In many cases, a proposed federal credit union (PFCU) can seek a low-income designation (LID) prior to chartering. If a majority of the PFCU’s potential members are believed to be low-income members, a low-income designation can be requested when the preliminary field of membership approval is processed.
A credit union can be designated low-income when a majority of the credit union’s potential or actual membership qualifies as low-income, meaning their family income is 80 percent or less than the median family income for the metropolitan area where they live or for the national metropolitan area, whichever is greater. Similarly, a credit union qualifies for this designation if its potential or actual members earn 80 percent or less than the total median earnings for individuals for the metropolitan area where they live or for the national metropolitan area, whichever is greater. For members living outside a metropolitan area, the statewide or national, non-metropolitan area median family income or median earnings for individuals is used to qualify for the designation. The term “low-income members” also includes those members enrolled as students in a college, university, high school, or vocational school. The NCUA will determine if a proposed area meets the low-income requirements.
The methodology for determining whether a majority of the potential members qualify as low-income members will largely depend upon the charter type being requested and whether the PFCU can provide address information on the potential members.
NOTE: If the potential members do not qualify for the designation when the PFCU application is submitted, a credit union can request a low-income designation after chartering, based on actual members, as detailed in the NCUA’s Regulations, Section 701.34. Although there is no minimum number of members needed to apply for a low-income designation, keep in mind that it is important to maintain this membership majority so that adding new members would not jeopardize the low-income designation.
Benefits of Low-Income Designation
Credit unions designated low-income are afforded certain benefits not available to other credit unions, including:
- Ability to accept nonmember deposits from any source up to the greater of $3 million or 50 percent of total shares.
- Ability to receive technical assistance grants and low-cost loans from the Community Development Revolving Loan Fund, which is administered by the NCUA. Technical assistance grants generally reimburse credit unions for expenses related to increasing member services, training of staff, or marketing if needed to improve the long-term financial health and stability of the credit union. Information on the Technical Assistance Grant Program, the Community Development Revolving Loan Program, and other resources for low-income designated credit unions can be found here.
Anticipation of NCUA technical assistance grants can be used as supplementary sources of funding to strengthen the potential for the PFCU’s ability to operate independently but cannot be relied upon as a primary source of capital, since they would only potentially become available after chartered, and must be used for a specific purpose. - Exemption from compliance with the aggregate member business loan limit set forth in section 107A of the Federal Credit Union Act, 12 U.S.C. § 1757a, and section 723.8(d) of the NCUA Regulations.
- Ability to include Subordinated Debt in the net worth ratio calculation. Additional information on Subordinated Debt is located in Part 702 Subpart D. Prior to January 1, 2022, low-income credit unions could include secondary capital in the net worth calculation under section 701.34(b) of the NCUA’s Regulations. The secondary capital rule will be replaced by the Subordinated Debt rule as of January 1, 2022, with an exception for LICUs that have outstanding issuances are grandfathered under Part 702.
Subordinated Debt can be considered as part of your financial projections and factor into the determination of the PFCU’s economic viability. It should not be included in your pro forma financial statement projections as donated capital for purposes of applying for a charter.