October of 2023 will mark 15 years since CU Strategic Planning was founded, and 15 years of helping credit unions gain certification as Community Development Financial Institutions and winning awards for those CDFIs to the tune of $770 million—along with the rest of our services.
We’ve seen a lot of changes over that time in our work as credit union consultants, and the most recent proposal from Treasury’s CDFI Fund has many that could affect credit unions’ operations and service to their members. We’ve heard from many of you about the impact, communicated our concerns to the CDFI Fund, and our experienced team is keeping abreast of this situation, which is in flux.
The proposed certification requirements are slated to go into effect in April of 2023, and it’s presumed that CDFIs would have up to one year from that date to implement any changes needed to meet those new requirements. Let’s discuss these requirements for better understanding, or you can view our recent webinar here for even further detail.
One of the key changes in the proposal would affect Low-Income Designated (LID) credit unions. While these LID credit unions previously automatically qualified for CDFI certification, the proposed changes would revoke this concession. LID CDFI credit unions, as well as other existing CDFIs, would be required to adopt a mission statement that clearly reflects their community development mission under the proposal. In addition, this change would also apply to affiliates, such as CUSOs in which a CDFI credit union has at least a 25% ownership stake or controls 25% of the board seats.
Another shift in policy would be the need for a community development strategy under the proposal. CDFIs would be required to submit a board-approved strategic plan demonstrating their community development strategy. The CDFI Fund has provided no further guidance on this element to date. Based on our experience with recent applicant reviews, this strategic plan will need to be detailed and focused specifically on achieving a community development mission, as opposed to a general focus on members and member well-being. As can probably be guessed, this an area where CU Strategic Planning is skilled and ready to assist clients.
CDFIs, as outlined in the proposal, also would be required to have “appropriate” products and services. The CDFI Fund is studying matters such as NSF fees and overdraft protection programs, stating that “any applicant offering products that lack reasonable protections, or that charge excessive fees, inconsistent with regulatory guidance, or community development mission, may be determined ineligible for CDFI certification.”
While there is no bright line guidance given, the new application is structured in a way that provides some indication of what the Fund would like to see from existing and applicant CDFIs. Some examples include ensuring a grace period prior to charging an overdraft fee, or allowing small negative balances without charging a fee, and allowing consumers to have access to real-time information about what’s available in their accounts, so they’re less likely to be hit with an overdraft fee.
A consumer’s ability to repay their loans is also included in the proposed changes, especially with consideration to payday alternative loans. While the proposal doesn’t require CDFIs to disclose a Military APR (MAPR) to consumers not already covered by the Military Lending Act, all rates required in a CDFI’s annual reporting would now need to be recalculated as an MAPR. Any rates that exceed 36% wouldn’t automatically disqualify an applicant from CDFI certification, but would trigger a set of secondary questions designed to demonstrate that the applicant’s loans meet the CDFI Fund’s subjective consumer protection standards. Because the calculation of an MAPR includes fees not included in the calculation of a standard APR under the Truth in Lending Act, this is particularly problematic if the applicant has purchased loans throughout the year.
Not all changes will be burdensome, however, such as the changes around CDFIs’ Target Markets (TMs). For example, the geographic boundaries of most TMs will be eliminated, so that all loans made to any qualified borrower, no matter where they live, will count toward qualified lending. Additionally, people with disabilities would be considered an “Other Targeted Population,” expanding CDFIs’ pool of potentially CDFI-qualified borrowers, helping to meet the 60% TM lending goal. Additionally, loans purchased that were originated in a TM would count toward the 60% requirement, even if those loans were not originated by the CDFI.
Rest assured, our knowledgeable team is keeping track of the CDFI Fund’s proposed changes and will continue to follow its progress diligently. We’re committed to positive outcomes for our CDFI credit unions and your members who so greatly benefit from your services. If you’re interested in further details of our interpretation and suggested changes to the proposal, please read the letter we submitted to Treasury’s CDFI Fund here or contact us with your questions and concerns.