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In Massachusetts, growth of low-income CUs rankles state's bankers

Massachusetts has seen rapid growth in its number of low-income designated credit unions since the end of 2012, but bankers in the state say some of those institutions are using the tag more for growth than anything else.

Massachusetts added 48 LID credit unions between the third quarter of 2012 and the first quarter of 2017 -- a 267% increase. Texas added 67, Michigan 58 and Florida 49 during that four-and-a-half year period, making them the only states to add more than Massachusetts during that time frame.

LID credit unions comprised 38.4% of all credit unions in Massachusetts at the most recent quarter compared to 25.4% just two years ago.

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In a 2016 study, the Massachusetts Bankers Association said the designation exempts credit unions from federal regulations, including limits on business lending and membership eligibility. Daniel Forte, president and CEO of the Association, said in an interview that the group commissioned the study after it noticed "explosive growth" in LID credit unions and wanted to figure out why.

He said credit unions have pushed legislatively both in Washington D.C. and in Massachusetts for new benefits to accompany the designation while continuing to claim they are simply serving people of modest means. Forte said the National Credit Union Administration promotes the designation even though there is no federal standard to measure service to those low-income individuals comparable to the Community Reinvestment Act for banks. "NCUA continues to push this designation really as a loophole to avoid any membership restrictions and any of the caps that they could not get legislatively in Washington on business lending," he said.

Gentile said Massachusetts has a lot of "have" and "have-not" areas. He said Lowell, for example, is a great area but also has a sizable portion of low-income households. "It is good to have opportunities for those in need," he said.

Forte said the association was amazed at the low threshold that was required to become low-income designated. Federal credit unions are eligible for the designation when a majority of their membership qualifies as low-income. That group includes those families whose income is 80% or less than the median family income for the metropolitan area where they live or national metropolitan area, whichever is greater, according to the NCUA. Members enrolled as students in a college, university, high school or vocational school also qualify.

"If you applied that standard to the banking industry, every single bank would be designated low income," Forte said.

He said there are exceptions to the rule, but many of the larger credit unions are using the designation as a growth strategy rather than for what it was intended. "When you look at the industry in it's entirety, clearly serving low-income individuals is not the motivation," he said. "It's growth."

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Cooperative Credit Union Association President Paul Gentile said in an interview that asset size has nothing to do with being a traditional credit union and added that some of the largest institutions in the U.S. are "as pure as it gets." He said he was not aware of any credit unions that were using the designation as a way to spur growth.

Instead, Gentile said the growth in the number of low-income credit unions is attributable to efforts by the NCUA to get more credit unions on board with the designation. He said one of the biggest advantages to the program is the possibility of additional funding from the Community Development Financial Institutions Fund. LID credit unions also have the ability to exceed the 12.25% cap on business lending, but that is hardly ever exceeded anyway, he said.

Forte said some credit unions have increased their commercial lending at the high end of the market, and he questioned whether the subsequent risk is being monitored sufficiently. Additionally, he said consumers ultimately end up paying more taxes because municipalities bring in less income as some business gravitates from tax-paying institutions to tax-exempt credit unions.

And it is not only Massachusetts that has seen a spike in the number of LID credit unions. There has been nearly a 40% increase in the number of low-income designated credit unions in the U.S. during the last four-plus years. There were 1,813 LID credit unions at the end of the third quarter of 2012, but by the close of the first quarter of 2017 that number had risen to 2,536.

Forte said in Massachusetts, 70% of the banks are mutuals that are similar in governance and operation to credit unions. And given the choice between two similar institutions where one can offer lower rates due to the tax exemption, people will often chose a credit union. "They're definitely going to take business away from that tax-paying entity," he said.

Forte said the association's concern has nothing to do with being afraid of competition, but instead it feels that from a public policy standpoint consumers are not being well served. He said Congress is beginning to understand that there are two classification of credit unions -- one type that are essentially tax-exempt banks and those that "stick to their knitting." And there needs to be a bifurcation in how those two groups are regulated, he said.

Gentile pointed out that some banks in the state have national and international parent companies. "So I think they're out of line when they talk about who's serving who," he said. He added that credit unions in Massachusetts have only 7% market share. "But they wish it was 0%," he said of the banks. "So unless they have 100% we're going to hear it from them."

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Click here for the credit union regulatory tear sheet template.

Click here for a refreshable template that combines the balance sheet and income statement of two or more credit unions.

Users can also access a refreshable financial performance report that displays customized, multi-period financial trends and operating results for a credit union versus an asset- or state-based group of your choice.