Low-Income Designation vs. CDFI

Credit unions that serve moderate- to low-income individuals and distressed communities lacking access to capital sometimes benefit from extra funding to help them serve these communities. Unfortunately, there’s some confusion between two designations—the low-income designation (LID) and the community development financial institution (CDFI) designation—that require different paths to gain funding.

The confusion between the two designations stems from two things: First, both LID credit unions and CDFIs serve low- to moderate-income consumers. That means teachers, nurses, police officers and just about every enlisted military member falls into this category. This is working class America, in many cases people who are already your members or who chartered your credit union. A lot of credit unions think they’re not eligible for assistance in serving low-income people, but may well qualify when you look at the specific criteria.

Second, both designations require some type of regulatory approval. While the approval comes from two different sources, both are governmental authorities.

This confusion has posed hurdles for credit unions that might benefit from funding to help individuals and communities. Here’s how a CDFI designation is different from a LID:

Administration

• A low-income designation is administered by the National Credit Union Administration; and
• a CDFI certification is administered by the CDFI Fund, a bureau of the U.S. Treasury Department.

Qualification

Credit unions serve predominantly (50 percent plus one member) low-income members qualify to receive a low-income designation from NCUA. “Low income” under NCUA’s rules means anyone who earns 80 percent or less of the median income in the metropolitan area where they live, or earns 80 percent or less of the national median average, whichever is greater. The low-income designation is often fairly automatic because it’s black and white.

Credit unions seeking CDFI certification must show that 60 percent of their service is to “low- to moderate-” income people. The CDFI Fund uses the U.S. Department of Housing and Urban Development’s definition of “moderate- to low-income,” which is 80 percent or less of median family income. It lets the credit union choose whether it wants to use the national average or its state’s average to do the calculation.

For instance, the median family income in the U.S. is $64,400. The median family income in California is a bit higher, at $69,600. For purposes of the CDFI Fund, you’d take 80 percent of each and then use the lower number for consideration. In our example, any family earning less than $51,520 (.80 * $64,400) would qualify.

Credit unions can get to that 60 percent in various ways:

• by showing that 60 percent of members are low to moderate income under CDFI’s definition.
• by showing that 60 percent of the members served by the credit union are people who have been traditionally disenfranchised from financial services (like African Americans, Native Americans or Native Hawaiians); or
• by showing that the credit union serves a low income geographic area.

There are advantages for getting a LID or a CDFI designation. (A credit union can get both designations if it wishes.)

CDFI advantages include a well-recognized status as a CDFI, plus:

• access to CDFI Fund grant programs, with the majority providing funding of $2 million per year per credit union (in the form of a “Financial Assistance” grant—other types and amounts of grants also possible). These grants are used for funding programs, providing the credit union capital or bolstering loan loss reserves;
• access to capital from outside sources;
• exemption from NCUA’s member business lending cap; and
• exemption from certain regulatory requirements, such as the Reg Z ability to repay requirements.

Low-income designation:

• makes credit unions eligible to attract secondary capital from additional public and private sector sources, allowing them to grow at an accelerated pace;
• allows credit unions to count secondary capital toward their net worth;
• generates an exemption from NCUA’s member business lending cap; and
• provides access to grants through NCUA’s Community Development Revolving Loan Fund, which traditionally has provided grants of up to $25,000 for initiatives approved by NCUA.

Credit unions certainly don’t need grant money to serve working class members; it’s often part and parcel of their values and mission. Credit unions seeking grant funds to help better serve those members or expand services to better meet the needs of their communities, however, are sometimes confused about eligibility requirements for different grant programs.

Only credit unions with a low-income designation are eligible to seek grant funding from NCUA, and only credit unions with a CDFI certification are eligible to seek grant funding from the CDFI Fund. Just having a low-income designation doesn’t make a credit union eligible to apply for grants from the CDFI Fund and vice versa.

Because the certification criteria for both programs can be similar, CU Strategic Planning has asked NCUA to automatically recognize CDFI-certified credit unions as also having a low-income designation. If approved, credit unions could be “grandfathered” into the program because they’ve already met the stricter CDFI certification standards.

Credit unions need to be informed about their options and the criteria for each program, as well as the available funding. It’s part of understanding the resources that are available to every credit union.

 Stacy Augustine is CEO/managing partner of CU Strategic Planning, Tacoma, Wash.