The following is the letter CU Strategic Planning provided in response to the Treasury's request for public comment on the Community Development Financial Institutions Program—Certification Application.
December 2, 2022
Spencer W. Clark, Treasury PRA Clearance Officer
Community Development Financial Institutions Fund
U.S. Department of the Treasury
Subject: Request for Public Comment: Community Development Financial Institutions Program—Certification Application, OMB Number: 1559-0028
CU Strategic Planning is a consultancy working with both CDFI certified and emerging CDFI credit unions across the country. On behalf of our clients, we appreciate the opportunity to provide comments in response to the CDFI Fund’s request for public comment on its certification application process.
Broad Observations
Public Policy Concerns: With this proposal, the CDFI Fund has indicated an interest in maintaining five policy objectives: 1) protection of the CDFI brand, 2) supporting the growth and reach of CDFIs, 3) fostering a diversity of CDFI types, activities and geographies, 4) minimizing administrative burden on CDFIs while maintaining data quality and collection methods, and 5) promoting efficiency within the department.
Each of these policy objectives is understandable and even laudable, however, the CDFI Fund’s proposal sacrifices some policy objectives—particularly policy objective #4 which seeks to minimize administrative burden—in its efforts to achieve other policy objectives. Stepping back from these policy objectives, we believe the public policy objectives that resulted in the creation of the CDFI credential encourages organizations with a community development mission to apply for CDFI certification. This credential should be protected, but shouldn’t be protected to exclude a broad diversity of CDFI types. Diversity among CDFIs should be encouraged to meet the unique and varied needs of low income people and communities throughout the United States. In protecting the CDFI brand and promoting efficiency, we believe the CDFI Fund will make it difficult to achieve this diversity. We believe that the broader public policy could be achieved by giving the CDFI Fund the flexibility needed to identify those organizations with a calling focused on community development, rather than bright line definitions that could exclude organizations with a mission and heart for community development. We encourage the CDFI Fund to seriously consider these concerns because the changes proposed by the CDFI Fund will have a dramatic impact on credit unions currently certified as CDFIs. In a recent meeting of our clients, about one-third of participants reported that they would consider ending their certification status if these changes go into effect as written. Some of these clients have received significant Equitable Recovery Program or Emergency Capital Investment Program awards important for the nation’s post-pandemic economic recovery.
Time Frame for Compliance: Other broad concerns include the CDFI Fund’s proposed timeframe for compliance with respect to the impactful changes proposed to its certification requirements. The cover letter to the preview proposal indicated that currently certified CDFIs would have one year to come into compliance. While it’s reasonable to expect compliance with methodologies and Target Market percentages within a year, this time frame is likely to prove problematic if a CDFI needs to make dramatic changes to its Target Market or establish new forms of accountability to meet these proposed requirements. The new standards proposed will require training and training takes time. If a large percentage of CDFIs suddenly failed to meet the new standards, this would create a tremendous burden on the CDFI Fund’s compliance team, which would need to manage and track all of the compliance issues resulting from the changes to the CDFI Fund’s certification standards. Would a CDFI that failed to meet the new requirements be put into cure allowing them to remain a CDFI while addressing these issues, or would the CDFI become uncertified? Would the CDFI Fund consider a longer runway for compliance that would better allow for the training needed to implement the changes proposed?
Key Definitions
Eligible Financial Products: The CDFI Fund recognizes forgivable loans that require at least one payment within twelve months of closing as an eligible Financial Product. We support the CDFI Fund’s choice to include forgivable loans as an eligible Financial Product, but encourage the department to broaden its definition of a forgivable loan. CDFIs sometimes model forgivable loans on existing government programs that qualify the borrower for forgiveness based on criteria such as income, length of stay in a home, sweat equity, etc. We encourage the CDFI Fund not to limit this definition to loans that require at least one payment within twelve months. We appreciate the CDFI Fund’s willingness to approve new Financial Products and create a process for this approval in the future.
Eligible Financial Services: We encourage the CDFI Fund to add individual retirement accounts and individual development accounts to its list of recognized Financial Services. The CDFI Fund further indicates that the recognized Financial Services listed can be used for the purpose of certification, but not toward the Target Market test. If a CDFI can provide methodologies that show use of Financial Services by an eligible Target Market, we urge the CDFI Fund to allow Financial Services to count toward the Target Market test because Financial Services often represent an entry-level product for unbanked and very low-income consumers who cannot qualify for Financial Products. We appreciate the CDFI Fund’s willingness to approve new Financial Services and Development Services and create a process for these approvals in the future. Once approved, will the CDFI Fund publish a list of pre-approved products similar to its proposed plan for making pre-approved methodologies publicly available?
