**7535-01-U**

**NATIONAL CREDIT UNION ADMINISTRATION**

**12 CFR Parts 701 and 705**

**RIN 3133-AC98**

**The Low-Income Definition**

**AGENCY**: National Credit Union Administration (NCUA).

**ACTION**: Final rule.

**SUMMARY**: NCUA is amending the definition of "low-income members" to
use median family income (MFI) to determine if a credit union qualifies
for a low-income designation and eligible for assistance from the
Community Development Revolving Loan Fund (CDRLF). The amendment will
eliminate the confusion associated with adjusting median household
income in metropolitan areas with higher costs of living. Additionally,
it will better align NCUA criteria for a low-income credit union (LICU)
designation with the criteria for the addition of an underserved area to
a federal credit union (FCU) field of membership and certification as a
Community Development Financial Institution (CDFI).

**DATES**: The rule is effective January 1, 2009.

**FOR FURTHER INFORMATION CONTACT:** Moisette Green, Staff Attorney,
Office of General Counsel, National Credit Union Administration, 1775
Duke Street, Alexandria, Virginia 22314-3428, or telephone: (703)
518-6540.

**SUPPLEMENTARY INFORMATION**:

[Background]{.underline}

The Federal Credit Union Act (Act) authorizes the NCUA Board (Board) to
define "low-income members" so that credit unions with a membership
consisting of predominantly low-income members can benefit from certain
statutory relief and receive assistance from the CDRLF. 12 U.S.C.
1752(5), 1757a(b)(2)(A), 1757a(c)(2)(B), 1772c-1. NCUA currently defines
"low-income members" in parts 701 and 705 of its regulations generally
as meaning members whose annual household income falls at or below 80%
of the national median household income and provides a differential for
certain geographic areas with higher costs of living. 12 CFR
701.34(a)(2), 705.3(a)(1). Federally-insured, state-chartered credit
unions (FISCUs) may also receive a LICU designation if they meet the
qualifications in §701.34(a); state regulators make or remove the
designation on the basis provided in §701.34(a) with the concurrence of
the appropriate NCUA regional director. 12 CFR 741.204(b). Therefore,
references in this preamble to FCUs includes FISCUs to the extent that
state law permits a LICU designation and permits FISCUs with the LICU
designation to accept nonmember accounts and secondary capital as
contemplated by NCUA regulations. 12 CFR 741.204(b)-(d).

In April 2008, NCUA proposed revising the definition of "low-income
members" in §§701.34(a)(2) and 705.3(a)(1) to base the determination on
MFI or median earnings for individuals instead of median household
income. 73 FR 22836 (April 28, 2008). For metropolitan areas, the
proposal defined "low-income members" as those living in a geographic
area where the income is at or below 80% of either the metropolitan area
or national metropolitan area income standard, whichever is greater. For
members living outside a metropolitan area, the proposal defined
low-income members as those living in a geographic area where the income
is at or below 80% of either the statewide, non-metropolitan area or
national, non-metropolitan area median family income, whichever is
greater. The proposed rule also contained grandfather provisions and
appeal procedures for FCUs that no longer qualify for a LICU
designation.

[Comments]{.underline}

NCUA received comments from three credit unions, six trade associations,
and one individual. Of those who commented on the rule generally, all
but one supported using the MFI standard. Eight commenters had
additional suggestions. One commenter suggested NCUA should ensure LICUs
are actually serving low-income members instead of changing the
low-income rule.

Three commenters suggested clarifying the rule so that members who do
not live in a low-income area, but are low-income, are included in the
definition of "low-income members." As discussed below, the final rule
provides that NCUA will estimate member earnings based on data from the
U.S. Census Bureau about the geographical area where members live, but
permits FCUs to present actual member income information, for example,
from loan applications or a survey.

