On August 21, 2023, Acting Director of the Community Development Financial Institutions Fund (“CDFI Fund”) Marcia Sigal indicated that the CDFI Fund is still on track to release the new CDFI Application (“Application”) sometime this fall.[1] What can we expect to see in the new Application[2]?
The Community Development Advisory Board meeting on July 31 provides critical insights on the direction of the final draft.[3] In that meeting, the Advisory Board heard from the CDFI Certification Subcommittee (“Subcommittee”) on its recommendations for navigating a few of the most controversial areas of the proposed Application changes.
Representing the Subcommittee, Michael Swack outlined the recommendations to the Advisory Board that he styled as “capturing the unintended consequences” of early drafts of the revised Application. There was no substantive engagement on whether or if the CDFI Fund would adopt changes based on the Subcommittee’s report; however, it is reasonable to expect that these areas will get further attention for revision based on the Subcommitte’s work.
The link to the formal report is available here: “Final and Approved CDFI Cetification Recommendations presented by the Community Development Advisory Board to CDFI Fund Acting Director Marcia Sigal July 31, 2023”. https://www.cdfifund.gov/sites/cdfi/files/2023-08/CDFI_Certification_Recommendations_Presented_to_CDFI_Fund_Director_31JULY2023.pdf (11 pages)
The areas discussed in the open meeting are:
- Mortgage Underwriting: The Subcommittee noted that the Ability to Repay (“ATR”) product feature requirements associated with Qualified Mortgage should be included. These include: points and fees are less than or equal to three percent (3%) of the loan amount (with important exceptions for loan amounts less than $100k); no negative amortization, interest-only, or balloon loans and a maximum loan term is less than or equal to 30 years.[4] That said, the Subcommittee recommended that loans for which there is a clear “community development purpose” that would otherwise breach one of these product features could be permitted if a compelling narrative is provided to the CDFI Fund.[5]It is important to note that while CDFIs can underwrite loans that do not meet the “Qualified Mortgage” or “ATR” standard without the regulatory overhang of liability, the CDFI Fund is within its right to impose its own regulatory standards. The “Official Interpretation of Paragraph 43(c)(1) published by the CFPB is likely to be very instructive on expectations of the CDFI Fund on the details of a compliant mortgage lending operation.[6]
- Low-Income Target Market Documentation: The Subcommittee noted that the documentation and verification standards for a CDFI to prove they were serving low-income individuals were operationally challenging for community service organizations. For example, it is impractical to ask that a small business operating as a community facility request tax documents from its customers. As a result, the Subcommittee recommended clarifying direction on providing income verification for “indirect” beneficiaries. Instead, the Subcommittee recommended that the CDFI Fund explore circumstances for which self-reporting of direct and indirect beneficiaries’ income or the broader use of income proxies.
- Staffing and the Financing Entity Test: One of the key metrics associated with meeting the “Financing Entity” test is that a predominance of the staff time is spent on providing financial products (or services). This proposed change in the drafts for the revised Application was met with significant pushback from the CDFI community that had become accustomed to including the staff time devoted to Developmental Services in the calculation. The Subcommittee recommended that Developmental Services should The Application (and, by extension, the certification process) should support the practice by granting it as time that can count towards the “Financing Entity” staff time test.
- Development Services and the “In-Person” Preference: The Subcommittee recommended that the changes related to qualifying “Development Services” should be more flexible to allow CDFIs to innovate. The implied result of the draft provisions in the revised Application was that only live, synchronous classroom-based teaching would be an acceptable delivery mechanism for Development Services. Instead, the Subcommittee recommended that the revised Application include an area for a narrative to a CDFI to make a compelling argument for their plans. Specifically, the Subcommittee noted that Zoom and online remote access are good ways to reach people.
- Accountability and Board Service: The Subcommittee noted that the drafts for the revised Application significantly limited the universe of people who could demonstrate “Accountability” by specifying that only the executives of qualifying nonprofits or service-related entities could count towards the Board service requirement. By implication, the Subcommittee recommended that less senior staff of the nonprofits or service-related entities should also be eligible. Similarly, the Subcommittee seemingly recommended that the Board of Directors of qualifying nonprofits and service-related entities be restored as suitable for the Accountability prong.