Application Process
Certification Agreement (#16): The CDFI Fund proposes requiring certification applicants to sign a CDFI Certification Agreement. While an additional requirement, we believe this addition to the certification process will help ensure the applicant’s understanding of their certification and the requirements that come with that credential.
Determination Decline (#17): If an applicant’s certification application is declined, the CDFI Fund proposes to send a determination letter to the applicant. We encourage the CDFI Fund to include the specific reasons for the CDFI Fund’s decision in this determination letter to allow the applicant to take immediate and prompt steps to address any issues outstanding.
Merger Concerns: The CDFI Fund’s proposal indicates that certification as a CDFI cannot be transferred to another entity. This appears to recognize current practice. However, the proposal goes on to indicate that following a merger, merged entities will be ejected from their certification status—regardless if they are the surviving entity. This is not consistent with the CDFI Fund’s current practice and would be extraordinarily detrimental to organizations with outstanding awards. While a merger represents a material event worth reporting to the CDFI Fund, and while the merged entity should certainly be required to meet all CDFI certification requirements post-merger, we do not understand why the CDFI Fund would choose to automatically remove a merged entity’s CDFI credential precipitously.
Applicant Basic Information
Bylaws or Similar Documentation (BI19 & BI20): The CDFI Fund requires an applicant to submit official meeting minutes showing initial approval of bylaws. Among credit unions, these documents are often 80+ years old. In the spirit of streamlining the application process and saving CDFI Fund staff time reviewing paperwork, we encourage the CDFI Fund to eliminate this requirement for any depository institution with a current and active charter number issued by the depository institution’s functional regulator (with the understanding that any depository institution with an active charter number would have this documentation in place). We also believe that the elimination of this unnecessary paperwork and documentation is consistent with 12 USC § 4715(b)(3) which requires the CDFI Fund to work with appropriate banking regulators to eliminate duplicative requests for information from insured depository institutions.
Race, Ethnicity & Sex of Board and Staff Members (BI-DI2, DI13, DI14, DI16, DI18, DI12, DI13, DI15, DI17, DI19, DI20): The CDFI Fund’s proposal requires applicants to collect and disclose information on the race, ethnicity and sex of board members and executive staff. Respectfully, requesting this information is intrusive, will discourage CDFI certification and is not related to the statutory criteria for certification. The collection of this type of information could be relevant to the qualification as a Minority Lending Institution under a separate CDFI Fund proposal, and could be relevant to establishing accountability to an OTP Target Market, but should not generally be required as part of a certification application. The collection of this information is also practically meaningless since boards and executive staff members change from year to year.
Basic Information Table 1: Financial Product Information: Table 1 asks each applicant to complete basic information on ALL of the applicant’s Financial Products. Some credit union applicants offer their members MANY Financial Products. For example, one of our clients offers members 43 different home financing loans. Requiring an applicant to list and describe ALL Financial Products is substantially burdensome to an applicant. Because this proposed requirement will have a far greater impact on large, complex CDFIs it will discourage large organizations from applying to be CDFI certified. Discouraging large, effective applicants from applying for CDFI certification is counter-intuitive and does not serve public policy since these organizations can be the most effective lenders in some market places and often have the capital on hand to take greater risk in their efforts to assist with broader community and economic development. We encourage the CDFI Fund to limit the list of data collected in Table 1 to ten Financial Products.
Basic Information Table 2: Financial Services: Table 2 asks each applicant to complete basic information on ALL of the applicant’s Financial Services. Similar to the comments in the prior paragraph, this could be very burdensome and time consuming for a large entity applicant. We encourage the CDFI Fund to limit the list of data collected in Table 2 to ten Financial Services.
Legal Entity
Legal Entity Documentation: As mentioned previously, we encourage the CDFI Fund to eliminate the requirement that depository applicants provide copies of bylaws, amendments to bylaws, chartering documentation, etc. for regulated entities with a current and valid charter number since these documents were required for chartering and represent unnecessary data collection in order to validate that a depository institution is a legal entity.
Primary Mission
Applicants Other than DIHCs, Affiliates of DIHCs, and Subsidiaries of IDIs: The CDFI Fund’s guidance on primary mission requires all applicants other than depository institution holding companies (DIHCs), affiliates of DIHCs and subsidiaries of insured depository institutions (IDIs) to demonstrate that any affiliate meets all primary mission requirements. Because the term “IDI” only includes banks and thrifts with deposits insured by the FDIC, we encourage the CDFI Fund to include Insured Credit Unions and State-Insured Credit Unions in the exemption from requiring subsidiaries from demonstrating primary mission requirements.
