move the needle above 50% with these additions.

(Also, as another practical piece of advice, check how many members you have utilizing post office boxes as their primary address on your system. Those are counting against your LICU qualifying number because NCUA cannot determine where they reside. If you can do a deep data dive into loan documentation to find an actual address, you may be surprised how much you can move the needle with those PO Box members when you enter their actual home address in the system and find they reside in a low-income census tract.)

If you are at 32% and need over 18% more of your members to be counted to get over 50%, it is going to be a tough go for your credit union.

That is why you need the LICU number from NCUA before you start.

Should I start tracking military and students regardless?

Yes, absolutely. This policy change is a clear indication that others could come over time. If teachers, fire fighters, police…or some other profession in which the pay unfortunately lags others…ever are added to the LICU qualifying number, it will be good to have students and military already identified and counted.

If I begin to add a sizable number of military and/or students to my number from NCUA, what do I do then?

Track the needle yourself before you contact them and ask them to re-calculate your number. You will have to provide some additional documentation to them, and it needs to be as sound as possible.

Therefore, we would not recommend contacting NCUA every three weeks and ask for another calculation run. Wait until your own internal data begins to show that you may have crossed the 50% threshold. Then, contact the same CURE office that you originally got your number from and ask them for a re-calculation.

We have had some clients move the needle from the high 40s over the 50% mark with these strategies – and this was before active duty military were included in the count.

What if I already have the LICU designation, is there any reason to still track military and students?

Again, yes, absolutely. The LICU designation will be recalculated by NCUA every time they get an AIRES data dump before your credit union’s next exam. If your qualification number ever falls below 50% because of member growth outside of the qualifying criteria outlined in regulation, they can remove the LICU designation.

Your credit union would then have five years to either gain it back or to be required to divest of MBLs above the 12.25% cap, sell any subordinated debt and remove it from your net worth calculation and return any non-member deposits to the depositor.

No credit union wants to wait until its qualification as a LICU is removed to begin buttressing its qualifying member numbers.

With the ability to add and track active duty military members (along with students if you are not already doing so), a credit union can build its LICU qualifying number well above 50% and virtually eliminate any possibility of losing the designation at some point in the future.

So, the answer to both questions is yes. There is benefit in this NCUA policy change if you do not have the LICU designation – and, also, if you do already.

Begin tracking active duty military. And students as well if you are not already.

The LICU designation has value, even if you do not foresee your credit union exceeding the MBL cap or needing subordinated debt/non-member deposits in the near future.

Things change. Strategic considerations ebb and flow. The marketplace fluctuates. Competition expands and shifts.

Having an exemption from the MBL cap, the option of subordinated debt counted as net worth and the ability to seek non-member deposits represent arrows in your strategic quiver that have a value – even if not used.

All those arrows come into your quiver with the LICU designation. If you do not have it, you should at least know how far away you are from getting it. And, if you already have it, you need to do everything the rules allow to try to keep it for the strategic options it provides you – today and tomorrow.

KEEP THE RESPONSES COMING ON WHETHER NINETY IS ENOUGH WHEN IT COMES TO THE EXTENSION DAYS FOR LOANS IN THE COVID-19 ERA

Thank you so much for the cut and paste responses so many of you have sent to my questions I extended last Thursday about whether, with the ongoing extension of many stay-at-home orders and the dramatically increasing unemployment numbers from the COVID-ERA, the resulting impact on your loan portfolio performance is going to be clear enough within 90 days to know where delinquency, charge-offs, further extensions, restructurings and provision for loan loss are headed. Or if you feel you are going to need more time from the regulator and examiners.

As we report, all the FFIEC agencies (including NCUA) seem to be on board with the 90-day forbearance approach that the regulators have jointly announced.

This seems to mean that the 90 day extension period will push back the clock from beginning to run on the charge-off clock until the 90 days are over for those members who were current on their loans headed into the distress of the COVID-19 era.

The question comes if, as seems to be the case where the timelines are headed, the economy is not ramped back up sufficiently within 90 days for members to begin making good on their loan payments again.

The early response we got from our credit union clients responding to the questions is that the job losses, business disruptions and payment schedules interrupted have left a real uncertainty as to whether loan performance can return to any semblance of normalcy within 90 days.

The general consensus seems to be that, while no one knows for sure, the likelihood that 90 days is not enough is growing more and more clear.

Therefore, I am going to ask for those of you who did not respond to last week’s five question survey if you or someone in a position of responsibility for monitoring such projections at your credit union would be willing to do a cut and paste of the following questions.

Then, if you don’t mind, take just a minute and relay in total confidence your answers based upon your own analysis as of today. Cut and paste the questions and answers into an email reply to me at [email protected].

1. Have you seen a discernable increase in delinquencies as a result of COVID-19? And, if so, primarily in what segment of your loan portfolio and approximately how much?
2. Does your analysis indicate that you believe a significant portion of these loans can be brought current within 90 days?
3. Do you believe 90 days of extensions followed by a required 120-day charge off period is sufficient to avoid considerable distress to your members and adverse impact on your credit union’s financial performance?
4. Is a second 90-day period of extensions (180 days total) more realistic or unnecessary before the 120-day charge-off period begins to run and/or TDRs are required?
5. Would you, if you believe 90 isn’t enough and a second 90-day extension period may be required for appropriate management of the COVID-19 impact on your loan performance, be willing to contact your trade association, the NCUA Board or both by email or letter asking them to consider implementing such a 180-day forbearance and extension period before the 120-day charge-off clock begins running?

It seems that this issue may well require future attention at the regulatory level certainly – and the congressional level possibly. We would like to know the thoughts of our credit union clients as we continue to monitor this situation as future policy decisions are made by NCUA, FDIC, OCC, the Fed and the states.

We predict this is going to become a high-profile issue. We would really like to know your thoughts. And, again, thanks to all of you who have already responded.

Until next time. Stay safe.