One commenter stated it was unclear from which sources NCUA would obtain
the MFI and median earnings for individuals and questioned the
reliability of Census Bureau data. The final rule includes the website
address for the Census Bureau where the data is available. The American
FactFinder on the Census Bureau's webpage,

[http://factfinder.census.gov/home/saff/main.html?\_lang=en]{.underline},
provides statistics and data from the decennial census and other annual
surveys. Decennial census statistics for MFI are currently recorded in
table P77 for each geographic area, and table P85 records the median
earnings for individuals. The Census Bureau also collects information on
the U.S. population, employment, and housing annually through the
American Community Survey (ACS). MFI statistics collected through the
ACS are reported in table B19113. Table B20002 records median earnings
for individuals. NCUA will use the decennial census or ACS data,
whichever is most beneficial to an FCU, when determining whether it
qualifies for a LICU designation. When ACS data is not available for a
geographic area, decennial census data will be used. Regarding the
reliability of the data, the Census Bureau is charged with collecting
information on the U.S. population, employment, and housing.
[See]{.underline} 13 U.S.C. 41. The final rule better aligns the
low-income definition with the criteria for underserved areas and CDFIs,
which rely on data from the Census Bureau. 12 U.S.C. 1759(c)(2); 12 CFR
1805.201. Therefore, the Board believes the Census Bureau is the
appropriate source for data about MFI and median earnings for
individuals.

Three commenters recommended NCUA develop a process to permit FCUs to
qualify using other criteria, such as unemployment rates. In line with
its statutory authority to designate low-income credit unions, the Board
believes the criteria should be based on income. 12 U.S.C. 1752(5),
1757a(b)(2)(A), 1757a(c)(2)(b). Additionally, the Board notes the
parallel relationship between member income and unemployment rates.

Two commenters were concerned the rule would require credit unions to
reapply for the LICU designation annually and stated NCUA should assist
CUs to obtain the data necessary to qualify as a LICU. As explained
below, under the final rule, credit unions are not required to apply for
a LICU designation. Instead, based on data obtained through
examinations, a regional director will notify an FCU that it qualifies
for a low-income designation, and FCUs that accept the designation will
continue to have the designation, without any need to re-apply, as long
as they meet the rule's criteria.

Five commenters stated NCUA should permit current LICUs to maintain the
designation permanently and only apply the new rule to new LICU
designations. One commenter suggested the five-year grandfather period
is insufficient because secondary capital investments are usually for a
seven- to ten-year term. The Board does not believe the LICU designation
should be permanent because LICUs need to continue to be serving
low-income members to fulfill the Act's intent. Nevertheless, the Board
appreciates the need for transition periods. Current LICUs that do not
meet the criteria of the final rule or those that lose the designation
after initially qualifying will not immediately lose their designation.
They will have five years to meet the LICU criteria or otherwise comply
with the Act and NCUA regulations. The final rule also permits a
regional director to extend the adjustment period when an FCU has
secondary capital or nonmember deposit accounts with a maturity beyond
the five-year grandfather provision.

One commenter was concerned there may be unintended adverse consequences
if the rule is finalized and suggested NCUA monitor the rule's effect on
LICUs. NCUA staff has analyzed the impact the final rule will have on
current LICUs and potential designees and determined more FCUs will
likely qualify for the low-income designation under this final rule than
under the current rule. Further, with the possible exception of one or
two FCUs, the Board does not anticipate the final rule will adversely
affect current LICUs. Additionally, this commenter stated LICUs losing
the designation because of the change in income standard should have the
right to appeal the removal to the Board. An FCU may appeal to the Board
a regional director's determination that it no longer meets the criteria
for a LICU designation, but not the loss of the LICU designation because
of the change in the income standard.

One commenter raised a concern that the rule does not adequately address
LICUs that are not geographically based, e.g. single common bond CUs,
multiple common bond CUs. Under the final rule, FCUs can qualify for a
LICU designation under the new procedure regardless of their charter
type.

A commenter suggested NCUA consult with state supervisory authorities on
implications of the regulation. The final rule does not change the state
supervisory authorities' procedures for designating LICUs.

Another commenter suggested NCUA coordinate this rule with recently
proposed amendments to NCUA's Chartering and Field of Membership Manual
regarding underserved areas to ensure consistency and facilitate
outreach to underserved areas and low-income members. 73 FR 34366 (June
17, 2008). As explained in the preamble to the proposed rule, NCUA is
amending the low-income definition to, among other reasons, better align
NCUA criteria for a low-income designation with the criteria for the
addition of an underserved area to an FCU field of membership and
certification as a CDFI. *See* 73 FR 22836 (April 28, 2008).

