The CDFI Fund proposes changes to CDFI certification. CU Strategic Planning responds on behalf of credit unions. The CDFI Fund's proposal could have severe consequences reducing the number of CDFI certified credit unions.
Tanya McInnis, Program Manager Office of Certification, Compliance Monitoring & Evaluation
Community Development Financial Institutions Fund U.S. Department of the Treasury 1500 Pennsylvania Ave. NW Washington, DC 20220 Via Email: ccme@cdfi.treas.gov 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.
Key Definitions
The CDFI Fund recognizes a finite list of products and services as Financial Services for the purposes of certification. Other Financial Services that could be included are: shared branching services, individual retirement accounts, prize-linked savings accounts, individual development accounts, on-line bill pay/account access and virtual tellers.
For example, although IRAs are often inaccessible to low income consumers, a number of credit unions have lowered the barriers to entry to encourage savings and give consumers access to higher-paying savings vehicles. Shared branching services gives the member of a credit union the ability to perform deposits, withdrawals and check cashing at other credit unions within the same cooperative network, dramatically reducing the need for expensive check cashing services and reducing costs to the consumer. Virtual tellers—whether deployed on-site at partner locations or available through Video Teller Machines, give low income consumers access to accounts in areas where a branch isn’t feasible. Finally, the CDFI Fund may also wish to consider recognizing allowance for Target Market account losses as an eligible Financial Service (losses associated with Financial Services accounts deployed to the Target Market).
Applicant Basic Information
Question BI21.1 of the certification application asks if a credit union’s bylaws demonstrate that the credit union’s governing board is democratically elected by the credit union’s members. Because all credit unions in the United States are not for profit, democratically controlled financial cooperatives, this question is unnecessary. Democratic control is a necessary tenant, and one of the defining principles of credit union operation. By removing this question and its subsidiary questions, the CDFI Fund reduces unnecessary paperwork for both the applicant and the CDFI Fund.
Under this same category, it’s very helpful that the CDFI Fund appears to be moving away from automatically requiring credit union applicants to include copies of their articles of incorporation. Most credit unions in the U.S. were chartered more than 50 years ago, with many chartered in the early 1930’s. While most have copies of their original articles of incorporation, these articles are sometimes less than legible, have often been amended over the years, and are often located off-site in long-term storage—making them somewhat inaccessible.
With the knowledge that all credit unions are democratically controlled, and by checking to ensure that the credit union applicant has a charter number assigned by the National Credit Union Administration, the CDFI Fund will save the time and paperwork necessary in collecting and submitting credit union bylaws and articles of incorporation.
Question BI-FP10 of the certification application requires the applicant to create a separate AMIS entry for each type of Financial Product offered, which includes information on the terms and conditions of the product, repayment terms, etc. Depository applicants are apt to offer many types of Financial Products, therefore, to reduce paperwork, we’d suggest that the CDFI Fund limit the number of entries to a reasonable number since there is considerable burden involved in entering all of the terms for each type of Financial Product offered.
Legal Entity To qualify as a Certified CDFI, each applicant must validly exist under state or federal law. There’s some ambiguity between this section and the applicant Basic Information section concerning what information must be submitted to validate legal existence. For example, the guidance requires a credit union to include a copy of its charter, however just what this constitutes is uncertain. Is it the credit union’s bylaws? Its articles of incorporation? By checking to ensure that the credit union applicant has a charter number assigned by the National Credit Union Administration, the CDFI Fund will save the time and paperwork necessary in collecting and submitting credit union bylaws and articles of incorporation.
Question LE02 of the certification application requires the applicant to include its official EIN letter from the IRS. Is this information necessary if the CDFI Fund can confirm that a credit union is active and operating with the NCUA? Is the EIN used for another purpose? Again, because credit unions have most commonly been in operation for more than 50 years— long before the federal EIN system was created by the IRS in 1974, original EIN documentation can be difficult to locate. All credit unions have an EIN since having an EIN is a prerequisite to paying employment taxes. Perhaps requesting the EIN itself, if needed, would be sufficient and reduce paperwork—at least for regulated applicants.
