NCUA PREPARES TO NOTIFY ALMOST 100 LICU FEDERAL CHARTERS OF LOW INCOME DESIGNATION (LID) QUALIFICATION STATUS CHANGE

It is our understanding that NCUA’s Office of Credit Union Resources and Expansion (CURE) is expected to send approximately 100 federal credit unions a letter within the next few weeks that they no longer qualify for their low-income (LID) designation.   They are no longer going to be low-income credit unions (LICU) and have access to the additional authorities granted under the law and regulation to LICUs.

These are credit unions that have been made aware that they no longer qualify and that they had five years to get their member numbers back into qualification status.  In each of these cases, the five-year requalification deadline expired during the 2020 and 2021 Covid years.

Because of a grace period during Covid, these credit unions were given essentially two additional years and have still not been able to have their LID status requalified.  Therefore, they will soon lose the status and its benefits until they again requalify.

While any credit union that recognizes the value of the LICU designation and received a notification letter indicating that it has fallen below the qualification threshold and has five years to get requalified would take that notice very seriously, it appears that these approximately 100 FCUs either did not see the value in requalification or have been unable to take the action necessary to requalify.

That is unfortunate.  And we are hopeful that none of our clients will be on that list as all of you recognize the value of the LICU designation and take affirmative steps to make sure you continue to qualify on an ongoing basis.

Yet, these notification letters provide another opportunity for us to remind you about the fact that it is as important to work to keep the LID once your credit union receives it as it does to work to get it in the first place.

We have had more than one of our credit union clients that received written notice from NCUA indicating that the credit union is now disqualified for its low-income designation (LID).  However, they are each working diligently to return to qualification status within the five-year period, and several have already requalified.

Just a reminder.  These notification letters can go out at the end of any quarter as a result of NCUA running the credit union’s qualifying numbers – which they do on a periodic basis from data they have on hand from the AIRES system in which credit unions dump data to their regulator or insurer as a part of the supervisory process – and they are always a shock to a credit union receiving one.

Some credit unions are using their LID to enable them to be exempt from the statutory member business lending cap of 12.25% of assets.  Others are using it to secure non-member deposits.  And a smaller number are utilizing it to submit an application for supplemental subordinated debt capital, some of which have been approved and the capital has been secured.

In each of these cases, the thought of having to divest of the business loans, the non-member deposits and/or the supplemental capital is frightening when the credit union balance sheet and income statement would be adversely affected by such a forced divestiture.

Therefore, we thought it might be timely once again to provide some insight into protecting the low-income designation, including some steps that a credit union can take to either get its LID restored or to protect itself against receiving a letter some quarter informing it that its LID is in jeopardy.

THE QUALIFYING CRITERIA AND THE TIME ALLOWED TO MEET THAT CRITERIA FOR LID RESTORATION

A credit union is eligible by law and regulation for the low-income designation if over half (50% plus one) of its members reside in census tracts designated as low-income by the Census Bureau, are students, or are active-duty military.

If a credit union meets this qualifying criteria and its eligibility is verified by NCUA, NCUA (or the state in the case of a state-chartered, federally-insured credit union) can grant the LID.

With the low-income designation, the law exempts credit unions from the statutory member business lending cap, authorizes the LID credit unions to accept non-member deposits and also authorizes the LID credit unions to apply to receive supplemental capital through subordinated debt.

Even if your credit union is LID and you have not taken advantage of any of these authorities, no credit union wants to lose it.  It is always good to have future options in all three of these authorized arenas, and the LID is the key to remaining so authorized.

The NCUA will grant the authority based upon verification of the credit union meeting and exceeding the “50% plus one” criteria.  The credit union receives written notification of this approval.

Yet, in their approval letter, NCUA notifies the LID credit union that they will periodically monitor their membership data to ensure that the credit union remains LID qualified with 50% plus one of its members in the categories outlined earlier.

