CUNA Regulatory Comment Call




November 17, 1999

Revisions to the CDFI Program

NOT A MAJOR RULE

EXECUTIVE SUMMARY

The Department of Treasury has issued an interim rule regarding the Community Development Financial Institutions (CDFI) Program that is intended to revise, clarify, and streamline CDFI certification and funding eligibility requirements; clarify the funding and certification application requirements and evaluation criteria; and reduce the frequency of previously approved collections of information.

This interim rule contains specific requirements regarding credit unions, which are:

This interim rule was effective as of November 1, 1999 and comments are due by January 14, 2000. Please submit your comments to CUNA by January 11, 2000. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. Click here for a copy of the rule, if you are viewing this from the CUNA website, or contact Jeff if you would like a copy sent to you.

BRIEF BACKGROUND

The purpose of the CDFI Program is to promote economic revitalization and community development through investment in and assistance to the CDFIs, which includes credit unions. The CDFI Program is administered by the CDFI Fund (Fund), and the Fund's programs are designed to facilitate the flow of lending and investment capital to distressed communities and to individuals who have been unable to take full advantage of the financial services industry. The Fund provides financial and technical assistance in the form of grants, loans, equity investments, and deposits to competitively selected CDFIs. After selection for such assistance, the CDFI must enter into an assistance agreement with the Fund, which includes performance goals, matching funds requirements, and reporting requirements.

DESCRIPTION OF THE INTERIM RULE

Definitions

The interim rule renames "Development Investment" as "Equity Investment" and provides an inclusive list, which includes loans made on such terms that they have sufficient characteristics of equity. Although not specifically stated in the rule, the Supplementary Information states that this definition includes secondary capital accounts established with low-income designated federal credit unions.

The interim rule adds a definition of "Financial Products," which for CDFIs are defined as loans, grants, deposits, and Equity Investments. The rule also adds a definition for "Target Markets," which are defined as Investment Areas and/or Targeted Populations. The definitions of Investment Area and Targeted Population will generally remain the same, which are defined as economically distressed areas and low-income population groups. The interim rule will modify Investment Area to include population loss in rural areas as a criterion of economic distress.

Applicant Eligibility

Under the current rule, an applicant that proposes to become a CDFI is eligible to apply for assistance if it will meet the CDFI eligibility requirements within two years of entering into an assistance agreement, or a lesser period as stated in a Notice of Funds Availability (NOFA). The interim rule will modify this to require an applicant to meet CDFI eligibility within 24 months from September 30 of the year of the NOFA application deadline, or such lessor or greater period as stated in the NOFA.

The current rule requires a CDFI to have a primary mission of community development, which is determined by examining the extent that a CDFI's activities are directed to Investment Areas and Targeted Markets. Under the interim rule, the primary mission will be determined by examining the extent that the CDFI's activities are directed toward improving the social and economic conditions of underserved people and residents of distressed communities. This will no longer be restricted to Investment Areas and Targeted Markets.

The interim rule will incorporate "Development Services" as one of the business activities that is examined to determine if an applicant qualifies as a CDFI. "Development Services" are currently defined as services that prepare or assist borrowers to use financial products, such as financial and credit counseling. The interim rule will now allow applicants to provide Development Services in the form of a contract with another provider. An applicant's Financial Products and other similar financing will also be examined. In examining all of these activities, the interim will require the applicant to provide qualitative and quantitative information on the percentage of staff time dedicated to providing Financial Products, Development Services, and other similar financing.

The interim rule will specify the information that must be submitted to demonstrate that a Targeted Population lacks access to loans and Equity Investments, which will include:

Matching Funds

The current rule requires that amounts awarded must be matched with funds from sources other than the federal government. The interim rule will clarify that an applicant that received funds previously under the CDFI Program cannot reuse matching funds used to satisfy the matching funds requirements of the previous CDFI Program award. However, the interim rule will now allow funds spent by an applicant for operating expenses in the prior calendar year to be used to meet the matching funds requirements.

The current rule describes how retained earnings may be used by insured credit unions to meet the matching funds requirements. The interim rule will now cover all insured credit unions, not just those that are insured by the NCUSIF. The current rule requires insured credit unions to meet their matching funds requirements by using retained earnings, in the form of net capital accumulated since inception, to increase shares fourfold within 18 months of the last day of the month prior to the month that funds are received. The interim rule will change this to 24 months from September 30 of the year of the application deadline. For all applicants, including credit unions, the interim rule will eliminate the requirement that retained earnings can only be used to meet matching funds requirements if there is liquidity in amounts that are at least equal to the amount of the retained earnings.

Applications for Assistance

The interim rule will eliminate the flexibility for applicants to submit applications in an order and format that they believe to be the most appropriate. Also, as part of the application process, each applicant must now describe the extent of the need for the Fund's assistance, as demonstrated by the extent of economic distress in the applicant's Target Market and the extent to which the applicant needs the Fund's assistance to carry out its five- year business plan to serve the Target Market. For applicants who previously received assistance under the CDFI Program, the Fund will now consider the applicant's level of success with that prior assistance and whether the applicant will expand the scope and volume of its activities with the additional assistance. The interim rule will, however, eliminate the requirement that the financial statements submitted by the applicant reflect accrual based accounting methods. This change is intended to accommodate applicants who use cash-based methods.

Data Collection and Reporting

The current rule imposes quarterly reporting requirements on applicants who receive funds. The interim rule will reduce the scope and frequency of such reporting and will now require submission of a semi-annual report consisting of internal, unaudited financial statements and information on compliance with financial soundness covenants. The current rule requires an applicant to submit an annual report within 60 days after the fiscal year, which includes audited statements of financial condition. In recognition that a longer period of time is needed for a CPA to complete the audit, the interim rule will extend the time period to 120 days, but this extension only applies to the audited financial statement.

QUESTIONS TO CONSIDER REGARDING THE REVISIONS TO THE CDFI PROGRAM

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com


Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com


Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com


Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com