Question LE12 of the certification application asks if the applicant is a State-Insured Credit Union. It’s worth noting that those credit unions that are not federally insured, may protect consumers against loss in a variety of ways. They could be state-insured, privately guaranteed or even potentially be uninsured. Although this last category of credit unions is dwindling, there are more privately guaranteed credit unions than those that are state-insured. In other words, perhaps this question should ask if the applicant is a non-federally insured credit union, with additional follow-up questions that allow the CDFI Fund to understand the applicant’s protection of consumer funds.
Question LE16 of the certification applicant asks if there have been any amendments to the applicant’s legal entity documentation. Again, because most credit unions were chartered more than 50 years ago, it can be arduous to track down all amendments over the course of time. We’d encourage the CDFI Fund to request only those amendments that are necessary to ensure that the applicant meets the need to prove that they are a legal entity.
Perhaps the CDFI Fund is looking to understand the history of the applicant as a legal entity since inception. However this could be described in a short narrative, creating less burden combined with ensuring that the credit union has as an active charter number with the NCUA. Primary Mission
Documentation of Primary Mission: A certified CDFI must have a primary mission of promoting community development and directing its activities toward improving the social or economic conditions of underserved people or communities. To date, the CDFI Fund has based part of its determination of community development mission by looking at an applicant credit union’s mission statement. One of the most important comments we’d like to leave with the CDFI Fund is that a mission statement often does not equate to mission at a credit union. By way of background, because credit unions are governed by democratically elected representatives from the credit union’s membership that are almost entirely contributing 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 that evidences strategies that demonstrate a community development mission and we encourage the CDFI Fund to expand its willingness to show evidence of other community development-related strategies that focus activities toward improving the social or economic conditions of underserved people or communities. 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 market (or perhaps a slightly higher benchmark) already has a primary mission of promoting community development in an effort to reduce paperwork and burden. Applicants that fail to meet this standard could then be required to demonstrate a primary mission with additional documentation.
Further, it seems very reasonable to require a CDFI to have a primary mission devoted to promoting community development for at least 12 months, so long as evidence of the primary mission can be documented in ways other than looking to the applicant’s mission statement alone. Because credit union applicants often have a decided community development mission focused on directing their activities to addressing the economic conditions of underserved people or communities, but also often have mission statements that don’t reflect this underlying organizational mission, some have, in the past, illustrated their mission by adopting a community development mission statement. The recent adoption of a community development mission statement does not belie the fact that the credit union applicant always had a community development mission, therefore the applicant should be given the opportunity to illustrate their underlying mission in other, flexible ways. Affiliate Primary Mission: The CDFI Fund’s proposal appears to require any affiliate in the family of applicant entities to meet the primary mission test (see p. 29 and 30 of Certification Application Overview). However, an affiliate not seeking certification as a CDFI should not be required to meet the primary mission test—only the certification applicant. This may simply be a section of the proposal that’s somewhat confusing and where additional clarification would be helpful. For example, the CDFI Fund may only intend to require affiliate information if the affiliate is actively involved in providing a Financial Product or Financial Service to the applicant’s Target Market.
Responsible Financing Practices: Although not a statutory requirement for certification, the CDFI Fund is proposing that applicants meet requirements for responsible financing practices. It’s understandable that the CDFI Fund wants to protect the CDFI brand as one that represents organizations certified to help, and not harm consumers. A cautionary consideration: does the CDFI Fund want to be the arbiter of what is a responsible financing practice (particularly when responsible finance is not a prerequisite of the underlying statute)? This determination could be a source of litigation or legislative scrutiny for applicants denied certification on these grounds. This is particularly true since a rate considered high for a borrower with a moderate to high credit score, could represent a godsend for a borrower with a poor credit history. For example, if a CDFI credit union offered a $500 payday loan alternative to be paid back within six months (extending the term to ensure that loan payments are kept affordable for a low income borrower), even at the highest rate allowed to a federally chartered credit union at 36% (which seems very high when compared to rates available to A paper borrowers), this adds up to a consumer loan cost of $90. At a comparable payday lender, the borrower would probably be unable to pay off the loan within one pay cycle and the loan would be rolled over, on average, four times. Over six months, the cost of the loan to the borrower could be as high as $2,895 in some states. In other words, “responsible financing” could be a very difficult benchmark for the CDFI Fund to define, as it’s often subjective and contextual.
