Treasury overhauls community development financial institution certification process

The Treasury Department on Friday released long-awaited revisions to its community development financial institution certification process, a move that CDFI advocates say provides a much-needed update to the process to weed out less scrupulous lenders and create a clear path for true lenders. Community development corporations provide resiliency.

Bloomberg News

WASHINGTON – After six years of public comment and refinement, the U.S. Treasury Department’s Community Development Financial Institutions Fund on Thursday released a revised application for CDFI certification.

The final revisions include authorizing applicant companies to request changes to specific certification-related standards, incorporating legal entity verification into the application process, and updating various standards related to loan products, geographic targeting and target groups.

“The revised CDFI certification application sets clear standards for responsible lending and allows for innovation in community finance,” said Noel Andrés Poyo, Treasury Department’s Deputy Assistant Secretary for Community and Economic Development. and flexibility. Public input from CDFI practitioners is critical in this process and their feedback is reflected in this new application.”

Treasury’s new standards introduce several key updates designed to enhance flexibility and transparency in the CDFI certification process.

The updated application now enables applicant companies to request changes to specific lists and standards related to certification, including financial products, services, target populations, target market assessment methods and responsible financing standards. The Treasury Department emphasized that upon approval of such requests, CDFI funds will promptly issue updated guidance to ensure that all applicants comply with such standards.

Compared to the updated draft, the revised application eliminates the Loan Purpose Form (where applicants enter information about their loan products) and is collected through targeted questions in the revised application and transaction-level reports Limited data.

The Treasury Department also integrated, the government’s legal entity database, into the updated Awards Management Information System, through which applicants can submit revised applications. This integration aims to ease the burden on candidates by simplifying the verification of organizational legal entity status, especially for those already registered in the system.

In the primary mission section of the final application, the previous requirement for entities to submit a strategic plan has been replaced by the option for applicants to provide a board or owner-approved narrative focused on community development outcomes resulting from financing activities.

The Responsible Financing Standards section of the updated application now clearly outlines practices that are inconsistent with community development and require explanation and consideration related to specific products and services in mortgage, consumer and small business lending.

The updated target market benchmarks provide applicants with greater flexibility, allowing CDFIs that fail to meet their target market benchmarks in a particular year to maintain certification by demonstrating compliance within three years.

The application also eliminates geographic boundaries for prequalified investment areas. Applicants now have the option to develop tailored geographic investment areas, where contiguous geographic units can be selected that meet comprehensive criteria for economic distress, including high-poverty or low-income areas. On average, they will meet the economic hardship criteria compared to other districts that do not. The CDFI Fund is implementing a three-year transition phase after issuing a revised rural lender application to meet this geographic criterion.

The revised application includes a new “other target group” that recognizes people with disabilities and designates Filipinos and Vietnamese as target groups.

In response to stakeholder requests, the update addresses the provision of development services to community members through online modules, without the need for instructors.

While the original draft application stated that board members receiving compensation had a conflict of interest that disqualified them from being considered responsible for the target market, the CDFI Fund revised this position in the updated criteria. CDFI funds now allow compensated board members to be deemed accountable to the target market as long as they meet specified accountability standards.

The CDFI Fund decided to grant a grace period to allow currently certified CDFIs to actively apply for re-certification within one year from December 20, 2023, review the revised application, and actively prepare the information required for re-certification.

CDFI advocates have long explain The application needs to be revised, emphasizing the critical importance of updating the certification process to ensure the application properly vets companies and ensures they serve low-income communities.

The overhaul of the certification process comes amid concerns that some companies may take advantage of regulatory exemptions from certain Consumer Financial Protection Bureau rules to engage in unethical lending. California-based CDFI Change Co. Recently involved in a lawsuit Filed by its former employees, it alleges that the company mischaracterized the loans and provided false information in its annual certifications, including misrepresenting the race, ethnicity and income levels of borrowers, falsifying information in its annual certifications, and providing false information to investors. A person makes misrepresentations about the fundamental characteristics of the mortgage loans he securitizes.

The revised application itself underwent substantial revisions over more than six years, during which time the CDFI Fund actively sought public comment. The fund launched the process in January 2017 Send a message request Gather input on CDFI accreditation policies and procedures. A total of 28 letters were submitted, including more than 200 pages of comments.Taking into account the feedback received through the RFI, the CDFI Fund developed a first draft of a revised certification application and related tools, which are now available at May 2020.

A second draft The application’s content was published in the Federal Register on November 4, 2022, entering the final comment period, after which the CDFI Fund screened approximately 300 responses to form the evolution of the final application.

Thursday’s update was the first time applicants were specifically asked about their financial products and practices.

Jeannine Jacokes, executive director of the Community Development Bankers Association, said the updates streamline the process for applicants in some neat ways while also establishing clearer standards for community development activities to address previous standards that allowed some CDFIs to slack off on community development. worries.

“There’s a concern that maybe some people who are less community-oriented and less consumer-friendly have been looking to get certified,” Jacks said. “Maybe they serve primarily a low-income market, but maybe they don’t offer a product or a service.” “These services are consumer-friendly or designed to create wealth in low-income communities. It’s felt they need to have clearer standards related to what they call the primary mission test.”

One particularly welcome improvement, Jacobes said, is adjusting the geo-targeting methodology within qualified investment areas. Previously, navigating this area involved a cumbersome process, with institutions having to carefully outline the specific physical geography they intended to serve based on strict criteria to qualify as a Community Development Financial Institution.

“[Now,] If the census tract appears to meet the requirements, you simply record it and you can continue to provide services [the community]so you don’t have to go through the tedious process of changing who you say your target market is,” she said.

CDFI leader David Beck, director of policy at Self-Help Credit Unions, responded favorably to the update, saying clear standards will strengthen a CDFI’s brand and mission and ensure the application process validates the institution’s commitment to serving the community.

“Treasury’s reforms to the CDFI certification application will strengthen consumer and business trust in the CDFI brand,” he said in the statement. “The CDFI program’s mission is to help bring equitable financial services to marginalized communities, and these updated certification standards is an important and concrete step towards ensuring that CDFIs fulfill this mission.”

Equally pleased with the changes are fair lending advocates such as Andrew Kushner, senior policy adviser at the Center for Responsible Lending, which educates the public about financial products and combats predatory lending, saying the new The application will ensure that lenders cannot abuse consumers under the guidance of CDFIs.

“The Treasury Department has established common-sense standards to prevent financial institutions that abuse consumer rights from receiving government approval,” he said. “These baseline standards will prevent CDFIs from approving institutions that regularly provide 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 during the Great Recession. “

Financial institutions trade groups are also pleased with the long-awaited reforms.And some credit unions Complaints were made about the draft applicationThis excludes many companies from certification, said Jim Nussle, president and CEO of the National Credit Union Association, who said the final update is a step toward protecting the CDFI label by ensuring effective standards meet the community development mission.

“We are grateful that the fund took credit unions’ concerns seriously and are pleased with the many important changes that have been made. Updating the accreditation standards is a significant challenge and a necessary step to protect the value of accreditation,” he wrote in a statement. Low-income and underserved populations are core to the mission of the IMF and CDFI credit unions. ”

The American Bankers Association, a banking industry trade group, also spoke favorably of the revisions, saying they supported the ultimate mission behind the changes as they reviewed the updated application.

“While we are still reviewing the revised CDFI certification application released today, we appreciate the Department of the Treasury’s commitment to ensuring that CDFI banks can meet the needs of the communities they serve,” ABA President Rob Nichols said in a statement. statement. “We look forward to working with Treasury to ensure CDFIs can continue to fulfill their vital mission of helping communities thrive.”

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