Bloomberg News
WASHINGTON — The U.S. Department of the Treasury’s Community Development Financial Institutions Fund released a revised CDFI certification application on Thursday after a six-year process of public input and refinement.
Final revisions include empowering applying firms to request changes to specific certification-related standards, integrating legal entity verification into the application process and updating various criteria related to loan products, geographic targeting and targeted populations.
“The revised CDFI certification application strikes a balance between providing clear standards for responsible lending and flexibility to allow innovation in the community finance sector,” said Treasury’s Deputy Assistant Secretary for Community and Economic Development Noel Andrés Poyo. “Public comments from CDFI practitioners were essential in this process and their feedback is reflected in this new application.”
The Treasury Department’s new standards introduced several key updates aimed at enhancing flexibility and transparency in the CDFI certification process.
The updated application now empowers applying firms to request changes to specific lists and standards related to certification, including financial products, services, targeted populations, target market assessment methodologies and responsible financing standards. The Treasury has emphasized that upon approval of such requests, the CDFI Fund will promptly publish updated guidance, ensuring all applicants are subject to such standards.
In contrast to the draft updates, the revised application eliminates “loan purpose tables” — in which applicants enter information about their loan products — and collects a limited amount of data through targeted questions in the revised application and the transaction level report.
The Treasury has also integrated the government legal entity database SAM.gov into the updated awards management information system, the platform through which applicants submit the revised application. This integration is designed to alleviate the burden on candidates by simplifying the verification of their organization’s legal entity status, particularly for those already registered in the SAM.gov system.
In the primary mission section of the final application, the previous requirement for entities to submit a strategic plan has been replaced with the option for applicants to provide a board- or owner-approved narrative, focusing on community development outcomes resulting from financing activities.
The responsible financing standards section of the updated application now explicitly outlines practices inconsistent with community development, those necessitating explanation and considerations related to specific products and services in mortgage, consumer and small-business lending.
The updated target market benchmark allows applicants more flexibility, enabling CDFIs failing to meet it in a given year to maintain certification by demonstrating compliance over a three-year period.
The application also removes geographic boundaries on prequalified investment areas. Applicants now have the option to develop a tailored geographic investment area, in which they may combine contiguous geographic units that meet the criteria of economic distress — including high-poverty or low-income areas — with other areas that do not, such that on average they would meet criteria of economically distressed. The CDFI Fund is implementing a transitional phase of three years following the release of the revised application for rural lenders to meet this geographic standard.
The revised application includes new “other targeted populations,” recognizing persons with disabilities and designating Filipino and Vietnamese populations as target groups.
Responding to stakeholder requests, the update addresses the delivery of development services to community members through online modules without instructors.
While the initial draft application suggested that board members receiving compensation had a conflict of interest, making them ineligible to be considered accountable to a target market, the CDFI Fund has revised that stance in the updated standards. The CDFI Fund now allows compensated board members to be considered accountable to a target market as long as they meet the specified accountability criteria.
The CDFI Fund has decided to grant a grace period to allow currently certified CDFIs, as of December 20, 2023, to actively apply for recertification within one year from that date to review the modified application and actively prepare the necessary information for recertification.
CDFI advocates have long said the application needed a revamp, emphasizing the critical importance of updating certification processes to ensure the application vets firms properly and ensures they are serving low-income communities.
The revamp in the certification process comes after concerns that some firms could exploit regulatory exemptions from certain Consumer Financial Protection Bureau rules to engage in unscrupulous lending. California-based CDFI Change Co. was recently involved in a lawsuit brought by its own former employee claiming that the company mischaracterized loans and provided false information in its annual certification, including by misrepresenting the race, ethnicity and income level of borrowers, falsifying information on its annual certification and making false representations to investors about the underlying characteristics of the mortgages it securitizes.
The revised application was itself subject to substantial revisions spanning over six years, during which the CDFI Fund actively sought public input. In January 2017, the fund initiated the process by issuing a request for information to gather comments on CDFI certification policies and procedures. A total of 28 letters, comprising over 200 pages of comments, were submitted in response. Taking into account the feedback received through the RFI, the CDFI Fund created an initial draft of the revised certification application and associated tools, which were made available for public comment in May 2020.
A second draft of the application was published in the Federal Register on November 4, 2022, for a final comment period, and since then the CDFI Fund sifted through roughly 300 responses, shaping the evolution of the final application.
Thursday’s update represents the first time the application asks applicants specifically about their financial products and practices.
Jeannine Jacokes, CEO of Community Development Bankers Association, said the updates streamline the process for applicants in some smart ways while also establishing a clearer bar for community development activities that address concerns that the previous standards allowed some CDFIs to slack on community development.
“There’s been a concern that maybe some folks that maybe are less community development oriented, less consumer friendly, have been seeking to get certified,” Jacokes said. “Maybe they primarily serve low-income markets, but maybe don’t provide products or services that are as consumer friendly or oriented toward building the wealth of low-income communities. There has been a sense that they needed to have more explicit criteria related to what they called the primary mission test.”
One improvement Jacokes said has been especially well-received is the revised approach to geographic targeting within eligible investment areas. Previously, navigating this aspect involved a cumbersome process where institutions had to meticulously outline the specific physical geography they intended to serve based on stringent criteria aligned with community development financial institution eligibility.
“[Now,] if the census tract meets the requirements on its face, you just have to document it, and you could just go ahead and serve [the community], so you don’t have to go through the onerous process of changing what you want to call your target market,” she said.
CDFI leader David Beck, policy director at Self-Help Credit Union, reacted positively to the updates, saying the clear standards will fortify the brand and mission of CDFIs, and ensure the application process verifies the institution’s commitment to serving communities.
“Treasury’s reform of the application for CDFI certification will enhance the trust that consumers and businesses have in the CDFI brand,” he said in a statement. “The CDFI program’s mission is to help bring fair financial services to marginalized communities and these updated certification standards are an important, concrete step to ensure CDFIs live up to that mission.”
Fair lending advocates like Andrew Kushner, senior policy counsel at the Center for Responsible Lending — which educates the public about financial products and fights predatory lending — were similarly pleased with the changes, saying the new application will ensure predatory lenders are not able to abuse consumers under the guise of a CDFI.
“Treasury has established commonsense standards to prevent financial institutions that abuse consumers from receiving a seal of approval from the government,” he said. “These baseline standards will stop the CDFI imprimatur from going to institutions that regularly offer predatory loans at interest rates above 36% APR or to institutions that issue mortgages without checking applicants’ ability to repay, putting them at risk of avoidable foreclosures like those experienced around the Great Recession.”
Financial institution trade groups were also pleased with the long-sought revamp. While some credit unions had complained about the draft application, saying it would exclude many firms from certification, Credit Union National Association President and CEO Jim Nussle said the final update was a step toward protecting the CDFI label by ensuring the effective standards meet the mission of community development.
“We thank the fund for taking credit union concerns seriously, and are relieved that many important changes were made,” he wrote in a statement. “Updating the certification standards was a significant challenge, and a necessary step to protect the value of the certification and the low-income and underserved populations at the heart of the mission of both the Fund and CDFI credit unions.”
The bank industry trade group the American Bankers Association also struck a positive note about the revisions, saying while they are reviewing the updated application, they support the ultimate mission behind the changes.
“While we are still reviewing the revised CDFI certification application released today, we are thankful for Treasury’s commitment to ensuring that CDFI banks are able to meet the needs of the communities they serve,” ABA president Rob Nichols said in a statement. “We look forward to working with Treasury to ensure CDFIs can continue to deliver on their critically important mission to help communities thrive.”
