Leveraging charitable donation accounts: A strategic tool for credit unions

Credit unions have always been at the forefront of community support, rooted in the principle of “people helping people.” While this ethos is evident in the day-to-day operations of credit unions, it takes on additional dimensions with the use of Charitable Donation Accounts (CDAs). Approved by the National Credit Union Administration (NCUA) in 2013, CDAs offer credit unions a powerful way to expand their philanthropic efforts while also enhancing their financial strategies. This article explores how credit unions can effectively use CDAs to support their communities, increase member engagement, and bolster their financial performance.

Understanding Charitable Donation Accounts (CDAs)

A Charitable Donation Account (CDA) is a special investment vehicle designed to allow credit unions to support charitable causes while adhering to regulatory requirements. CDAs enable credit unions to invest up to 5% of their net worth (hard cap) in a variety of assets, including those that may offer higher yields than traditional credit union investments. The catch? At least 51% of the returns generated by these investments must be donated to qualified 501(c)(3) organizations.

This structure creates a win-win scenario: credit unions can pursue potentially higher returns on their investments while making significant contributions to the communities they serve. The remaining portion of the returns can be used to further the credit union’s mission, whether through reinvestment in the institution or additional community initiatives.

Strategic benefits of CDAs for credit unions

1. Maximizing impact through charitable giving: CDAs allow credit unions to amplify their philanthropic efforts. By leveraging investments that may yield higher returns, they can generate more funds for donation than would be possible through traditional methods. This not only enhances a credit union’s ability to support local causes but also strengthens its role as a community leader.

2. Enhancing community engagement and loyalty: Charitable giving is a powerful tool for deepening community ties. Through CDAs, credit unions can support a broader range of causes, from local nonprofits to nationwide initiatives that align with their values. This engagement fosters stronger relationships with community members and can increase member loyalty. Members are more likely to remain with—and advocate for—an institution that visibly contributes to the well-being of their community.

3. Diversifying investment portfolios: CDAs provide credit unions with the opportunity to diversify their investment portfolios by allowing investments in asset classes typically outside the scope of traditional (permissible) credit union investments. This diversification can lead to higher returns, benefiting both the credit union and its charitable partners. Furthermore, the ability to pursue a wider range of investment opportunities allows credit unions to manage risk more effectively while still adhering to the regulatory framework.

Staying in compliance: Risk management and oversight

For credit unions considering the implementation of CDAs, several best practices can help to stay compliant with NCUA regulations:

• Understanding the 5% net worth limitation: The NCUA allows credit unions to invest in CDAs as a means to generate income for charitable donations. Under NCUA Part 721.3(b), credit unions can allocate up to 5% of their net worth into CDAs. This 5% cap is crucial, as it limits the total amount that a credit union can invest in higher-risk assets under the CDA structure.

• Regular compliance monitoring: Credit unions should maintain detailed records that document their net worth calculations, CDA investment decisions, staying in compliance with the 5% cap, and tracking donations verifying that at least 51% of the income generated is donated to qualifying charities.

• Developing a comprehensive Investment Policy Statement (IPS): A detailed IPS should outline the types of investments, risk tolerance levels, and expected returns. This document serves as a guide for portfolio management and ensures that all investment activities align with regulatory requirements and the credit union’s strategic goals.

• Transparent reporting: Credit unions should provide regular reports to their boards of directors and regulators, detailing the current net worth, CDA investments, and the percentage of net worth allocated to CDAs. This transparency helps prevent inadvertent non-compliance.

Conclusion

Charitable Donation Accounts offer credit unions a unique opportunity to expand their impact on the communities they serve while also enhancing their financial strategies. By leveraging CDAs, credit unions can increase their charitable contributions, strengthen their ties to the community, and differentiate themselves in a competitive market.

As the credit union industry continues to evolve, those that effectively utilize CDAs will be well-positioned to not only meet their financial goals but also fulfill their mission of service to their members and communities. In doing so, they will exemplify the true spirit of credit unions—where financial success goes hand in hand with making a positive difference in their community.