Critical Capital: How Secondary Capital Investments Help Low-Income Credit Unions Hit Their Stride

May 14, 2002 | by
  • Description

Credit unions that serve predominantly low-income consumers or low-income credit unions (LICUs) tend to be smaller and experience greater challenges maintaining adequate net worth than mainstream credit unions or banks. Concerns regarding adequate net worth have increased since the National Credit Union Administration (NCUA) approved "Prompt and Corrective Action" (PCA) regulations in August 2000. PCA is an early warning system that is used by NCUA to identify credit unions that are not sufficiently capitalized. NCUA has developed several policies to support LICUs, such as allowing them to accept deposits from non-members. In 1996, it approved a regulation that allows LICUs to increase their net worth by accepting secondary capital investments. The NCUA Board intended that the additional capital be used to support increased lending and services. Therefore, applicants are required to submit a long-term business plan to NCUA that describes how the secondary capital will promote institutional growth and stability and help the credit union achieve its goals.