Under the current rule, NCUA uses median household income to determine
if a credit union qualifies for the LICU designation, and this is
inconsistent with the field of membership (FOM) provisions and criteria
for CDFI certification. Multiple common-bond FCUs may add an underserved
area to their FOMs if, among other requirements, the area meets the
definition of an "investment area," as defined in §103(16) of the
Community Development Banking and Financial Institutions Act of 1994. 12
U.S.C. 1759(c)(2)(A)(i); NCUA Chartering and Field of Membership Manual,
Chapter 3, II.A., Interpretive Rulings and Policy Statement (IRPS) 03-1,
68 FR 18334 (April 15, 2003) (as amended by IRPS 06-1, 71 FR 36667 (June
28, 2006)). Treasury Department regulations, implementing the Community
Development Banking and Financial Institution Act of 1994, include an
MFI at or below 80 percent of the MFI for corresponding metropolitan
area as a factor supporting the determination that an area is an
investment area. 12 C.F.R. 1805.201(b).

Additionally, The Treasury Department's CDFI Fund, through monetary
awards and other benefits, helps promote access to capital and local
economic growth in urban and rural low-income communities across the
nation. Qualifying credit unions obtain assistance from the CDFI Fund to
offer financial services to and further economic development of
low-income members. The CDFI Fund uses MFI to implement the Community
Development Banking and Financial Institutions Act of 1994, as described
above.

The use of MFI as a standard to determine low-income status will bring
uniformity and consistency to the regulations, and should eliminate
industry confusion regarding the low-income designation and application
for an underserved area. Additionally, because credit unions may apply
for financial assistance from the CDFI Fund, the Board believes it would
be beneficial to align the low-income formula with the CDFI Fund
criteria. This would reduce the regulatory burden on credit unions
attempting to qualify for the advantages of receiving a LICU designation
and benefits from the CDFI Fund.

Two commenters suggested the Board should expand the rule to enable more
FCUs to serve low-income and underserved people. As noted above, the
final rule will likely allow more FCUs to obtain the low-income
designation. The Board notes the rule does not limit service to
low-income or underserved people, and all FCUs are encouraged to serve
low-income and underserved people within their applicable fields of
membership, regardless of whether they receive a LICU designation.

[The Final Rule]{.underline}

In order for an FCU to qualify as a LICU, a majority of its actual
members must meet the definition of "low-income members." The final rule
amends the definition of low-income members and clarifies the procedures
for designating an FCU as a LICU and removing the designation.

Under the final rule, low-income members are those who earn 80% of the
metropolitan area MFI or less. NCUA will make the determination of
whether a majority of an FCU's members are low-income based on data it
obtains during the examination process. This will involve linking member
address information to publicly available information from the U.S.
Census Bureau to estimate member earnings.[^1] Using automated,
geo-coding software, NCUA will use member street addresses collected
during FCU examinations to determine the geographic area[^2] and
metropolitan area[^3] for each member account. NCUA will then use income
information for the geographic area from the Census Bureau and assign
estimated earnings to each member. Using this method, if a majority of
an FCU's members have estimated earnings equal to or less than 80% of
the MFI for the metropolitan area, the FCU will qualify for a LICU
designation.

To ensure all eligible FCUs qualify for the LICU designation under the
new procedure, median earnings for individuals may be substituted for
MFI, and non-metropolitan area MFI data will be used when a member lives
outside a metropolitan area. NCUA recognizes this approach means
different MFI levels will apply in different parts of the country. This
approach recognizes the concept of low-income as related to the cost of
living and salaries in geographic areas. The Census Bureau, however,
provides national statistics in addition by geographical areas and, to
ameliorate potential disparity among geographic areas, the rule provides
an FCU will also qualify for a LICU designation if a majority of its
members are considered low-income when compared to the national
metropolitan MFI.