Documenting Mission: The documentation of a credit union certification applicant’s primary mission has often been a sticking point in certification applications. To date, the CDFI Fund has relied heavily on the applicant’s mission statement which has been problematic because a mission statement often doesn’t properly convey a community development mission. By way of background, because credit unions are governed by democratically elected representatives from the credit union’s membership that largely contribute their time as volunteers, credit union mission statements sometimes lack the polish and specificity of larger corporation, instead emphasizing service to the credit union’s members and financial stability. Credit union mission statements are often developed by this group of volunteers as part of a planning session. As a result, in our experience, their missions can be somewhat generic. We applaud the CDFI Fund’s willingness to look at other documentation such as the applicant’s community development strategies and community development-related Financial Products, Financial Services and Development Services that paint a holistic picture of the applicant’s dedication to community development.
Further, we’d encourage the CDFI Fund to consider creating the assumption that any applicant that can show the deployment of over 60% of its total loan volume to an eligible Target Market (or perhaps a slightly higher benchmark) already has a primary mission of promoting community development in an effort to reduce paperwork and burden. The proof, as it is, being in the pudding. Applicants that fail to meet this standard could then be required to demonstrate a primary mission with additional documentation. This suggestion would support the CDFI Fund’s goal of minimizing administrative burden on CDFIs while maintaining data quality and collection methods, and its goal of promoting efficiency within the department.
An approach to documenting a community development mission that might include a mission or vision statement, types of products and services offered, community development strategies and a past track record that shows service to low-income consumers paints a holistic pictures of an applicant’s track record and commitment to community development. The assessment of each of the factors alone is inherently subjective. If, instead, no one element is a requirement, but any of these elements could be submitted to show a community development mission, applicants would be in a better position to convey their mission-focus.
Responsible Financing Practices: The CDFI Fund’s certification requirements propose to ask applicants a series of questions related to the Financial Products and Financial Services offered, with the answer to some questions automatically disqualifying the applicant. The responses to other questions would be used to evaluate the applicant’s practices as a whole. We urge the CDFI Fund to defer to the applicant’s functional regulator concerning what products should and should not be offered to consumers rather than imposing requirements that constitute the regulation of products and services through the window of CDFI certification. While some of the practices the CDFI Fund seeks to discourage—and essentially regulate with these requirements—may seem costly to the consumer some are situational. To you or I, a loan at 20% APR might be excessive. To someone with a negative credit history, it could be the opportunity needed to rebuild credit. If one of the goals of this proposal is to foster a diversity of CDFI types, we encourage the CDFI Fund to not view any lending practice as an effective veto on a certification application. Of specific concern in this section:
Ability to Repay: The CDFI Fund’s proposal indicates that all loans must be based on a borrower’s ability to repay. While this appears very reasonable on a surface level, we’d like to point out two problematic issues concerning a bright-line ability to repay standard. First, payday alternative loans are not based on a borrower’s ability to repay. They are designed around a consumer’s need for immediate and emergency financing. Because they are not underwritten in a traditional manner, they represent greater risk of loss to the lender. This risk of loss along with the overhead expense of issuing the loan traditionally result in a higher interest rate. Neither payday loans nor payday loan alternatives are an ideal solution to long-term money management. However, it is advantageous for a CDFI to offer a payday lending alternative because it gives the CDFI the opportunity to work with the consumer on better long-term financial management strategies. Requiring underwriting for a payday alternative loan both removes an important source of competition to marketplace predatory lenders and eliminates the CDFI’s opportunity to identify, intervene and counsel borrowers.
Second, requiring a bright-line ability to repay contravenes current regulatory standards that expressly create an exemption from the ability to repay rule with respect to mortgage financing under 12 CFR § 1026.43. Presumably this exemption was created to allow CDFIs to adapt extraordinary financing to meet the needs of low-income borrowers—helping their long-term ability to improve household stability and economic net worth.
Interest Rate Cap: The CDFI Fund’s proposal prohibits charging more than 36% APR on loans. The CDFI Fund is seeking to regulate functional behavior with this requirement. Adding another functional regulator to a depository institution’s regulators is a distinct disincentive to CDFI certification. For a state-chartered credit union, these regulators already include a state regulatory authority, the NCUA through the credit union’s federal share insurance, the CFPB and a host of ancillary regulatory bodies (HUD, EEOC, etc.)