Use of Military Annual Percentage Rate: 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 application burden to applicants, and the need for considerable expertise to fully ensure compliance with the requirement. 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 true cost of credit.
Question PM19 of the certification application asks applicants whether they have disclosed periodic payments due, total amounts to be repaid over the life of the loan, total finance charges over the life of the loan, etc. Each of these disclosures appears to mirror the disclosures required under the Truth in Lending Act and Regulation Z. If all lenders applying for CDFI certification are already bound by the disclosure requirements of Reg. Z, this question seems unnecessary. If there are lenders applying for CDFI certification not bound by the disclosure requirements of Reg. Z, perhaps this question should be solely directed to those applicants. Question PM26 of the certification application asks applicants whether they offer at least one Financial Services depository account with “total functionality” with associated low fees. We would appreciate greater clarity around the use of the term “total functionality”. Since each Financial Services account can be structured differently, we’d need to know which functions should be included in order to answer the question accurately.
Primary Mission – Affiliates (see p. 42): Here again, we would appreciate greater clarity over when information concerning an affiliate should be included in an applicant’s CDFI application. We do not believe it is the CDFI Fund’s intent to require this information on affiliates, if the affiliate is not applying with the applicant or supplying one or more of the characteristics needed to qualify the applicant as a CDFI (for example, providing Financial Products). The most common example at a credit union would be a wholly owned credit union service organization or CUSO that offers insurance services. These services are kept separate from those offered by the credit union because they are not core credit union services and can’t be offered under the credit union’s not for profit charter. A credit union applying to become a CDFI would not typically rely on any CUSO activities to meet the requirements to become a CDFI and a credit union CUSO would probably not meet the primary mission test since the affiliate was specifically chartered separately from the credit union to offer a service outside the scope of the credit union’s mission and unlikely to be focused on community development.
Financing Entity
Question FE-AS12 of the certification application asks applicants if any of the applicant’s staff are dedicated to activities other than the direct provision of Financial Products and/or Financial Services and provides a pick list of other non-financing activities to choose from. We’re unclear on why the CDFI Fund is seeking the answer to this question, since the applicant is already required to list the total number of FTEs dedicated to Financial Products and Financial Services, however, if the answer to this question is important, it’s worth noting that there should be many other pick list categories to choose from such as: management, marketing, financial management, compliance, security, data analytics, etc.
Capital Available to Support Financial Products (FE-AC01 through FE-AC03): These questions in the proposed certification application concern the cash needed to fund Financial Products. We’re unclear on whether this question is directed to non-depository applicants or all applicants. If directed to regulated, depository institution, this information could be reliably verified through public call report data to reduce regulatory burden (specifically the following line items on a credit union call report: ACCT_730A (representing cash on hand) and ACCT_730B (representing cash on deposit)). Because every CDFI, once certified, is required to submit an Annual Certification Report that tracks lending to the CDFI’s Target Market, perhaps this question could be eliminated since, the proof of lending will figuratively be in the pudding!
Financing Entity Projections (FE-PO1 & FE-PO2): These questions in the proposed certification application ask the applicant to project the total number of transactions expected to be closed in the next three months along with the dollar amount of financing transactions projected. These questions are highly relevant to a grant application that requires the grantee to meet established performance benchmarks, but we are unclear on how the questions relate to the statutory tenants for certification as a CDFI. Year-to-year performance should be illustrated by year-over-year annual certification reporting data without requiring applicants to include loan projections as part of their certification application.
