What if we told you that credit unions nationally have between $100 million and $200 million that they could be giving to their communities, at no cost to their members, that they’re NOT? Unfortunately, it’s true. Credit unions have the ability to make a massive and direct impact in the lives of their members and their communities through Charitable Donation Accounts (CDAs).
During this unprecedented time, it has never been more important to give back to those in need.
Your credit union has always looked for ways to help your community in times of distress. Whether caused by local disaster, financial crisis, or the changing whims of bankers, you have always been there. The COVID financial crisis has affected your community in ways different from any prior hardship. While your members may be largely weathering the storm, other members of your community are likely facing the strain of the economic impact of COVID-19. While a limited number of your members are using hardship deferment CU loans, nationally, data shows roughly twice the rate of forbearance on mortgages requiring higher credit scores. This means the more economically sensitive people in your community are being squeezed.
The Government has taken extraordinary steps to try to help the U.S. weather the COVID-related disruption. The knock-on effect of this stimulus is extremely low-interest rates and a huge flow of new deposits to your CU. Put simply, you have more liquid funds than usual, yet few places you can invest those funds that provide compelling yields. A CDA offers a win-win-win situation by helping you deploy excess liquid funds into instruments that yield more than your traditional options, generating added earnings for your credit union while helping your community in the process.
What does section 721.3(b) require of CDA accounts?
According to 721.3(b) of the Federal Credit Union Act, CDAs are designed to generate added earnings for 501(c)3 charities. Investment in a CDA is limited to 5% of a Credit Union’s net worth. The Credit Union is required to give an amount equal to 51% of the earnings of the CDA to a 501(c)3 charity keeping the other 49%. This contribution is based on a 5-year rolling look-back of CDA earnings.
How a CDA works
The CDA allows the credit union to invest in assets beyond their traditionally allowable options. In the current environment, many of those options are expected to provide significantly higher yields than traditional options. In fact, many options allow the credit union to earn as much if not more than traditional alternatives even after providing the required 51% to the charity.
Credit unions that already give substantially to charities have even more reason to consider the CDA. If you have already budgeted charitable giving for 2021 the CDA can be used to offset that expense. This achieves yet another goal most credit unions have this year; reducing or mitigating expenses across the organization.
A CU Investment of $5M towards a CDA account that earns 4% would yield $200,000 in total. Per CDA regulations, an amount of $102,000 (51%) would be contributed to a 501(c)3, and $98,000 (49%) would be retained by the CU.
Given the current yield environment, a CDA earning a 2.5% yield split 51% to 49%. The charity would receive 1.275%, and the credit union would retain 1.225%. Even the lower-level yield of 1.225% provides the credit union a return consistent with what their normal investments are earning today. If a more sophisticated alternative is considered, the yield to the credit union could be a multiple of this value.
An example of community need comes from a credit union we work within Michigan. This credit union found that numerous students in districts within its community had unpaid school lunch balances. This put pressure on the district and parents and often stigmatized the student. Many of the parents were on the edge of not being able to make ends meet. In paying off $45,000 of those collective balances, the credit union was able to directly help some of the most vulnerable in the community and send the message of true community involvement and care.
When you create a lasting impact on your community, you receive lifelong, loyal members who advocate for your business.
It’s time to get creative!
Get creative with how your credit union gives back to the community. Poll your Board, ask your members, take the temperature of the community and see what moves people around you.
Here are a few ideas from our team:
- Food scarcity is a massive issue in our current situation, and it’s likely going to continue. You have the ability to draw attention to this issue, and directly help those who experience food scarcity.
- Corporate matching programs: Creating a corporate matching program within your credit union will help magnify the effect on your community while incorporating your team into the giving. These programs help to build a community within your organization as well as support the community you serve.
- United Way: Donating to the United Way is a great way to invest in improving the lives of others. The United Way serves to give individuals an equal opportunity to succeed.
- National Credit Union Foundation: The National Credit Union Foundation aims to enhance financial literacy and knowledge throughout the United States. If this program gained traction 10 years ago, we might not have the student loan crisis we have today.
Your communities need help now more than ever. Consider starting a CDA program that helps those in need, while also helping your credit union. At Newcleus Credit Union Advisors, we believe in helping you make a tremendous impact in your community. The Charitable Donation Account is a great way to kickstart or enhance your effort. Contact us today to see how we can help your credit union start giving back!