Low Income Vs. Modest Means: Paper Says Difference Matters
The difference should not be downplayed, according to the National Federation of Community Development Credit Unions, which has just-released a paper, "Serving Low-Income Communities: Recommendations for the NCUA Outreach Task Force," that calls on the agency to delineate the difference between credit unions seeking to serve "low-income" persons (LICUs) and the congressionally mandated service to "people of modest means." NCUA's Member Service Assessment program is concerned with doing that, but the terms are often confused, according to the Federation.
Perception Is Reality?
At issue is perceptions of credit unions, the ability of credit unions to service certain groups, and perhaps even the credit union tax-exemption itself, according to NFCDCU. For instance, the paper notes that the tax exemption is based in part on credit unions serving those of modest means. NCUA designates low-income CUs and low-income members as those who make less than 80% of the average for all wage earners or whose annual household income falls at or below 80% of the median income set by the Census Bureau in an area with a higher cost of living. If a majority of a CU's members meet that standard, it can be classified as a LICU, which grants it powers not available to other CUs, such as the ability to accept secondary capital, deposits from non-members, and an exemption from the 12.25% limit on member business loans.
The NFCDCU paper does not mince words in portions of its analysis. "In the late 1980s and early 1990s when the agency's unspoken agenda appeared to be forcing mergers and eliminating small credit unions the number of LICUs shrank...," the paper states, before going on to ask if a change in formula for the designation is necessary or warranted.
As the total number of credit unions nationally has decreased, the number of LICUs has grown to represent 12% of the total, according to NFDCCU. Suggesting that the agency is fixing something that is not broken, the NFCDCU paper questions why NCUA seems to be moving to ease the definition. Doing so might allow credit unions with "a more prosperous member profile to qualify as low income," the analysis states, adding that such a move would not mean CU service to more low-income persons would occur as a result. The goal should be to expand service to more low- and moderate-income people; changing the classification would not achieve that, according to the Federation.
The paper posits that political motivations may be afoot. "A dramatic increase in the ranks of LICUs may be perceived as an attempt to influence the 'modest means' debate by implying that more credit unions are dedicated to this market than they actually are," it said. This might affect the tax exemption argument by suggesting that only those LICUs be tax exempt, the paper adds.
In its analysis the Federation suggests that NCUA facilitate service to the underserved but focus specifically on reaching low and moderate-income people rather than the "broader and as yet undefined category of 'people of modest means.'"
Eliminating The Rule
The paper recommends that NCUA eliminate the "20% rule" limiting non-member deposits for LICUs because it is a paperwork burden and often causes the credit unions to return funds and forgo income. Examiners, states the NFCDCU, have also been "rigid" in its application. LICUs should also have greater access to secondary capital and greater use of those funds, the paper states.
While approximately 3% of all credit unions are disappearing each year, primarily due to mergers, the decline in LICUs is even steeper, according to the Federation, which observes that the trend does not bode well for service to low-income earners. The paper asks the agency to adopt and implement policies that encourage such service and acknowledges that NCUA cannot eliminate the management challenges from new and more complex government regulations, such as the Bank Secrecy Act.
It goes on to say that NCUA's own white paper, published in February of 2005 and entitled "Supervising Community development Credit Unions-Balancing Their Mission and NCUA's Regulatory Responsibilities," was well-intentioned, but "examiners often ignore or are unaware of the guidance" it provides.
Examination practices "often undermine the goal of expanding credit union services to low-income people," states the paper. How? By improper comparisons to their asset-sized peers, it states. Serving low-income people is harder, more expensive and somewhat riskier but "that is the price of doing business in low-income communities." The NCUA should "give favorable weight" to CUs serving this market rather than provide "disincentives."
Finally, the paper states that the Community Development revolving Loan Fund administered by NCUA underperforms because of the "structure and permissible uses of funding." Less than half the funds held by NCUA is now out in loans, and while the agency is charged with monitoring the CDRLF, it should also "reexamine its own funding priorities and policies."