Written by Shari R. Pogach, Regulatory Paralegal
Earlier this year, NCUA streamlined the application process for a credit union to become Community Development Financial Institution (CDFI)-certified. When CDFI-certified, a credit union receives specially tailored financial and technical assistance to help enhance and/or expand its products and services to better serve members in impoverished communities. NCUA Chairman Rick Metsger has also established a goal of adding more than 200 CDFI-certified credit unions in 2016. The agency is actively encouraging eligible credit unions to apply for certification.
NCUA’s recently released Supervisory Letter SL 16-01 provides field staff with examination and supervision guidance in assessing a CDFI credit union’s use of CDFI grants and other nontraditional funding sources to support various financial services. The agency notes that the business model of a CDFI, much like a low-income designated credit union, may have a very different risk profile than other credit unions. Some risks in a business model are acceptable but the guidance is intended to ensure that a CDFI-certified credit union adequately manages those risks.
The supervisory letter outlines common characteristics of CDFIs, including:
- Higher operating expenses;
- Reliance on fee income;
- Low dollar transactions;
- Frequent transactions;
- Higher delinquency; and
- Use of less traditional funding sources to support various products and services.
In its guidance, the agency points out that CDFI-certified credit unions might rely on less traditional funding sources and this can present the risk that increased expenditures on new programs and services might not be viable if a funding provider decreases or discontinues funding. NCUA finds such risk acceptable if a credit union has developed and administered a reasonable business plan (appropriate to the size and complexity of the credit union) involving CDFI funding. If a credit union meets these conditions, examiners and examination reports will support CDFI-related activities.
To assess a CDFI-certified credit union’s condition, NCUA expects field staff to focus on:
- If the business plan is reasonable, and whether any new or modified programs associated with reliance on any non-traditional funding are properly managed.
- Whether the credit union is faithfully following its business plan.
- Whether the credit union is using any non-traditional funding in accordance with the terms of the funding.
- The extent to which the credit union is properly accounting for the non-traditional funding.
In terms of specific CDFI grant accounting issues, NCUA states that accounting for CDFI grant revenue can differ based on the type and characteristics of the award. The supervisory letter indicates examiners will review CDFI grant agreements to see whether a grant has any restrictions and/or conditions. Timing of CDFI grant accounting entries depends on the circumstances around the execution of a grant agreement, receipt of the disbursements and when the grant revenue is earned. In some instances the time lag between when a credit union receives grant disbursements and earns grant revenue will dilute (lower) the credit union’s net worth ratio. This in turn could trigger more actions in order to meet regulatory net worth requirements. According to NCUA, it is important for a credit union to recognize grant revenue as “soon as appropriate to avoid any negative implications from these timing differences.” Timing issues will be considered in the evaluation of the capital adequacy of the credit union.
Embedded within the guidance is an attachment with illustrative accounting entries for recording CDFI grants in accordance with generally accepted accounting principles (GAAP). Also provided are links to additional relevant guidance for CDFI credit unions.