CDFI Fund Releases Preview of New Application, Certification Process
New requirements would update regulations surrounding primary mission, target markets and institutional accountability for CDFIs.
Credit unions no longer would be able to use a Low-Income Designation as acceptable documentary evidence of a primary mission of community development, under a proposal to be unveiled shortly by the Treasury’s Department CDFI Fund.
Officials released a preview of the new CDFI application and certification process they plan to propose in the coming weeks. The proposed new process will be open for comment for 30 days after it is published in the Federal Register, following which the Treasury Department will then issue a final plan to be implemented in April 2023.
“This review and update is designed to ensure CDFI Certification practices reflect and represent the evolving nature of CDFIs; safeguard government resources; and continue to accurately verify an organization’s commitment to a community development mission,” CDFI Fund officials said.
They added that the changes would set high standards for mission, responsible products and services, accountability, conduct and performance.
“These are absolute and universal principles of CDFI Certification that should carry more credence during these challenging times, when so much needs to be done to facilitate economic opportunity in distressed and underserved communities,” they stated.
The revised certification application may require some CDFIs to adjust how they do business, and some may no longer meet the tests required for certification, the officials warned, noting, “CDFI Certification is not for every business model and was never intended to be.”
How Will CDFI Certification Change?
Fund officials outlined the major updates to the process.
When changes first were proposed, there was a common belief among commenters that adherence to responsible lending practices represented a “foundational” CDFI activity and financial institutions that do not meet those standards should not be certified.
To ensure that organizations seeking certification are truly mission-focused, officials said the new application will include “bright-line questions” related to an institution’s lending and financing practices.
“In situations where the CDFI Fund is able to make clear-cut distinctions that an applicant’s financial products or practices are harmful to low-income and underserved communities, indicate absence of a community development mission, or harm the CDFI brand, the proposed CDFI certification application would be disqualified for failing to meet set standards,” they said.
For instance, the officials noted, any applicant that offers loans in excess of a 36% interest rate, and fails to demonstrate that they meet specific safety and consumer protection standards, would be disqualified.
The NCUA generally has set a limit of 18% for most loans, with the exception of Payday Alternative Loans, which may carry an interest rate of 28%.
The application proposal would measure an applicant’s target financing over the most recently completed fiscal year and eliminate the requirement that the applicant also provide data on its year-to-date activity, according to CDFI Fund officials.
They said the application would keep the requirement that applicants meet financial product thresholds in both the number and dollar amount of that activity. That standard had been proposed in 2020.
The revised application would additionally expand opportunities for a financial institution to receive Target Market credit, as well as allow certified CDFIs to meet the thresholds based on a three-year rolling average.
CDFI Fund officials said they recognize that some financial institutions have unique board-related challenges, so the changes to the application would allow banks and credit unions to create advisory boards.
They also revealed that in the next few weeks, they will release for preview further changes to the Annual Certification and Data Collection Report. The new process will no longer include the creation of a separate Certification Transaction Level Report. Instead, all CDFIs will be required to submit a slightly modified version of the Transaction Level Report.
Officials said that collecting and publishing data from all certified CDFIs will, for the first time, provide a complete picture of the industry’s activities as a whole.
They likewise announced the fund will soon solicit comment on a proposed list of pre-approved Target Market assessment methodologies. That, they stated, will allow a CDFI to demonstrate that they are serving targeted markets by selecting from a list of pre-approved methodologies. By using one of the assessment methods, applicants would be able to select from a pre-populated list of options, eliminating the need to submit additional information documenting the process they used.