The rule also provides an alternative basis for an FCU to qualify for a
LICU designation. An FCU may be able to demonstrate the actual income of
its members based on data it has, for example, from loan applications or
surveys of its members. An FCU may qualify as a LICU if it can establish
a majority of its members meet the low-income formula. For example, an
FCU with 1,000 members may be able to show the actual income of 501 or
more of its members is equal to or less than 80% of the MFI for the
metropolitan area(s) where they live. As a practical matter, the Board
thinks few FCUs will need this option because NCUA's approach of
matching member residential information with Census Bureau income
information will provide an estimate very close to members' actual
income.

The proposed rule stated that a regional director "will designate" an
FCU as a LICU "if a majority of its membership qualifies as low-income
members" but did not indicate how an FCU would be informed of the
designation, how an FCU would indicate that it wanted the designation,
or whether an FCU could refuse the designation. The final rule clarifies
that a regional director will notify an FCU that it qualifies, and an
FCU will then have 30 days to notify the regional director that it wants
to receive the designation. Thus, the final rule permits an FCU to
refuse a low-income designation simply by opting not to notify the
regional director that it wants to receive the designation. The final
rule does not require state supervisory authorities to change the
process or procedures they currently use for FISCUs to receive the LICU
designation from state regulators.

Additionally, the final rule clarifies the process for removing a
low-income designation. If a regional director determines an FCU no
longer meets the criteria for the LICU designation, the regional
director will notify the FCU in writing. The FCU will have five years
after the date of the notice to either requalify as a LICU or come into
compliance with regulations applicable to credit unions that do not have
a low-income designation. If an FCU does not requalify and has secondary
capital or nonmember deposit accounts with a maturity that extends
beyond the five-year adjustment period, a regional director may give the
credit union additional time to satisfy the terms of any account
agreements.

An FCU may appeal to the Board a regional director's determination that
it no longer meets the criteria for the LICU designation. The rule
states an appeal must be filed within 60 days of the date of the
regional director's notice. An FCU will submit its appeal through the
appropriate regional office. On appeal, the Board will determine whether
the regional director correctly applied the regulatory criteria. An FCU
may not, however, appeal the loss of the LICU designation to the Board
solely because of the change in the income standard in this rule.

In addition to streamlining the proposed rule based on the comments, the
final rule also revised some of the provisions in the proposal for
clarity. The proposed rule noted, with a cross-reference to §701.32,
that LICUs may receive shares from nonmembers. The final rule has
eliminated this statement as unnecessary. The proposed rule also defined
the term "geographic areas" and defined low-income members in terms of
meeting the MFI criteria on the basis of earning or the geographic areas
where members live. The final rule has deleted the definition of
geographic areas as unnecessary. As proposed, the alternatives of
earning or residence were, in effect, redundant. As provided in the
final rule, the LICU designation is based on calculating members'
estimated earnings based on where they live, using data from the Census
Bureau, and defining geographic areas in the rule is unnecessary as this
is part of the data available from the Census Bureau.

Finally, the final rule makes a conforming amendment to §705.3 and
clarifies that FCUs qualifying for the low-income designation under
§701.34 may apply for assistance from the CDRLF. Part 705 and §701.34
continue to apply to state-chartered credit unions in accordance with
§741.204. As stated above, there is no change in the process or
procedures for FISCUs.

**Regulatory Procedures**

[Regulatory Flexibility Act]{.underline}

The Regulatory Flexibility Act requires NCUA to prepare an analysis to
describe any significant economic impact any regulation may have on a
substantial number of small entities. 5 U.S.C. 603(a). For purposes of
this analysis, NCUA considers credit unions having under \$10 million in
assets small entities. Interpretive Ruling and Policy Statement 03-2, 68
FR 31949 (May 29, 2003). As of December 31, 2007, out of approximately
8,410 federally insured credit unions, 3,599 had less than \$10 million
in assets.

This final rule directly affects all low-income credit unions, of which
there are approximately 1,087. NCUA estimates approximately 692
low-income credit unions are small entities. Therefore, NCUA has
determined this final rule will have an impact on a substantial number
of small entities.

