Advisory Board: Changes to CDFI Certification Could Inhibit Lending

Subcommittee lays out list of concerns over impact to banks and credit unions.

Proposed changes to the CDFI application and certification process could inhibit lending by institutions that may be the only available source of credit for some people, a CDFI Advisory Board said, in a memo released Tuesday.

“We urge the CDFI Fund to continue to provide flexibility for truly mission driven CDFIs to develop and tailor financial products to best meet the needs of their communities,” the advisory board stated.

Backstory and Context

Treasury Department officials are considering an overhaul of the CDFI Certification process—a review that has dragged on, much to the consternation of credit unions. The fund is not accepting new applications until that review is completed.

A subcommittee of the CDFI Advisory Board on Monday presented recommendations concerning the application and certification process to the full Advisory Board. The board adopted the recommendations, which were outlined in a memo released Tuesday.

Inside the Memo

In its memo, the advisory board recommends that in order to avoid the huge changes that may be instituted following the review, fund officials should review the process at least every three years.

The board also said that fund officials are proposing to require an Ability to Repay (ATR) standard for all consumer and small business lending, which might eliminate some much-needed lending.

“The requirement is simply too narrow to capture the wide variety of credit products that very reasonably do not require an ATR standard,” the board found. “In general, this test has the potential to damage the communities that banks serve and stifle useful and responsible products, particularly in small dollar lending, but also for credit building small dollar loans, overdraft, and earned wage advance loans.”

The panel added that the intent of the fund is to promote access to capital among low-income people and the ATR requirements may be at odds with that.

“We believe the Fund’s underlying goal of ensuring that consumer lending by CDFIs is done responsibly can be met with a less rigid standard of verification of a borrower’s income,” the memo reads.

Further Findings and Recommendations

In its memo, the advisory board additionally said that:

–A 36% maximum APR for loans made by banks would have a chilling effect on lending in certain communities and keep many institutions from offering alternatives to payday loans. The requirement would not affect credit unions, since the NCUA has an interest rate cap of 18% for most loans and 28% for loans modeled on its Payday Alternative Loan program.

–A blanket prohibition on loans that offer balloon payments or interest-only payments would eliminate the ability of CDFIs to take into account the unique needs of their borrowers. “The prohibition of these features serves as a limitation that would prevent CDFIs from serving customers with varied needs,” the memo states.

–Arbitrary census tract boundaries are not a proper unit of analysis for measuring what type of lending capital would be useful to any given community.

–The CDFI Fund must allow credit unions to use well-tested, objective and non-intrusive ways to determine race, ethnicity and family income when the collection of that data is not already required under federal law.

–The proposed Financial Interest Policy is inappropriate for credit unions. That policy would block accountable credit union board members from receiving loans at the credit union they serve.

“The Fund did not account for the significant regulatory safeguards already in place to protect against board conflicts of interest when designing this policy and keeping it in place will make it impossible for boards of credit unions and cooperativas to meet the Fund’s Accountability standards,” the advisory board wrote.

–The fund’s proposed definition of “development services” in such areas as managing debt should not only take into account classroom sessions, but also should factor in one-on-one sessions.

–The proposed certification application does not allow an applicant to include loans and investments that primarily benefit a targeted population indirectly.

–Under the proposed application, youth-based services no longer would be considered qualifying Development Services. That option should be restored, according to the panel.

The advisory board added further that certified CDFIs will need time to comply with new certification rules and to prepare to reapply using those rules. Therefore, the fund should provide greater clarity about the timing for recertification and allow a grace period of at least one year.