September 17, 2012

Lower-Income-Area Lending Deals Not Always Grabbed By Credit Unions

Credit unions whose members predominantly reside in lower-income areas can qualify for big benefits that other credit unions, especially larger ones, would envy.

Low-income credit unions (LICUs) are not subject to a business lending cap, they can accept nonmember deposits, access special grant programs and raise secondary capital for lending.

Though applying for the LICU designation has never been easier, not all eligible credit unions see it as a benefit.

Gardner-based GFA Federal Credit Union was one of 1,001 credit unions across the country to receive a letter in August from its regulator, the National Credit Union Administration (NCUA), saying it was eligible to become an LICU. All it would have to do is reply that it wanted the designation. No additional paperwork would be required.

Tina M. Sbrega, president and CEO at GFA, said it's unlikely GFA would join the more than 250 other credit unions across the country that have accepted LICU designations this month as a result of the NCUA push, part of a White House drought-relief measure. Just under half of the credit unions that received letters are in drought-stricken areas.

I-C Federal Credit Union in Fitchburg also received a letter, as did UMass Five College Credit Union, which has a branch at the University of Massachusetts Medical Center campus in Worcester.

Several executives at I-C did not return messages seeking comment.

UMass Five was the only one of 16 institutions that received letters and that decided to accept the designation, according to the NCUA. UMass Five is somewhat unique in that many of its members are students, which fall within the NCUA's definition of low income.

Including UMass Five, there are now eight LICUs in Massachusetts.

Not For Everyone

The type of credit union that would most want an LICU designation may be up against their business lending caps, experts say. Their capital may be depleted. And they may want access to federal grants that can pay for training.

Sbrega said GFA doesn't fall into any of those categories. GFA business lending to members has grown from $14.2 million in the second quarter of 2008 to $17.6 million in the second quarter of this year.

"We've got a long ways to go in lending before we even hit the cap, so some of the advantages of the low-income designation don't really pertain to us," Sbrega said.

GFA's main focus is consumer financial services, she said. An increased emphasis on business lending would represent a change in strategic direction.

Impact And Other Considerations

Daniel Egan, president of the Massachusetts Credit Union League, said he's not sure if extra paperwork was holding back eligible credit unions from pursuing LICU designations in the past.

Egan thinks the outreach might cause some credit unions to consider it again if they were to become eligible because of the recent incorporation of 2010 U.S. Census Bureau income data into the NCUA's database. A credit union ineligible for low-income status after the 2000 census may be eligible now.

Also, though LICU benefits look good, Egan suspects some may feel there's a stigma that comes with the designation.

"In their mind, it may not reflect what they want to reflect to their membership," Egan said.

That stigma has been around for a while, said Robert Leonard, director of consumer access at NCUA.

"It's unfortunate, because there are a lot of nice resources available," Leonard said. "We do struggle with that."

Another concern may be the potential for increased scrutiny to ensure LICUs are actually lending to those with lower incomes, said Keith Leggett, a vice president and senior economist at the American Bankers Association.

"The purpose of this supplemental capital was to assist credit unions who were truly serving low-income communities," Leggett said. But there's no way to truly measure that, he charges. Federally chartered credit unions, unlike banks, are not required to comply with the Community Reinvestment Act of 2009, which measures the extent to which low-income communities are being served by financial institutions.

Bankers are critical of credit unions' attempts to lift business lending caps because credit unions are tax-exempt. They also say the recent push by the NCUA to enroll more credit unions in the program is disingenuous, because it's wrapped into a drought-relief program.

Though Massachusetts banks may resent credit unions trying to take some of their lending turf, banks still dominate the commercial lending market.

From 2001 to 2011, credit unions increased their small business lending share relative to community banks in the state from 3.5 percent to 10.4 percent, according to a study commissioned by the Massachusetts Bankers Association.

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