What Are Low and Moderate Income Communities?
Low and moderate income communities (LMI communities) refer to geographic areas, typically census tracts, where the median family income falls below certain thresholds relative to the broader Area Median Income (AMI). This classification is a critical concept within community development finance and is used by governmental bodies and financial institutions to identify areas in need of targeted investment and support. The designation of LMI communities aims to ensure equitable access to financial services, affordable housing, and economic development opportunities.
History and Origin
The concept of identifying and supporting low and moderate income communities gained significant prominence with the passage of the Community Reinvestment Act (CRA) in 1977. This landmark legislation was enacted to address historical patterns of disinvestment and redlining in urban and rural areas. Redlining was a discriminatory practice where financial institutions would refuse or limit services to residents of certain neighborhoods, often based on race or income, regardless of their individual creditworthiness.30, 31
The CRA established an affirmative obligation for banks to help meet the credit needs of the entire communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations.28, 29 Prior to the CRA, many community groups and policymakers were concerned that despite existing civil rights laws, practices leading to systematic disinvestment lingered, leaving these communities underserved.27 The CRA's implementation by federal banking agencies, including the Federal Reserve, marked a pivotal shift towards encouraging reinvestment and fostering economic development in these areas.25, 26
Key Takeaways
- Low and moderate income (LMI) communities are defined primarily by median family income relative to the Area Median Income (AMI).
- The classification is central to the Community Reinvestment Act (CRA) and other government programs aimed at equitable investment.
- LMI designations help direct resources for affordable housing, credit access, and community development projects.
- Income thresholds for LMI communities are typically set by federal agencies like the Department of Housing and Urban Development (HUD).
- These designations are dynamic and can change annually based on updated income data.
Formula and Calculation
The determination of whether an area qualifies as a low and moderate income community is based on a comparison of the area's median family income to the Area Median Income (AMI) as established by the U.S. Department of Housing and Urban Development (HUD). For the purpose of the Community Reinvestment Act, LMI communities are generally defined as census tracts where the median family income is less than 80 percent of the AMI for the metropolitan or non-metropolitan area.24
Specifically, HUD defines:
- Low-income families as those whose incomes do not exceed 80 percent of the median family income for the area.21, 22, 23
- Very low-income families as those whose incomes do not exceed 50 percent of the median family income for the area.18, 19, 20
- Extremely low-income families as those whose incomes do not exceed the greater of 30 percent of the median family income for the area or the federal poverty guidelines.16, 17
When identifying LMI communities, the aggregate income levels within a defined geographic area, such as a census tract, are assessed against these thresholds.
Interpreting Low and Moderate Income Communities
Interpreting the designation of a low and moderate income community involves understanding its implications for policy, investment, and socioeconomic indicators. Such a designation signals that the area faces challenges related to income disparity and may lack sufficient access to essential financial services and investment capital.
For policymakers, identifying LMI communities allows for the strategic allocation of resources. Programs focused on affordable housing, economic development, and credit access are often specifically designed to serve these areas. For financial institutions, this classification guides their compliance with regulations like the Community Reinvestment Act, requiring them to demonstrate that they are meeting the credit needs of these communities. Understanding these designations helps stakeholders direct efforts toward fostering sustainable community development and promoting financial stability for residents.
Hypothetical Example
Consider a metropolitan area with an Area Median Income (AMI) of $80,000 for a four-person household. A census tract within this area would be classified as a low and moderate income community if its median family income falls below 80% of the AMI.
In this example:
- AMI for a four-person household = $80,000
- 80% of AMI = 0.80 * $80,000 = $64,000
If a specific census tract has a median family income of $60,000 for a four-person household, it would be designated as a low and moderate income community because $60,000 is less than $64,000. This designation would make the community a target for initiatives aimed at providing credit access, promoting affordable housing, and supporting local economic development, often through financial institutions with CRA obligations.
Practical Applications
The concept of low and moderate income communities is primarily applied in regulatory frameworks and governmental programs designed to promote equitable distribution of financial resources and opportunities.
One of the most significant applications is within the regulatory compliance of the Community Reinvestment Act (CRA). Under the CRA, banks are assessed on their performance in meeting the credit needs of the LMI communities where they are chartered. This includes providing various forms of lending, investments, and financial services.14, 15 Regulators evaluate how well financial institutions lend to and invest in these areas, and the outcomes influence their CRA ratings.