- Accountability and Conflict of Interest Rules: The Subcommittee noted that current borrowers of the CDFI should be eligible for service on the CDFI’s Board for purposes of the Accountability prong. The Subcommittee noted that borrower representations often provide invaluable insights into needs, opportunities and challenges. The Subcommittee stated that recusals could be used to mitigate any potential conflict of interest issues.
- Target Market Reporting and Conflicting Rules for Banks/Credit Unions: Without providing much detail in the meeting, the Subcommittee noted that the apparent conflicts in the CDFI rules with common regulatory compliance practices of credit unions, banks and venture capital funds deserve a closer look.[7] The final report details recommendations. Notably, the Subcommittee recommends that the CDFI Fund abandon reliance on the Military Annual Percentage Rate (MAPR) as the benchmark for the interest ceiling.
Details are available in the final report.[8] It is hard to predict exactly how much of the Application, reporting or Target Market Verification may change based on these recommendations, but the existance of this report certainly narrows the focus of the most likely areas for further adjustment.[9]
Falcon Capital Advisors is here to answer all of your questions! Please feel free to drop me a line, [email protected]
[1] See “Message from CDFI Fund Acting Director Marcia Sigal: A Status Check on CDFI Fund Activities.” Published by the CDFI Fund. Available here: https://www.cdfifund.gov/director-messages/40
[2] The proposed Application changes and the iterations of the drafts for public review are available here: https://www.cdfifund.gov/programs-training/certification/cdfi/certification-pra (last updated May 1. 2023)
[3] Virtual Public Meeting of the CDFI Fund’s Advisory Board Rescheduled to July 31, 2023
[4] See “Basic Guide for lenders: What is a Qualified Mortgage?” Published by the CFPB. Available here: https://files.consumerfinance.gov/f/201310_cfpb_qm-guide-for-lenders.pdf
[5] “Community Development Purpose” is a term of art that is commonly used in the Community Reinvestment Act compliance regime. One demonstrable definition appears in the “Interagency Questions and Answers Regarding Community Reinvestment “: “A loan, investment, or service has as its primary purpose community development when it is designed for the express purpose of revitalizing or stabilizing low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income areas, providing affordable housing for, or community services targeted to, low- or moderate-income persons, or promoting economic development by financing small businesses or farms.” Available here: https://www.fdic.gov/resources/supervision-and-examinations/consumer-compliance-examination-manual/documents/11/xi-12-1.pdf
However, in the CDFI proposed revised Certification application, it is part of a drop down that includes,
- Business development.
- Asset/wealth building.
- Homeless/transitional housing/services.
- Senior housing/services
- Community facilities development/ improvements.
- Special needs housing/services.
- Accessibility modifications.
- Affordable housing.
- Job creation/retention.
- Charter school development.
- Community healthcare centers development.
- Commercial real estate development.
- Climate resilience
- Reduced poverty and/or inequality.
- Credit building.
- Financial stability.
- Other.”
See PM #9, Available here: https://www.cdfifund.gov/programs-training/certification/cdfi/certification-pra
[6] See “Official Interepretation of Paragraph 43(c)(1) General Requirement” Published by the CFPB. Available here: https://www.consumerfinance.gov/rules-policy/regulations/1026/43/#c-1
[7] See “Final and Approved CDFI Cetification Recommendations presented by the Community Development Advisory Board to CDFI Fund Acting Director Marcia Sigal July 31, 2023.” CDFI Fund. Available here: https://www.cdfifund.gov/sites/cdfi/files/2023-08/CDFI_Certification_Recommendations_Presented_to_CDFI_Fund_Director_31JULY2023.pdf
[8] Id.
[9] Drafts of the proposed changes are available on the CDFI Fund’s website here: https://www.cdfifund.gov/programs-training/certification/cdfi/certification-pra
