This fall, when the U.S. Department of the Treasury
The Community Development Financial Institutions Fund at Treasury oversees the certification of community development financial institutions (CDFIs). CDFIs bring capital and other vital financial services to chronically disinvested communities that are not adequately served by traditional banks. Seeing promise where others see risk, CDFIs are a powerful tool to address the nation's growing economic inequality and to close racial wealth gaps.
Certified CDFIs, of which there are almost 1,500 operating in all 50 states and managing $250 billion in assets, are coming out of one of the most productive periods in the industry's history. As financial first responders in the pandemic-related economic crisis, CDFIs have shown in the past few years what they can accomplish with large-scale investment and supportive policies.
When the federal government wasn't reaching the nation's most vulnerable small businesses with emergency pandemic relief, it looked to CDFIs for help. As Paycheck Protection Program lenders, CDFIs and other mission lenders made
The state where the first U.S. credit union opened in 1909 reported fewer members in the first quarter compared to a year earlier, due in part to the competitive threat from banks.
CDFIs have grown in importance to the financial system because they are effective at combining public and private sector resources to reach low-income people and communities in responsible ways. And they have been recognized for it with
Unfortunately, as the benefits of CDFI certification have grown, some have sought certification to gain market advantage without a sufficient commitment to serve low-income families and communities most in need. The CDFI Fund's current criteria are not robust enough to ensure that certified CDFIs fully embrace a community development mission or keep out bad actors and predatory activities. Without stronger rules of the road, shrewd people chasing excessive profits are finding ways around them. This is not fair to the communities intended to be served by CDFIs or to taxpayers who support CDFIs with public resources.
The CDFI Fund's certification rules have not changed since the fund's creation in the 1990s. The same cannot be said of the financial services landscape during that time. With these reforms, the CDFI Fund is seeking to maintain a high standard for responsible lending in low-income communities, while also certifying as many CDFIs as possible.
Here is one example: To become certified, CDFIs must meet the "primary mission" test, which judges the degree to which an applicant achieves community development outcomes. Under the current requirements, an applicant simply needs to state on paper that it has such a mission. The CDFI Fund is proposing that the primary mission test now include an evaluation of products, terms, rates and fees, and whether a CDFI verifies a borrower's ability to repay. This is entirely appropriate. The CDFI Fund is not seeking to regulate products, it is simply asking CDFIs to show that their lending products are responsible. Requiring CDFIs to offer consumer or business loans at affordable rates and mortgages that are sustainable should be the bare minimum.
Critics of the proposed reforms have expressed concerns that the new process will be too onerous or threaten their certification. In some cases, decertification may be warranted. The CDFI Fund must reform certification because the threat to the CDFI brand by those who would push the envelope is real.
A robust and up-to-date certification assures consumers, investors and taxpayers that financial institutions operating in low-income and low-wealth communities are true to their community development mission. The fund may not get everything right with this first round of updates, but it has
The CDFI Fund's proposed changes to certification requirements are necessary to maintain the trust and reputation of the CDFI industry. Now is the time for these reforms.