Use of Military Annual Percentage Rate: Of even greater APR calculation concern, the CDFI Fund proposes that all certification applicants recalculate all rates in the form of a Military Annual Percentage Rate. This requirement would represent a tremendous burden to applicants requiring any CDFI applicant to recalculate all rates from the rate charged on the loan to an MAPR. Credit union lending systems aren’t set up for MAPR reporting, but are structured around meeting the disclosure requirements of the federal Truth in Lending Act. We’d strongly encourage the CDFI Fund to rely on the calculation requirements of the Truth in Lending Act since the Act was established to create a uniform disclosure of costs that allows consumers to effectively shop for rates and understand the cost of credit.
Sale of Charged-Off Debt: The CDFI Fund proposes to disqualify any applicant that sells its charged off debt to a debt buyer. We encourage the CDFI Fund to remove this prohibition. As a financial cooperative, if a member has caused a credit union a loss, this loss is a loss to all owners of the cooperative—all of its members. Because of a credit union’s cooperative structure, if, after working with a member to restructure or refinance their debts, the member causes a significant loss to the cooperative, this loss usually results in expulsion from the cooperative. Once expelled from the credit union, it is a disservice to the cooperative’s members NOT to recoup losses that impact the health and well-being of the credit union. Sometimes selling charged-off debt to a debt buyer makes good business sense for the sustainability of the credit union and its member-owners.
Information on Financial Services Offered: The CDFI Fund’s proposal appears to require depository institution applicants to provide information on all checking or share account features offered. It is unclear whether an applicant can highlight Financial Services designed for low income or first-time account holders or designed to reduce potential carrying costs to the consumer, or whether, as it appears, the applicant is required to detail information on all Financial Services offered. Including application information on all Financial Services offered is cumbersome and contravenes the CDFI Fund’s purpose in streamlining and reducing regulatory burden to the applicant. We encourage the CDFI Fund to clarify that the applicant should provide information on pertinent Financial Services offered rather than information on ALL Financial Services offered.
PM13.1 Asks applicants to recalculate the current highest MAPR charged on any type of consumer loan, including purchased loans. Purchased loans often consist of equity investments. The calculation of MAPR is impacted by ancillary products such as GAP insurance. The purchaser of a loan will not have origination information needed to calculate MAPR on a purchased loan.
PM13.3 & PM14.3 Ask applicants if any loans include a leveraged payment mechanism and makes any applicant with a leveraged payment mechanism that charges over a MAPR 36% rate ineligible for certification. While 36% seems a high rate, including ancillary products such as GAP insurance can increase a very reasonable rate to 36% or higher. The Federal Credit Union Act (12 USC § 1757(11)), and most—if not all—state credit union acts include a statutory lien on shares, constituting a leveraged payment mechanism. This statutory authority has been part of the Federal Credit Union Act since 1934 and represents both the will of Congress and its recognition of a credit union’s cooperative structure. We encourage the CDFI Fund to remove this prohibition or expressly exempt any credit union lien on shares from the definition of a leveraged payment mechanism.
PM13.4 Appears to prohibit applicants from offering loans of $1,000 or less with a repayment timeframe of less than a year. Respectfully, some credit unions offer their members very small dollar loans. Requiring a loan repayment period of over a year on a $100 loan seems excessive and would result in higher interest costs to the borrower. We encourage the CDFI Fund to eliminate this prohibition because it is so situation specific.
PM13.5 Appears to require a CDFI applicant to waive any upfront fees on a refinanced loan for twelve months. We strongly urge the CDFI Fund to remove this prohibition. While a lender may choose to waive fees for a loan applicant, this again is very situation specific. In addition to representing a regulatory requirement, it creates a strong disincentive to refinancing a loan—even if refinancing the loan would be in the consumer’s best interests, resulting in a perverse public policy outcome.
PM16.2 Requires an applicant to underwrite adjustable-rate mortgages using the maximum rate allowed during the first five years of the loan. Underwriting a loan is essentially the process of collecting information that helps the lender understand the borrower’s full financial picture. Part of this process involves determining whether the loan is affordable. It is in neither the borrower nor the lender’s interest to finance a loan destined for default. While it is not unreasonable for a lender to understand the potential impact of a worst-case scenario on the borrower’s financing, underwriting involves many factors including the homebuyer’s potential for increased income. ARM loans can be abusive to consumers. ARM loans can also be an important tool to make homeownership accessible to first-time homebuyers. We encourage the CDFI Fund to review ARM loans, while not imposing what amounts to a new regulatory requirement—underwriting them using the maximum rate allowed during the first five years of the loan because it eliminates a useful tool in a CDFI lender’s toolkit for increasing homeownership through responsible ARM lending.