Target Market
Calculation of Financial Products to Target Market: The CDFI Fund’s request for comments institutionalizes recent practice, requiring certification applicants to direct at least 60% of both the number and dollar volume of Financial Products to one or more eligible Target Market types. We recognize that the CDFI Fund is responsible for establishing an enforceable standard used to determine when a certification applicant can reasonably be said to have a primary mission of community development under 12 USC 4702(5) and 12 CFR 1805.201(b)(1). (Although it might be more reasonable to recognize any entity providing over half of its products and services (51%) to an eligible Target Market type.) Nonetheless, requiring an applicant to meet a supermajority-type, 60% standard in both the number and dollar volume of Financial Products to an eligible Target Market creates a standard that does not serve the interests of public policy—carefully balancing the need to ensure that applicants have a community development mission with the overarching policy of encouraging applicants to embrace a community development focus.
Further, reliance on a standard that requires 60% of loan dollar volume can skew true Target Market deployment for applicants competing with predatory small dollar marketplace lenders. For example, an applicant making 50 small, payday alternative loans in the amount of $200 to an eligible Target Market, and just one housing loan for $250,000 to a non-eligible Target Market would not meet the CDFI Fund’s calculation standards because even though 98% of loans were deployed to an eligible Target Market, less than 4% of the dollar amount of loans were deployed to an eligible Target Market. As a result, we’d encourage the CDFI Fund to adopt greater flexibility with its primary mission standards that better balance evidence of primary mission with public policy that encourages applicants to meet the standards associated with CDFI certification.
Use of Financial Services to Calculate Primary Mission to Target Market: 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 and its creative proposal for calculating these services to a Target Market (since many Financial Services are provided without the knowledge of the user’s income—income that would only be obtained through loan underwriting). An unfortunate hurdle to using Financial Services accounts to calculate service to low to moderate income consumers comes from the fact that low income consumers are more likely to have just one account at an applicant credit union, whereas a higher income consumer might have multiple accounts (e.g., savings account, checking account, money market account, IRA). This is likely to skew the calculation of Financial Services provided. For the purpose of calculating the provision of Financial Services to an eligible Target Market, perhaps the CDFI Fund should disregard duplicate Financial Services provided to a single consumer. We further encourage the CDFI Fund to allow applicants to rely more heavily on the provision of Financial Services to a Target Market to demonstrate its primary mission 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 50% 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).
Allowed Target Market Types: Investment Area: The CDFI Fund’s Certification Application PowerPoint presentation indicates that geographic boundaries and mapping requirements are being eliminated for most Target Markets (page 26). This change would seem to streamline future reporting, however we would appreciate additional clarification on how an applicant will use pre-qualified Investment Areas to meet the CDFI Fund’s benchmarks for certification.
Target Market Verification Process: The CDFI Fund’s request for comments appears to disallow loan sampling used to determine whether the applicant meets the benchmarks established by the CDFI Fund. For the reasons illustrated in the example above (50 payday alternative loans + one mortgage loan), loan sampling represents an important tool for illustrating true service to an eligible Target Market. If the CDFI Fund’s analysis is based on 12-months of history in deploying Financial Products (and possibly Financial Services) to an eligible Target Market, depending on the volume of the applicant’s lending, one commercial loan can dramatically impact and skew the results of the calculations used to determine whether the applicant is meeting its benchmarks.
For other, large applicants, requiring 12-months of loan data represents its own challenge. Large credit unions can easily produce over 100,000 loans during a 12-month period. For grant reporting purposes AMIS has been unable to accept file uploads over 1,000 records. During grant reporting, this requires high-volume lenders originating 100,000 loans during a year to break their files into an estimated 100 separate uploads (issues that “time out” the upload appear to depend on file size, so it’s difficult to estimate the exact number of loan files AMIS can routinely support before erroring out, however we’ve found that reducing the number of loan records to 1,000 or less generally circumvents the upload error). On several larger credit unions we’ve worked with, we’ve needed to enlist CDFI Fund staff support to be able to submit this many records. If the CDFI Fund is proposing that all certification and annual certification reports include a full 12-months of lending data, we have concerns over whether the systems used to collect the data can support it.
Development Services
Tracking of Development Services: The CDFI Fund’s request for comments requires certification applicants to track the delivery of, and participation in Development Services along with the amount of time staff spend on the administration and delivery of Development Services. While we recognize that many CDFI applicants routinely track this information for (non-CDFI) grant reporting and to attract funders, other applicants do not. It’s important that the CDFI Fund continue to allow applicants to estimate this information consistent with past practice. Requiring actual tracking would be a burdensome new requirement, diverting applicant attention away from actively providing the products and services that represent the fulfillment of its community development mission.