Another key application is in the work of Community Development Financial Institutions (CDFIs). The U.S. Department of the Treasury's CDFI Fund supports these specialized financial institutions, which have a primary mission of serving underserved markets, including low income communities.13 CDFIs provide loans, investment capital, and financial services that traditional lenders might not offer in these areas, fostering local economic development and affordable housing projects.11, 12 For example, the New Markets Tax Credit program, administered by the CDFI Fund, is specifically designed to attract private investment into low-income communities.9, 10
The Department of Housing and Urban Development (HUD) also uses LMI definitions for eligibility in programs like Public Housing and Section 8, which provide rental assistance and support for affordable housing.7, 8 These programs directly benefit individuals and families residing in LMI communities by ensuring access to safe and affordable living spaces.
Limitations and Criticisms
While the classification of low and moderate income communities is instrumental in directing resources, it faces several limitations and criticisms. A primary critique revolves around the use of Area Median Income (AMI) as the sole determinant. Critics argue that relying on AMI can sometimes disadvantage truly struggling communities, particularly those in rural development areas where overall incomes are lower. In such cases, a family's income might exceed the "low income" threshold for their specific rural area, even if that same income would be considered very low in a higher-income urban development setting.6 This disparity means that two households with identical incomes might be treated differently for program eligibility depending on their geographic location and the relative affluence of their neighbors.5
Furthermore, the static nature of income thresholds can fail to capture the nuances of economic well-being, such as the actual cost of living in a particular area. A high cost of living in an otherwise moderate AMI area can still lead to significant financial hardship for residents, even if they technically fall outside the LMI classification. Some argue that this approach risks overlooking genuine poverty and economic stagnation in areas that do not technically meet the LMI criteria based on AMI.3, 4 There is also a broader discussion around the negative connotations associated with the term "low-income" itself, with some suggesting alternative terminology to avoid stigmatization.1, 2
Low and Moderate Income Communities vs. Poverty Line
The terms "low and moderate income communities" and "poverty line" both relate to economic well-being but represent distinct measures and are used for different purposes.
Low and moderate income communities are defined by income thresholds relative to the Area Median Income (AMI) of a specific geographic area. For example, a household or community might be classified as low-income if its income is below 80% of the AMI for its region. This definition is dynamic and varies significantly by location, reflecting local economic conditions. It is primarily used for regulatory purposes, like the Community Reinvestment Act, and for targeting federal programs that encourage investment and financial services in underserved areas.
In contrast, the poverty line is a national standard set by the federal government, based on a fixed dollar amount that varies only by family size and composition, not by geographic location (except for Alaska and Hawaii). It represents the minimum income required to afford basic necessities nationwide. While the poverty line is a uniform measure of absolute poverty, the definitions for low and moderate income communities provide a relative measure of economic status within a specific local context, guiding efforts towards broader community development and resource allocation beyond mere subsistence.
FAQs
What does "LMI" stand for in financial contexts?
"LMI" stands for "Low and Moderate Income." It is commonly used in discussions around community development, affordable housing, and regulatory compliance for financial institutions.
How are LMI communities identified?
LMI communities are typically identified by comparing the median family income within a specific geographic area, such as a census tract, to the Area Median Income (AMI) established by the U.S. Department of Housing and Urban Development (HUD). Generally, an area is considered LMI if its median family income is below 80% of the AMI.
What is the purpose of classifying an area as an LMI community?
Classifying an area as an LMI community helps direct resources and programs aimed at promoting economic development, providing affordable housing, and improving credit access for residents. It is a key component of regulations like the Community Reinvestment Act, which encourages financial institutions to invest in these areas.
Do income limits for LMI communities change?
Yes, income limits for LMI communities are dynamic and are updated annually by the U.S. Department of Housing and Urban Development (HUD). These changes reflect shifts in the national and local Area Median Income (AMI) data, which can affect eligibility for various affordable housing and community development programs.
What is the difference between "low income" and "very low income"?
Within the broader classification of low and moderate income communities, the U.S. Department of Housing and Urban Development (HUD) defines "low income" as households earning up to 80% of the Area Median Income (AMI). "Very low income" is a stricter category, defined as households earning up to 50% of the AMI. These distinctions help determine eligibility for specific programs like public housing and other types of affordable housing assistance.