NCUA has determined, however, the economic impact on entities affected
by the final rule will not be significant. The rule aligns criteria for
a low-income designation with the criteria for the addition of an
underserved area to a federal credit union field of membership under
Interpretive Rulings and Policy Statement (IRPS) 03-1, 68 FR 18334
(April 15, 2003) (as amended by IRPS 06-1, 71 FR 36667 (June 28, 2006))
and certification as a CDFI. The final rule establishes one income
standard for determining a low-income designation, underserved areas,
and investment areas. It also eliminates the confusion within the credit
union industry due to the use of different income standards. NCUA
believes the final rule reduces the regulatory burden for LICUs and
minimizes any economic impact. Additionally, the final rule contains a
five-year period for affected LICUs to make necessary operational
adjustments. Accordingly, the Board certifies this rule does not have a
significant economic impact on a substantial number of small entities.

[Small Business Regulatory Enforcement Fairness Act]{.underline}

The Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996,
Pub. L. 104-121, provides generally for congressional review of agency
rules. A reporting requirement is triggered in instances where NCUA
issues a final rule as defined by Section 551 of the Administrative
Procedures Act. 5 U.S.C. 551. The Office of Information and Regulatory
Affairs, an office within OMB, has determined that, for purposes of
SBREFA, this is not a major rule.

[Paperwork Reduction Act]{.underline}

In accordance with the Paperwork Reduction Act of 1995 (PRA), 44 U.S.C.
3501 [et seq.]{.underline}, NCUA may not conduct or sponsor, and a
person is not required to respond to, an information collection unless
it displays a currently valid Office of Management and Budget (OMB)
control number. The final rule now provides for FCUs, once they are
notified that they qualify for the low-income designation, to notify the
appropriate regional director that they wish to accept the designation.
Although, in the past, FCUs have requested the designation from regional
offices, the regulation did not address application procedures. The
final rule, like the proposed, provides that NCUA will make the
determination without requiring FCUs to apply. As FCUs will, however, be
required to notify regional directors that they wish to accept the
designation, NCUA believes this notification is a "collection of
information" within the meaning of section 3502(3) of the PRA.
Additionally, FCUs that do not receive notification from the regional
director but believe they qualify for the LICU designation may submit
information to demonstrate they meet the criteria. NCUA believes this
voluntary submission is also an information collection. NCUA has
submitted the requirements of the information collections contained in
the final rule to OMB for review and approval under section 3507 of the
PRA and §1320.11 of OMB's implementing regulations. 5 CFR §1320.11**.**
OMB approval is pending.

[Executive Order 13132]{.underline}

Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. The final rule will not have substantial
direct effect on the states, on the connection between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has
determined this final rule does not constitute a policy that has
federalism implications for purposes of the executive order.

[The Treasury and General Government Appropriations Act, 1999 --
Assessment of Federal Regulations and Policies on Families]{.underline}

NCUA has determined that this final rule will not affect family
well-being within the meaning of section 654 of the Treasury and General
Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681
(1998).

**List of Subjects**

**12 CFR Part 701**

Credit unions, Federal credit unions, Low income, Nonmember deposits,
Secondary capital, Shares

**12 CFR Part 705**

Community development, Credit unions, Loans, Low income, Technical
assistance.

By the National Credit Union Administration Board, on November 20, 2008.

Mary F. Rupp

Secretary of the Board

For the reasons stated above, NCUA amends 12 CFR parts 701 and 705 as
follows:

**PART 701 --- ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS**

1\. The authority for part 701 continues to read as follows:

**Authority:** 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782, 1787,
1789; Title V, Pub. L. 109-351, 120 Stat. 1966.

2\. Amend § 701.34 by revising paragraph (a) to read as follows:

**§701.34 \[Amended\]**

\(a\) [Designation of low-income status]{.underline}.