PM16.3 Similar to our prior comments, offering mortgage loans with terms longer than 30 years is another tool that a responsible CDFI can use to help make homeownership accessible to first-time or low-income borrowers—particularly in expensive mortgage markets. Longer mortgage products also allow these borrowers to lock in lower interest rates in a rising rate environment. We encourage the CDI Fund to eliminate this bright-line determination that all mortgage loans with terms over 30 years are impermissible.
PM17 The CDFI Fund’s proposal extends consumer Truth in Lending Act protections to small businesses. Businesses were purposefully excluded from TILA because businesses are presumed to have greater business wherewithal than consumers. Practically, business loans are often housed and underwritten on separate lending systems that do not automatically provide TILA disclosures creating expense and difficulty for the CDFI, disincentiving the CDFI from providing small business lending and adding regulatory burden not recognized under the Truth in Lending Act.
PM24 This question asks certification applicants to identify certain features associated with a checking or share account. We encourage the CDFI Fund to remove account dormancy fees from its list. Most credit unions institute account dormancy fees because of their cooperative structure. This structure often makes it difficult to close the account of a member who has disappeared or otherwise become unreachable. Often the accounts are low balance. Credit unions charge dormancy fees after repeated attempts to locate the member with the intent of feeing out small balance “left overs” when members fail to close unused accounts. The alternative either requires a membership vote to expel the member (12 USC § 1764) or represents the paperwork intensive process of remitting unclaimed funds to the state.
PM24 We also encourage the CDFI Fund to remove its picklist item that asks applicants to indicate if they “only deny new customers for past incidences of actual fraud.” Again, relating to a credit union’s cooperative nature, former credit union members re-applying for membership at a credit union will routinely be denied membership if they have caused the financial cooperative a loss. This loss impacts all members in the financial cooperative and goes beyond fraud. Former members who “make right” their loss to other members in the financial cooperative are allowed to rejoin, but will often not be allowed to rejoin the cooperative absent a willingness to reimburse a past loss. It’s also worth noting that members are sometimes expelled from membership for non-fraud related reasons such as abuse or inappropriate behavior to staff or other credit union members and SHOULD be screened from membership.
PM25 Touches on the politically charged subject of overdraft fees and asks a series of questions designed to allow the CDFI Fund, in its judgment, to determine whether the overdraft fees are predatory or not. Overdraft fees can be abusive. Overdraft options can also be a viable, lower-cost alternative to a payday loan or NSF fees. The inherently subjective determination over whether the applicant’s holistic account structure is useful or predatory depends on each consumer’s situation. Transparency over rules and fees and the consumer’s ability to decide whether or not a product is a good fit seem the most important factors. Realistically, if one of the CDFI Fund’s goals is to promote efficiency in its certification determinations, wading into this complex and politically charged determination will not further its goal. We’d encourage the CDFI Fund to lean into the expertise of a depository institution’s functional regulator concerning the permissibility of overdraft fees.
PM26 Asks applicants to report on whether account holders could be charged NSF fees. We encourage the CDFI Fund to remove this question because it implies that NSF fees are predatory. At a financial cooperative, NSF fees are designed to achieve two outcomes: 1) to encourage or discourage certain behaviors—such as discouraging purchases without the funds to make the purchase; and 2) to eliminate the socialization of costs to other members in the financial cooperative.
Financing Entity
Certain Regulated Financial Institutions: The CDFI Fund’s proposal creates the presumption that DIHCs, depository institutions with FDIC insurance and state-insured credit unions automatically meet the definition of a financing entity. It appears that Insured Credit Unions (federally insured credit unions representing the majority of all credit unions) have been omitted from this list.
Target Market
Financial Services Option: The CDFI Fund’s request for comments proposes to allow depository institutions to incorporate the delivery of Financial Services into the applicant’s calculation of service to a Target Market. This proposed change recognizes the crucial importance of lifeline account services to low-income consumers. We appreciate the CDFI Fund’s recognition of Financial Services, particularly since low-income consumers unable to qualify for Financial Products enter the financial mainstream through Financial Services.
The CDFI Fund’s proposal allows a depository institution to demonstrate that 60% of total unique depository account holders are members of an eligible Target Market only if at least 50% of the dollar value of Financial Products and at least 60% of the total number of its Financial Products have also been made to one or more eligible Target Markets.
