CDFI Fund: Preview of Revisions to the New CDFI Certification Application Available

Release is in Advance of Further Request for Comments coming from OMB

In May 2020, the Community Development Financial Institutions Fund (CDFI Fund) requested public comment on the application and reporting requirements for Certified Community Development Financial Institutions (CDFIs). The CDFI industry overwhelmingly responded and submitted 55 letters with over 600 unique comments to proposed changes to the CDFI Fund’s Certification Application and Annual Certification and Data Collection Report (ACR), as well as its data collection mechanisms. Over the past two years, the CDFI Fund has spent considerable time reviewing and considering these comments and suggestions.

In the coming weeks, the revised CDFI Certification Application, ACR, and updated methods for collecting transactional level data from Certified CDFIs will be released by the Office of Management and Budget (OMB) for a final round of public comment. This will be the last opportunity for public input on the revised CDFI Certification Application and reporting requirements before they are implemented in April 2023.

The CDFI Fund is providing the CDFI industry and the public at large an opportunity to preview updates that have been made to the CDFI Certification Application (as well as the ACR and data collection methods) since the 2020 version. This preview is intended to provide organizations with additional time to review the new Application and reporting requirements before the comment period ends.

Substantial updates have been made to both the Application and the reporting requirements since the initial round of revisions were proposed back in 2020. These further modifications were all made in response to comments submitted to the CDFI Fund, as well as through the CDFI Fund’s research and consultation with other federal agencies and regulators. This preview covers the timeline and process for the implementation of the new CDFI Certification Application and explains some of the large-scale revisions to the Application.

CDFI Certification Application Timing 
Earlier this month, the CDFI Fund instituted a blackout period on the submission of all new CDFI Certification Applications. This blackout period provides the CDFI Fund the time needed to complete the build out of the new CDFI Certification Application in the Awards Management Information System (AMIS). 

In the coming weeks, OMB will officially open its comment round on the CDFI Certification Application, ACR and data collection mechanisms. The window to submit comments will be limited to 30 days only and cannot be extended. Once this window closes, OMB and the CDFI Fund will review any new comments as necessary. However, the CDFI Fund does not expect to make major additional revisions that would affect the projected timeframe of deploying the new CDFI Certification Application.

In April 2023, the blackout period will end and the CDFI Fund will begin accepting CDFI Certification submissions using the new CDFI Certification Application. The updated CDFI Certification Application will be in effect at this time for organizations seeking Certification as a CDFI for the first time. For those organizations that are already Certified CDFIs, there will be a grace period to come into compliance with the updated CDFI Certification criteria. 

The CDFI Fund’s Examination of the CDFI Certification Process
As noted back when the CDFI Fund first solicited input on CDFI Certification requirements in 2017, the significance and scale of CDFI Certification has increased substantially in the more than 25 years since the first organizations were certified as CDFIs in 1997. There are now nearly 1,400 Certified CDFIs, headquartered in all 50 states, the District of Columbia, Guam, and Puerto Rico, with collective assets in excess of $160 billion.

While Certification provides eligibility to participate in various CDFI Fund assistance programs, more frequently it also serves as a qualifier to access other Federal governmental resources and benefits, as well as State and local governmental, philanthropic, and private sector investment. This review and update is designed to ensure CDFI Certification practices: reflect and represent the evolving nature of CDFIs; safeguard government resources; and, continue to accurately verify an organization’s commitment to a community development mission.

From the start of this process, there have been five policy objectives guiding the CDFI Fund’s work:

1. Protect the CDFI brand;
2. Support the growth and reach of CDFIs, especially as it relates to their ability to innovate and take advantage of new technologies;
3. Continue to foster a diversity of CDFI types, activities, and geographies;
4. Minimize burden on CDFIs, while improving data quality and collection methods; and
5. Promote efficiency for CDFI Fund staff in rendering CDFI Certification determinations.