> \(1\) Based on data obtained through examinations, a regional director
> will notify a federal credit union that it qualifies for designation
> as a low-income credit union if a majority of its membership qualifies
> as low-income members. A federal credit union that wishes to receive
> the designation will notify the regional director in writing within 30
> days of receipt of the regional director's notification.
>
> \(2\) Low-income members are those members who earn 80% or less than
> the median family income for the metropolitan area where they live or
> national metropolitan area, whichever is greater. A regional director
> may use total median earnings for individuals instead of median family
> income if it is more beneficial to a federal credit union when
> determining if the credit union qualifies for a low-income credit
> union designation. A regional director will use the statewide or
> national, non-metropolitan area median family income instead of the
> metropolitan area or national metropolitan area median family income
> for members living outside a metropolitan area. Member earnings will
> be estimated based on data reported by the U.S. Census Bureau for the
> geographic area where the member lives. The term "low-income members"
> also includes those members enrolled as students in a college,
> university, high school, or vocational school.
>
> \(3\) Federal credit unions that do not receive notification that they
> qualify for a low-income credit union designation but believe they
> qualify may submit information to the regional director to demonstrate
> they qualify for a low-income credit union designation. For example,
> federal credit unions may provide actual member income from loan
> applications or surveys to demonstrate a majority of their membership
> is low-income members.
>
> \(4\) If the regional director determines a low-income designated
> federal credit union no longer meets the criteria for the designation,
> the regional director will notify the federal credit union in writing,
> and the federal credit union must, within five years, meet the
> criteria for the designation or come into compliance with the
> regulatory requirements applicable to federal credit unions that do
> not have a low-income designation. The designation will remain in
> effect during the five-year period. If a federal credit union does not
> requalify and has secondary capital or nonmember deposit accounts with
> a maturity beyond the five-year period, a regional director may extend
> the time for a federal credit union to come into compliance with
> regulatory requirements to allow the federal credit union to satisfy
> the terms of any account agreements. A federal credit union may appeal
> a regional director's determination that the credit union no longer
> meets the criteria for a low-income designation to the Board within 60
> days of the date of the notice from the regional director. An appeal
> must be submitted through the regional director.
>
> \(5\) Any credit union with a low-income credit union designation on
> January 1, 2009 will have five years from that date to meet the
> criteria for low-income designation under paragraph (a)(1) of this
> section, unless the regional director determines a longer time is
> required to allow the low-income credit union to satisfy the terms of
> a secondary capital or nonmember deposit account agreement.
>
> \(6\) [Definitions]{.underline}. The following definitions apply to
> this section:
>
> [Median family income]{.underline} and [total median earnings for
> individuals]{.underline} are income statistics reported by the U.S.
> Census Bureau. The applicable income data can be obtained via the
> American FactFinder on the Census Bureau's webpage at
> <http://factfinder.census.gov/home/saff/main.html?_lang=en>.
>
> [Metropolitan area]{.underline} means an area designated by the Office
> of Management and Budget pursuant to 31 U.S.C. 1104(d), 44 U.S.C.
> 3504(c), and Executive Order 10253, 16 FR 5605 (June 13, 1951) (as
> amended).

\* \* \* \* \*

**PART 705 --- COMMUNITY DEVELOPMENT REVOLVING LOAN FUND FOR CREDIT
UNIONS**

3\. The authority for part 705 continues to read as follows:

**Authority:** 12 U.S.C. 1772c-1; 42 U.S.C. 9822 and 9822 note.

4\. Amend § 705.3 by revising paragraph (a) to read as follows:

**§ 705.3 Definitions.**

> \(a\) The term "low-income members" means those members defined in
> §701.34 of this chapter.

**\* \* \* \* \***

[^1]: Using Census Bureau reports, NCUA can obtain income information
    for various types of geographic areas, including a "census block." A
    census block is the smallest geographic area for which the Census
    Bureau collects and tabulates decennial census data and is an area
    bounded on all sides by visible features, such as streets, roads,
    streams, and railroad tracks, and by invisible boundaries, such as
    city, town, township, and county limits, property lines, and short,
    imaginary extensions of streets and roads. A census block may be the
    size of a city block, or many square miles of territory in rural
    areas.

[^2]: A "geographic area" is any State, the District of Columbia,
    American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, the
    Virgin Islands, or any territory of the United States or a
    geographic unit that is a county or equivalent area, a unit of a
    local government, incorporated place, census tract, census block,
    Zip Code Tabulation Area, block group, or Native American, American
    Indian, or Alaskan Native area, as such units are defined or
    reported by the U.S. Census Bureau.

[^3]: A "metropolitan area" is an area designated by the Office of
    Management and Budget pursuant to 31 U.S.C. 1104(d), 44 U.S.C.
    3504(c), and Executive Order 10253, 16 FR 5605 (June 13, 1951) (as
    amended).