The regulations interpreting the Riegel Community Development & Regulatory Improvement Act, which created the structure for the CDFI program (12 CFR § 1805.201(b)(3)) require a CDFI to serve a Target Market by showing that it provides “Financial Products and/or Financial Services in Investment Areas and/or Targeted Populations.” We believe that a plain meaning interpretation of the statute would allow an applicant to demonstrate its Target Market service through EITHER Financial Products or Financial Services, allowing the applicant to rely solely on Financial Services to qualify as a CDFI.
We encourage the CDFI Fund to allow applicants to rely more heavily on the provision of Financial Services to a Target Market to demonstrate service to an eligible Target Market, including wholesale reliance on Financial Services to meet the standards established by the CDFI Fund (in other words, allowing the applicant to show 60% of Financial Services to an eligible Target Market instead of requiring both 60% of Financial Services to an eligible Target Market AND an additional 60% of the number of Financial Products to an eligible Target Market AND 50% of the dollar volume of Financial Products to an eligible Target Market).
Target Market Benchmark Test: The CDFI Fund’s proposal clarifies that certification applicants must demonstrate compliance with Target Market percentage benchmarks based on a three-year average with any applicant falling below both number of loans and dollar volume of loan benchmarks marked as ineligible for CDFI certification. Once certified, a CDFI must maintain these benchmarks based on a three-year average. As these past three pandemic years have aptly illustrated, conditions outside of the control of an applicant could disqualify an otherwise well-qualified CDFI applicant from certification. With the understanding that neither the CDFI Fund’s current 60% requirement nor the requirement that an applicant meet this benchmark through both the number and dollar volume of Financial Products are part of a statute or regulation, we encourage the CDFI Fund to exercise flexibility concerning its benchmarking. If, for example, an applicant could show the CDFI Fund that the financial conditions created by the pandemic dramatically reduced its lending, but that it met or exceeded all required benchmarks in the years prior to the pandemic or over an average of a reasonable time period, this type of evidence could be used to show unusual fluctuations in lending. To achieve the CDFI Fund’s policy objective of promoting efficiency within the department, should an applicant seeking certification fail to meet required benchmarks, perhaps the applicant could shoulder the burden of proof in demonstrating service to an eligible Target Market and explain the market conditions that prevented the applicant from meeting the CDFI Fund’s general standards for certification.
Other Targeted Population – Persons with Disabilities: We appreciate that the CDFI Fund’s proposal recognizes persons with disabilities as an OTP Target Market.
Target Market Assessment Methodologies: The CDFI Fund’s request for comments proposes to adopt standardized Target Market assessment methodologies pre-approved by the department. These methodologies are part of a separate request for comments; however, we would like to thank the CDFI Fund for developing a process to approve new methodologies in an effort to continue to identify effective ways of identifying applicable Target Markets.
Transaction Level Report: The CDFI Fund proposes to require all certification applicants to complete a Transaction Level Report as part of their certification process. While we appreciate the CDFI Fund’s emphasis on creating data-driven and quantitative evaluation process that can be used to evaluate the effectiveness of certified CDFIs and CDFI applicants, we believe that the proposal is unduly burdensome.
The proposal increases the burden of becoming a CDFI considerably and disincentivizes participation in the CDFI Fund’s certification process. Among first-time applicants, the difficulty of completing a TLR will be made particularly difficult for organizations applying without the assistance of a third-party expert. While this seems contrary to CU Strategic Planning’s interests (as a third-party expert), we believe that public policy should encourage organizations to become CDFIs and maintain the standards of a CDFI. We believe this public policy of encouraging organizations to become CDFIs is aligned with Congress’ intent in establishing the CDFI Fund, and that CDFIs are perfectly poised to assist with economic and community development in America.
Specifically, because the proposed annual TLR requirement mirrors many of the requirements of grant reporting, and because we estimate that, on average, grant reporting takes an average of 40 hours to complete (compared to an average of 13 hours needed to complete an Annual Certification Report under current guidelines), the CDFI Fund’s proposal will create a regulatory burden of 27 additional hours to comply with the proposed requirement. A reporting requirement that directs an additional 27 hours away from mission-focused lending is simply too high, and for some organizations this burden will be much higher.