With unprecedented levels of resources being directed at CDFIs, the proposed changes to the CDFI Certification Application deliberately set high standards for mission, responsible products and services provided, accountability, conduct, and performance. These are absolute and universal principles of CDFI Certification that should carry more credence during these challenging times, when so much needs to be done to facilitate economic opportunity in distressed and underserved communities. 

The revised CDFI Certification Application may require some CDFIs to adjust how they do business, and some may no longer be able to meet the tests required for Certification. CDFI Certification is not for every business model and was never intended to be. The CDFI Fund’s strategic plan seeks to promote the growth, reach, and performance of the CDFI industry, but also states the, “CDFI Fund does not want growth for growth’s sake if it comes at the expense of a strong community development mission.” 

With this in mind, changes to the CDFI Certification Application attempt to maintain the integrity of what it means to be a Certified CDFI from a mission perspective, and to provide the flexibility necessary for CDFIs to grow and to serve the hardest to reach distressed communities. However, in specific policy situations where different objectives may have conflicted, the CDFI Fund prioritized adherence to a Primary Mission of community development (i.e., the CDFI brand) while, where possible, seeking modifications or alternatives to minimize any negative impact on other objectives.

New Changes to the CDFI Certification Application
When the CDFI Fund first released the initial revisions to the CDFI Certification Application in May 2020, the areas with the most substantive changes were those portions of the Application dealing with Primary Mission, Target Market, and Accountability. As a result, these were the areas that generated the most comments. And, for good reason, these areas tend to be at the heart of what makes CDFIs impactful in distressed and underserved communities.

With this preview of the updated CDFI Certification Application, you will find that it is in these same areas where the CDFI Fund has made significant modifications since the Application was first presented for public review in 2020. At a high-level, a few of these substantive revisions are highlighted below.

• Primary Mission. There are a number of updates that were made to the Primary Mission section of the proposed CDFI Certification Application. Of particular note, questions related to responsible financing practices drew the greatest number of individual comments. Accessibility and affordability of financial products and services represent foundational CDFI activities. There was a common belief among commenters that adherence to responsible financing practices should be a Certification prerequisite, and clear standards for the disqualification of CDFI Certification Applications that do not conform to these expectations should be established.
  
  To reinforce and strengthen the CDFI Fund’s ability to verify that organizations seeking Certification are truly mission-focused, the Application now includes bright-line questions related to an organization’s lending and financing practices. In situations where the CDFI Fund is able to make clear-cut distinctions that an Applicant’s Financial Products or practices are harmful to low-income and underserved communities, indicate absence of a community development mission, or harm the CDFI brand, the proposed CDFI Certification Application would be disqualified for failing to meet set standards.
  
  For example, any CDFI Certification Applicant that offers loans in excess of a 36% rate and fails to demonstrate that they meet specific safety and consumer protection standards would be disqualified. This level of review applies to other financing practices, beyond just loans that exceed 36%.
   
• Target Market. Initial revisions made to the Target Market section of the Application were essentially retained, including the elimination of geographic boundaries and mapping requirements for most Target Markets. The Application will now measure an Applicant’s Target Market financing activity over the most recently completed fiscal year only, and eliminate the requirement that the Applicant also provide data on its year-to-date activity.
  
  The Application also maintains the requirement, as originally proposed back in 2020, that Applicants meet Financial Product activity thresholds, without exception, in both the number and dollar amount of such activity. Some commenters advocated that the CDFI Fund should retain its policy of being flexible and allow Applicants to meet Target Market standards for Financial Product activity through demonstration of either number or dollar volume of lending. Requiring a high standard of service to a Target Market in both number and dollar volume ensures: 1) a CDFI’s financing activity is consistent with its Primary Mission, and 2) a CDFI maintains a focus on all of its activity and does not reserve its higher-dollar Financial Products for its non-Target Market customers. As originally proposed, the revised Application expands opportunities to receive Target Market credit, as well as allow Certified CDFIs, to meet the thresholds based on a three-year rolling average.
   
