How CDFI Changes Could Affect Participation

    By Sheryl S. Jackson

    NAFCU raises member concerns about proposals

    Proposed changes to the Community Development Financial Institutions Fund’s (CDFI) requirements for new certification as a CDFI institution as well as annual renewal of certification for existing organizations are presenting some significant concerns for credit unions.

    “Our first concern is the short effective date of implementation—one year after the effective date of the final rule,” said NAFCU Senior Regulatory Affairs Counsel Aminah Moore. Moore explained that this presents a challenge because some of the proposed changes create new data collection and reporting requirements and affect issues such as board member qualifications. Creation of new processes and allocation of staff to handle additional data collection and analysis place an undue burden on credit unions, she said. “Also, credit union board members serve multi-year terms and cannot be switched out easily because they are democratically elected by membership per statute,” she said. “We have recommended a three-year implementation to allow time for compliance.”

    Another significant change for credit unions with the National Credit Union Administration’s (NCUA) designation as a low-income credit union is the removal of automatic acceptance of the low-income designation (LID) as proof of a primary mission of promoting community development. Currently, institutions that have met NCUA’s rigorous criteria to obtain the LID designation may face decertification if they do not meet the proposed certification standards.

    “The elimination of the LID designation will be especially burdensome for those credit unions that are already LID CDFIs because they only have one year to come into compliance with this new requirement,” said Moore. “Most credit unions hire a consultant to obtain the expertise needed to produce documentation to meet the CDFI requirement regarding primary mission, but LID credit unions are typically smaller with fewer resources and cannot hire outside assistance.”

    Park Community Credit Union in Kentucky received its CDFI certification five years ago and its LID in 2011. Founded in 1965, the credit union is grateful to have resources to handle data collection and the analysis required to document appropriate use of funds from the CDFI Fund and NCUA. “We know it’s a luxury to have a three-person analytics department that supports all areas of the organization,” said Jim Spradlin, CCUE, president and CEO of the credit union. “Our state has a lot of need, so access to grants that can be used to support members who might not qualify for traditional loans is important to our communities.”

    While Spradlin is taking a “wait-and-see” position on the proposed changes, he does point out that some changes related to loan volume and deposits in the target market might be a concern. “In most of our areas, our loan volume is high, but deposit levels are lower,” he said. “This is typical of CDFI areas where members need the most help because they don’t have significant savings.” His organization’s 5-year experience as a CDFI-certified credit union does provide confidence that they can adjust to maintain the certification, he added.

    Some of the CDFI’s proposed changes also evaluate products, services and fees of the credit union, which duplicates the regulatory oversight of other agencies, said Moore. “Our position is that the CDFI Fund is not tasked with regulating credit union products, services and fees and should not base certification on something that is already regulated by another agency.”

    “A lot of the borrowers who benefit from a CDFI’s help are unable to go anywhere else for loans due to their financial circumstance; they are often the only type of loan the member qualifies for,” said Moore. Under the proposed certification standards, an applicant that does not consider a borrower’s ability to repay a loan may be determined ineligible for CDFI certification if an acceptable justification is not offered. “This is contrary to Regulation Z, which explicitly excludes CDFIs from the ATR requirements.”

    Business loans are the main staple of Park Community’s use of CDFI and LID funds, said Spradlin. “We have a micro-loan program for small or new businesses that provides up to $10,000, giving them access to loans they could not obtain elsewhere,” he said. If paid back in a timely manner in three years, interest on the loan is refunded, he added. “We also use grant funds to partner with local groups such as the Rotary Club of Louisville to provide mortgages to purchase homes in specific areas of the city,” he said. “This type of program helps families purchase a home, which is a critical step to breaking out of poverty and creating a legacy of wealth for the family.”

    Connex Credit Union started the CDFI certification application process in May 2021 and was certified in February 2022 after several months of delay. “We immediately applied for grants because of the grant application timing and because we had already created loan programs to support some of our communities,” said Frank Mancini, CEO of the Connecticut-based credit union. While waiting to receive a decision on the grant application, his credit union’s board is supporting the funding of these loan programs that were created with the intention of relying on the CDFI support. “We made about $1 million in loans in 2022 and have $2 million in the pipeline for 2023,” he said.

    The CDFI Fund postponed the new CDFI Certification Application in late 2022 to revise the application based on feedback received, pausing the processing of new applications, said Moore. “We don’t know when the new application will be available, but if some of the proposed changes are made, there will be credit unions that qualified under the previous rules that won’t qualify, and some existing CDFIs will face decertification,” she said. “It is too early to know what the final rule will look like, but CDFI-
    certified credit unions can take a look at the proposed standards and see if they will require the credit union to change processes, collect additional data or increase documentation so they can think about how those changes could be made if needed.”

    Although his organization was certified recently, Mancini does not know how a revised application will affect Connex when it files for recertification. “We won’t just look at the final rule, because I always worry about the interpretative guidelines,” he said. “It is frustrating to see how the CDFI Fund, through some of its proposed rules, is trying to duplicate regulatory oversight that credit unions already have from state regulators, federal regulators and auditors.”

    Mancini added, “Credit unions have a history of doing the right thing for our members and communities. Any changes should help us continue—not limit—that effort.”