More practically, the TLR format does not include any detailed information on consumer loans which represent the bread and butter of credit union lending. Few credit unions applying for CDFI certification will be successful if only relying on mortgage and small business lending. Further, if the CDFI Fund adds consumer loans to the TLR this outcome would create further burden and a technology issue for the CDFI Fund’s systems which have difficulty compensating for current TLR data, often requiring the data to be broken up into multiple uploads (currently if a CDFI’s TLR data needs to be broken out into more than ten or so files, CDFI Fund staff need to assist with the reporting upload). Simply put, credit unions make a LOT of consumer loans and the CDFI Fund’s TLR reporting system is not currently equipped to accommodate them and creates errors when uploading more than five thousand records. If adjusted to somehow accommodate this level of reporting, the CDFI Fund will be in a position of collecting information on hundreds of thousands of loans but will likely not have the staffing needed for any type of analysis because of the sheer weight of information provided.
Development Services
Generally: The CDFI Fund proposes to substantially narrow the definition of a Development Service. We would like to address several parameters established by the CDFI Fund in its request for comments.
Development Services must be provided in conjunction with Financial Products: The CDFI Fund’s definition of a Development Service restricts that definition to training or coaching provided solely in conjunction with a Financial Product and not a Financial Service. We do not believe this is consistent with the CDFI Fund’s underlying statute or interpreting regulation. Specifically, 12 CFR § 1805.104 expressly defines Development Services as activities undertaken by a CDFI that assist consumers “to use the CDFI’s Financial Products or Financial Services.” Because Financial Services are such an important gateway to Financial Products, we believe the intent in this language is that Development Services should include training, counseling and technical assistance that promote access to and/or the success of Financial Services in addition to Financial Products and we urge the CDFI Fund to broaden its definition with respect to Development Services.
Development Services must be formal, structured, stand-alone training, counseling or technical assistance service offered separately and distinctly from other products and services: We urge the CDFI Fund to remove this requirement. Often the most effective Development Services are those provided just in time to the consumer when they are most needed. Identifying and providing Development Services can often take place when opening an account or reviewing a loan application with the consumer—activities that are not distinctly separate from other products and services.
Applicants must maintain control over the content and delivery of the Development Service: This means that mutually-beneficial partnerships with other community development-oriented organizations to provide Development Services will not be considered Development Services for the purposes of certification. In the past the CDFI Fund has recognizes the value of community partnerships that leverage the expertise of all parties involved. These types of partnerships can often offer more robust services to a Target Market consumer. While it’s reasonable to require the applicant and Development Services provider to be part of a structured agreement of some kind, we believe it better serves the consumer to not require the CDFI applicant to maintain control over the content and delivery of all Development Services.
DS04 Requires certification applicants to attach all agreements with any entity that provides Development Services on behalf of the applicant. While it’s reasonable to require the applicant and Development Services provider to have an agreement that outlines expectations in place, asking applicants to attach confidential agreements creates an unnecessary paperwork burden. We do not believe the CDFI Fund should put itself in the position of acting as an arbiter concerning whether these agreements meet or fail to meet unknown standards. Rather, we suggest that it would be reasonable to require certification applicants to attest to the existence of these agreements.
Accountability
Demonstration of Accountability to Low-Income Targeted Populations: The CDFI Fund’s request for comments proposes narrowing avenues for demonstrating accountability to a LITP Target Market, restricting recognized accountability to persons who are low-income themselves or serve as an executive staff member of a third-party mission-driven organization that primarily serves low-income people. We encourage the CDFI Fund to allow service on the board of a mission-driven organization to demonstrate accountability, as in the past. Further, we encourage the CDFI Fund to expand its definition from solely considering executive staff to demonstrate accountability through certain non-executive key staff in the organization. For example, a credit union’s Marketing Director or Director of Community Development are unlikely to be considered executive staff, and yet are often in an excellent position to understand the Target Market’s community development needs.
Governing/Advisory Board Size: The CDFI Fund proposes requiring all governing boards to consist of no less than three board members and all advisory boards to consist of no less than five advisory board members. Among credit unions, these numbers seem reversed. While it would be unlikely for any credit union to have just three board members, the work of an advisory board—chosen for each advisory board’s connection to key community development interests—can be effective with just three members. At minimum here, we encourage the CDFI Fund to reduce the minimum advisory board size to three members.