• Accountability. The revisions proposed to the Application back in 2020 increased emphasis on the use of governing boards to demonstrate Accountability to a Target Market. However, in recognition of some of the unique board-related challenges faced by regulated entities, new revisions to the CDFI Certification Application create advisory board options for bank and credit union CDFIs. 

The CDFI Fund has prepared a summary overview of updated changes since the initial changes to the CDFI Certification Application were proposed in 2020. The CDFI Fund will also provide additional guidance over the coming weeks discussing revisions in more detail to provide a fuller understanding of, and better prepare organizations for, the pending changes. 

What Else to Expect?
When the CDFI Fund released the proposed CDFI Certification Application for public comment two years ago, we also released changes to the Annual Certification and Data Collection Report (ACR) that would align with those contemplated for the Application. This was to ensure that existing CDFIs are being held to the same evaluation, benchmarks, and review criteria as newly Certified CDFIs. 

In the next few weeks, the CDFI Fund will also release for preview further revisions that have been proposed to the ACR, as well as updated methods for collecting transactional level data from Certified CDFIs. Of significant note, the CDFI Fund is no longer proposing the creation of a separate Certification Transaction Level Report (CTLR), instead all CDFIs will be required to submit a slightly modified version of the existing Transaction Level Report (TLR)—the length of which will vary by award status. 

This change is being done in an effort to minimize reporting burden while still providing the CDFI Fund with the necessary data to track annual Target Market activity for each individual CDFI. In addition, collecting (and publishing) data from all Certified CDFIs will, for the first time, provide a more complete picture of the industry’s activities as a whole, with the hope of creating new opportunities for growth and access to additional resources. For now, CDFIs should continue to report transactional data consistent with existing compliance requirements. 

As part of a separate but complementary request for comments, the CDFI Fund will soon solicit input regarding a proposed list of pre-approved Target Market assessment methodologies. Once finalized, the CDFI Fund will allow organizations applying for Certification (or submitting a Target Market Modification Application) to demonstrate they are serving their identified Target Market(s) by selecting from a list of pre-approved assessment methodologies.

The use of CDFI Fund pre-approved assessment methods will provide greater transparency and minimize Application burden, enabling Applicants to select from a pre-populated list of options and thereby negating the need to submit additional information documenting the process they have used to determine Target Market financing activity.

Finally, the CDFI Fund is examining barriers to CDFI Certification that are unique to those CDFIs that are community development venture capital funds (CDVCs). In the coming months, the CDFI Fund will unveil a separate proposal, and request for comments, that address these barriers. While CDVCs may only comprise a small portion of the total number of Certified CDFIs, the CDFI Fund believes there is a vital need for equity in and among CDFI Investment Areas and Targeted Populations, and is working to ensure that mission-driven issuers of equity have equal access to CDFI Certification and associated benefits.

More Information
While we will follow up with an announcement once OMB officially opens its comment period on the CDFI Certification Application, the CDFI Fund urges those interested in submitting further comments to regularly check the Federal Register for notices. 

The CDFI Fund has published the updated CDFI Certification Application, as well as a summary of the revisions, to our website here. We urge you to check back often for additional information and guidance documents.

Clarifying questions, related to this preview of the CDFI Certification Application only, can be submitted to cert-review@cdfi.treas.gov. Please note, official comments on the CDFI Certification Application MUST be submitted to OMB in accordance with directions in the official Request for Comments that will be published in a future issue of the Federal Register. The CDFI Fund is unable to accept official comments via this email address.

Related Information:
•    CDFI Certification Application (For Preview Purposes Only)
•    CDFI Certification Agreement (For Preview Purposes Only) 
•    CDFI Certification Application: Overview of Final Revisions and Modifications (October 2022)
•    CDFI Certification Application & Data Collection Reporting Revisions Web Page