If NCUA determines that the credit union has fallen below the “50% plus one” standard, the credit union will receive a letter informing them of the fact that the credit union’s LID will be suspended at the end of five years unless the credit union can bring its numbers back above 50% plus one.

So, the first thing to realize is that a LID credit union has five years to get its qualifying number back above 50% plus one before it would be required to divest of business loans, non-member deposits, or supplemental capital.

But, even with this reasonable and extended time period allowed to get the numbers back up, the threat of losing the LID is significant enough that a credit union would need to put in place a concerted and coordinated effort to get its numbers back above the 50% plus one threshold.

And, as the 100 FCUs about to receive a LID suspension will soon be able to attest, five years comes quickly and corrective actions to improve a credit union’s LID qualifying number are best taken before a non-qualifying letter is received.

There is too much at stake, either with authorities already being utilized by a credit union or those that a credit union wants to keep in its quiver for consideration of future strategic utilization, to let this notification slip by with no action and hope that the numbers straighten themselves out over the next five years.

But, even though you should not ignore it like many of these 100 FCUs have done. there is really no reason to panic if you get an initial “no longer qualify” letter.  With five years notice, a coordinated and concerted effort to raise a credit union’s LID qualifying number can almost always bring about tangible results and put the credit union membership back over the “50% plus one” standard within a year or two at the max.

WHY WOULD A CREDIT UNION’S NUMBER THAT WAS ONCE ABOVE 50% PLUS ONE NOW FALL BELOW?

The answer is normally that the credit union was barely above 50% plus one when it was approved.  Then, as a result of new membership growth, the percentage of members that reside in low-income census tracts, students, or are active-duty military is diluted by more members that do not meet these qualifying criteria.

This dilution of the LID qualifying members, we have found, happens more often in credit unions with strong indirect lending programs whereby many new members come into the credit union through auto dealer relationships that are hard to monitor or control with an eye toward keeping at least half of them coming from low-income census tracts, students, and active-duty military.

This impact on a credit union’s qualifying LID numbers from indirect lending should make any LID credit union with a strong indirect lending program to consider possible mitigation strategies (such as the ones we will outline in this Client Update) to make sure it keeps its qualifying number above the 50% plus one threshold.

WHAT’S A GOOD STRATEGY TO GET MY LID NUMBER OVER 50% PLUS ONE – OR KEEP IT THERE?

Whether your credit union has received notice that you need to get your qualifying LID number back above 50% plus one or if you feel your credit union finds so much value in the LID that you want to insure that you have a strategy in place to make sure you always stay above 50% plus one, the following ideas are worth considering as you develop a concerted and coordinated approach to working your LID number to get back or stay qualified.

(In fact, this same strategy could be employed if your credit union does not currently meet the LID qualifying criteria but you would like to see if you can move the numbers sufficiently to try to qualify over the next several years.)

Consider the following as a part of your LID qualification strategy:

AVOID POST OFFICE BOX ADDRESSES FOR MEMBERS.

A member with a post office box automatically works against your qualifying LID number.  If the member’s residence cannot be positively verified as being within a Census Bureau designated low-income census tract, it counts against you.

Every member with a PO Box as his or her primary address cannot be considered residing in a low-income census tract because, according to the data available to NCUA, the member cannot be verified as residing in a low-income census tract.

If you have members that want to utilize a PO Box for their primary mailing address, find a way to designate that on your core system as the preferred mail address but list their primary address in your core as the member’s residential street address.  That puts the member in play to be counted as low-income, depending upon the residence and the applicable census tract.

Several credit unions have moved their LID number by noticeable percentage points by doing a manual dive into loan records and other documentation to help them move members with PO Box addresses to their actual residential address in the core system.

This, along with making sure that all future members are listed by residential address as their primary address (even if they want a second address such as a PO Box as their mailing address), is one of the most important strategies in keeping your LID number above 50% plus one.

FLAG STUDENTS AND MILITARY.