Demonstration of Accountability Options: The CDFI Fund proposes to abandon the credit union special accountability provision. This long-standing policy provided that if 50% of a credit union’s loans are to a single Target Market, the CDFI Fund recognizes that a credit union’s democratically elected board creates automatic accountability to its Target Market. Credit union boards of directors continue to be democratically elected, a statutory requirement for almost 90 years and a hallmark of the credit union movement’s philosophical roots. We are perplexed and disappointed that the CDFI Fund would choose to eliminate this presumption, particularly since its elimination fails to support the department’s policy objective of minimizing administrative burden or its policy objective of promoting efficiency within the department. The CDFI Fund proposes to replace this simple and well-grounded presumption with a process that requires the development and appointment of an advisory board that includes both 60% accountability to the applicant’s overall proposed Target Market and individual accountability among advisory board members to each proposed Target Market. This requirement adds substantial regulatory burden to credit union applicants, a burden made worse by the continually evolving nature of boards and advisory boards, with a percentage of most boards and advisory boards turning over each year. We estimate that this proposed change will impact 83% of applicants that submitted their application in 2022 and 87% of applicants that were submitted prior to 2022, illustrating its impact and the ramifications of requiring all certified CDFIs to comply with the changes proposed by the CDFI Fund in the span of a year.
Financial Interest Policy: The CDFI Fund’s proposal prohibits an applicant from relying on its own staff members to show accountability. The CDFI Fund’s proposal further prohibits an applicant from relying on its board members who have active loan products from the applicant to show accountability. The proposal asserts that these relationships create an inherent conflict of interest for the applicant. However, we fail to follow the CDFI Fund’s rationale behind these assumptions. Staff members at an applicant are often in the best possible position to show accountability through their understanding of the Target Market. Board members with outstanding loan products at the credit union are demonstrating loyalty to the credit union, nothing more. We cannot conceive of a scenario in which an outstanding loan product would create a conflict of interest with Target Market interests, particularly since all credit unions are required to have board-approved conflict of interest policies and 12 CFR § 703.17 prohibits conflicts of interest among federal credit union officials and employees (with most states adopting similar statutory or regulatory prohibitions).
AC11 Doubling down on the comments submitted in the prior paragraph, this question makes any organization that compensates board members for their service on the board ineligible for CDFI certification. Credit union board members overwhelmingly serve as volunteers; however, some states have authorized reasonable compensation to better allow credit unions to attract quality, experienced board members and hold those board members to higher performance standards. A larger percentage of credit unions don’t compensate their board members, but may provide insurance to them as a benefit under the credit union’s umbrella plan. An insurance benefit is not exempted from the constructive prohibition against compensating board members. We encourage the CDFI Fund to eliminate this prohibition on compensation altogether as we believe it has little demonstrable connection to a conflict of interest and is not a statutory or regulatory requirement for certification. Absent removal of the prohibition, expressly exempting insurance and other benefits designed to attract quality board members from the definition of compensation is an important consideration. Providing these types of benefits does not create a conflict of interest for a CDFI applicant.
AC16 Precludes board members from demonstrating accountability through the ownership of a small business with multiple locations unless 51% of the business locations are located in a qualified census tract. While it’s conceivable that a business with many locations may lose its connection and understanding of a Target Market community, this is not necessarily the case. For example, even with multiple locations the business might be headquartered in a qualified census tract or develop a firm understanding of local needs through regular interaction with the census tract. Among applicants that fail to meet this criterion, we encourage the CDFI Fund to allow applicants to describe their connection to the Target Market as part of their application—to make their case explaining why they meet required accountability standards.
Means of Accountability – Low Income Targeted Population (AC25): The CDFI Fund’s proposal appears to require certification applicants to verify each board member’s income to assure their accountability to a Low Income Targeted Population. We strongly urge the CDFI Fund to allow this verification to take the form of simply asking the board member whether they earn more or less than their applicable low income benchmark. Unless the CDFI Fund has seen growing evidence of board members lying in order to meet accountability standards in service to low income consumers, we cannot stress the importance of relying on the board member’s own verification (as opposed to requiring pay stubs, tax forms or other forms of income verification). To do otherwise constitutes an invasion of privacy and will dissuade capable board members from serving on CDFI boards of directors, representing poor public policy.
Native CDFI Designation
Native CDFI Designation Qualifying Standards: Echoing our comments under the Target Market section, we encourage the CDFI Fund to allow applicants seeking certification as a Native CDFI to demonstrate service to their Target Market through the delivery of Financial Services in addition to Financial Products, and to rely on these Financial Services in part or solely to meet a 60% benchmark standard.
The CDFI Fund’s proposed certification changes are clearly the product of much time and intensive effort. Thank you for the opportunity to provide our input on this important proposal. As always, if you have any questions concerning these comments, please do not hesitate to reach out.
Respectfully yours,
Stacy S. Augustine
President/CEO