Information Not Considered Development Services: The request for comments indicates that the CDFI Fund will not consider information presented in newsletters, flyers, or online to be Development Services. Here, we feel it’s important to distinguish between general information presented on an applicant’s website and information specifically designed to provide information that helps consumers or small business owners better their ability to borrow, budget and plan for their financial future. Some of our clients have developed extraordinarily helpful informational materials geared to a consumer’s stage in life and including tools that can be used to develop budgets, develop small business marketing plans and determine the amount of house they can afford. These resources should be considered Development Services, whereas general web pages that promote products should not. Further, the proposal indicates that the CDFI Fund will not consider presentations at one-off events or regular events held by other entities as a Development Service. While a presentation at a singular event probably lacks the continuity needed to help prepare and qualify consumers for Financial Products, we believe that regular events held at partner locations are, and should qualify as Development Services. By conducting events at partner locations, CDFIs have in-roads into underserved communities that most need the Development Services expertise often provided by the CDFI.
Accountability
Demonstration of Accountability: When using an advisory board to demonstrate accountability, the CDFI Fund’s proposal requires at least one governing board member to have a seat on the advisory board. It’s understandable that there should be a link between the advisory board representing an eligible Target Market and the CDFI’s governing board, however, perhaps the CDFI Fund could allow for other ways of creating this link. For example, one of our clients serves a native population, and the ultimate advisory board might be comprised of an existing organization of consumers elected from within the native population. As elected representatives, these consumers would have a thorough understanding of the native population’s economic issues and needs, however, aligning the election of this separate governance organization with a credit union’s democratically elected board would be difficult. Could there be other ways of establishing accountability by requiring attendance at the credit union’s board meetings, reports to the independent native governance organization, etc.?
Question AC28 of the certification application asks applicants applying for certification using an Other Targeted Population to identify the means of accountability used to demonstrate this accountability to the OTP. Under the “select all that apply” pick list, we are unclear on the application of the pick list references to persons with disabilities. Are the responses indicating that unless the applicant’s OTP is made up of disabled persons accountability cannot be shown by being employed by, or by serving on the governing or advisory board of an organization that primarily provides services to an OTP? If so, why would it not be acceptable to show accountability to any OTP through one of these methods? Finally, the acceptable forms of accountability to an OTP in Question AC28 is inconsistent with the means of demonstrating accountability to a native community in Question NACR10 which allows accountability to be demonstrated by employees of organizations primarily providing services to residents of the native community or governing/advisory board members primarily providing services to residents of the native community.
Question AC-CU01 of the certification application asks credit union applicants if the credit union’s board of directors are elected by the credit union’s members. Along the same lines of those comments provided relating to Question BI21.1, all credit union boards of directors are democratically elected by members of the credit union from among members of the credit union, making this question unnecessary.
Question AC-CU03 and Question AC-CU04 of the certification application require credit union applicants to parse all of its members, identifying which, if any, Target Markets each falls into. These questions represent a burdensome and nearly impossible requirement. To understand which eligible Target Market every member of a credit union might fall into, a credit union would need to have access to member income (to qualify the member under a LITP Target Market), or race/ethnicity/disability information (to qualify the member under an OTP Target Market). Credit unions don’t know a member’s income absent a loan application, and don’t know a member’s racial/ethnic information absent a home loan application (which may be requested, but not required from the home loan applicant under the Home Mortgage Disclosure Act. Many credit unions have upwards of 200,000 members, with some credit unions serving over a million consumers. Classifying each of these members into eligible Target Markets without using a statistically valid sample, would make CDFI certification insurmountable for large credit unions.
▪▪▪
Broad public policy should encourage organizations with a community development mission to apply for CDFI certification, which represents a laudable and recognizable credential. We respect the CDFI Fund’s mission of protecting the “CDFI brand” by ensuring that all certified applicants meet reasonable benchmarks, however in several areas where we have provided comments, 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. 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