It is essential that your core system allows you to flag student and active-duty military members.  And, because most core systems allow this, you must set up this feature in your system and maintain it whenever a new member joins that is a student or a military member.  In fact, it is probably a good idea to have a procedure in place when you are signing up a new member to indicate whether the new member is a student or active military.

Once this feature is set up, one way to move your LID qualifying number significantly is to develop a focused marketing program at a local college, community college, or high school within your field of membership and with whom you have a relationship.

Sign up those students.  Make sure they are flagged as such in your system.  It can move your LID needle.

The same strategy can apply if you have a military base in your field of membership.  Again, the key is the ability to track those members.

Regardless of where a student or active-duty military member resides, he or she counts as low-income toward your LID designation.  But you must be able to document it in your system…hence, the importance of flagging these members in some demonstrable manner.

MARKET DIRECTLY TO LOW-INCOME CENSUS TRACTS.

Although you likely know where the pockets of low-income neighborhoods are located in your community, there is value in getting data from the US Census Bureau that indicates where the low-income tracts are in your field of membership.

Once identified, a marketing strategy designed to go directly at these residents can help move the LID qualifying needle.

The more new members from low-income designated census tracts, the easier it is to get above 50% plus one and stay there.

This type of target marketing should, frankly, not be a one-time thing.  We recommend that any LID credit union that values the designation keep in place a direct marketing effort at all times to those who reside in low-income census tracts, students and active-duty military.

APPLY TO SERVE UNDERSERVED AREAS OR MARKET MORE EFFECTIVELY THOSE YOU ALREADY SERVE

Multiple common bond, SEG-based federal credit unions can apply to serve geographic underserved areas.  Many of our SEG-based credit unions already serve a number of underserved areas.  These areas are a treasure trove to market if the goal is to move the LID qualifying number.

If your credit union is SEG-based and you have not applied to serve some identifiable and qualified underserved areas, you should consider doing so.  This is perhaps the best way to improve your LID qualifying number and keep it above 50% plus one.

As you know, Dollar Associates is your “go-to” source on all matters field of membership related.  If you want us to work with you to identify and consider applying for underserved geographic areas in your marketplace, let us know.  We’d be glad to pursue these options with you.

GO A REASONABLY BIT DEEPER IN YOUR INDIRECT LENDING UNDERWRITNG, INCLUDE MORE USED AUTO DEALERSHIPS, OR BOTH.

Because of the inherent risk in indirect lending, many credit unions require almost pristine credit in order to approve an indirect auto loan.  As a result, most of the financing comes from higher end autos and trucks being financed for members with sterling credit scores.

These members are indeed lower risk from the point of view of their likelihood to repay the loan.  However, they are also the members most likely to reside in higher income census tracts.  Thus, they work against your LID qualifying number.

While we would never recommend taking on risk in your indirect portfolio beyond your ability to effectively manage it, there is some LID qualifying advantage in going beyond the BMW, Mercedes, Lexus, and Acura new car buyers.

Make sure your indirect relationships include dealers that sell Toyotas, Hyundai, Nissan, Fords, and Chevy.  And work to build relationship with trusted previously owned car dealerships.

Going a bit deeper in the credit pool and establishing more trustworthy dealer relationships with some less expensive auto providers can make your indirect lending program work against your LID qualifying number a bit less.

Think about where your indirect lending members come from.  And, knowing that a large percentage of your membership growth comes from those members each year, try to strategize for ways to keep that line of business from working against your LID qualifying number.

Again, in closing, the LID is a tremendous strategic tool for qualifying credit unions.  But, once qualified, you want to stay a LICU credit union.

Hopefully, this Client Update has given you some practical ideas to consider as you strategically look for ways to keep your credit union above the “50% plus one” threshold – or to get it back there if you get a notice that your LID number no longer qualifies and the five-year requalification clock is now running.

Until next time.

Dennis Dollar