Comment Letter: CDFI and NACA Program Financial Assistance and Technical Assistance Applications
The following is the letter CU Strategic Planning provided in response to the Treasury's request for public comment on the Community Development Financial Institutions Program and Native American CDFI Assistance Program Financial Assistance and Technical Assistance applications
May 10, 2023
Pooja Patel, CDFI Program & NACA Program Manager
Community Development Financial Institutions Fund
U.S. Department of the Treasury
1500 Pennsylvania Ave. NW
Washington, DC 20220
Subject: CDFI Program and NACA Program Financial Assistance and Technical Assistance Applications, OMB Number: 1559-0021
CU Strategic Planning is a consultancy working with CDFI-certified and emerging CDFI credit unions nationwide. 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 proposed changes to its CDFI Program and NACA Program Financial Assistance and Technical Assistance applications.
General Input on FA Application Content
With recent, past Financial Assistance applications windows, the CDFI Fund has required applicants to be certified prior to the release of the Notice of Funding Availability. Because the CDFI Fund has postponed the release of its certification standards, with this pause likely to extend for about a year, we urge the CDFI Fund to allow applicants to apply for a Financial Assistance grant prior to being certified. Originally the CDFI Fund had planned to release its final certification guidelines in the Spring of this year. This would have allowed organizations intent on applying for grant funds during the joint FY23/FY24 grant funding round to attempt to become certified prior to the release of the NOFA. We respect the CDFI Fund’s careful and deliberate consideration of comments submitted concerning the certification standards proposed, but the department’s pause on the acceptance of certification applications represents a factor out of the control of organizations seeking certification and intent on applying for grant funding.
Specific Input on FA Application Content
With its request for comments, the CDFI Fund asks for specific input on its Financial Assistance application. The following comments and feedback are labeled using the numbering structure provided in the request for comments and only include those topics where we are providing specific feedback (and are not, therefore, consecutive).
2. Are certain data fields, questions, or tables redundant or unnecessary? If yes, which ones and why?
Question 13, which asks the applicant to describe how an award would build, increase or improve an applicant’s ability to achieve its strategic goals, seems redundant with Question 4 (use of funds) and Question 5 (strategic goals). Alternatively, the CDFI Fund could consider marrying Question 4 with Question 13 to eliminate the overlap between the two questions.
3. Should any data fields, questions or tables be added to ensure collection of relevant information?
While it represents an additional burden to the applicant, the CDFI Fund should consider adding two years to the financial input tables to correspond with the application’s request for five-year strategic goals. This expanded financial projection would allow applicant financial input to align and support five-year strategic goals.
7. Are the character limitations for narrative responses appropriate? Should certain questions allow additional or fewer characters?
With its proposed changes to the Financial Assistance application, the CDFI Fund proposes reducing the characters available to describe the CDFI’s demographic information and adding tables that parse the data. While the tables are helpful, we believe it will be difficult to address all the data in Table 1 and Table 2 within the 2,000 characters provided, particularly because the CDFI Fund asks applicants to expand upon the demographic information provided in the Beneficiary Snapshot and Portfolio Statistics charts. In order to adequately expand the statistics being collected, additional characters are needed.
The character limitations associated with Question 10, which seeks to describe both marketplace competitors (and there can be many) and trends, should be longer to truly address the question being asked.
The characters provided for Question 4, which asks the applicant to describe how the award funds will be used are greater than those needed. Alternatively, this question could be adequately described using a table with short narratives that describe the use of funds in each category.
12. Beneficiary Data
The CDFI Fund proposes requesting beneficiary data separately for Financial Products, Financial Services and Development Services. While it is understandable that the receipt of this data would provide a good snapshot of the beneficiaries served, it is important for the CDFI Fund to recognize that, except in limited circumstances, regulated financial institutions cannot collect information on the race, ethnicity, disability status or (generally) marital status of their members or customers.
When providing Financial Services or Development Services, a credit union does not collect information needed to categorize a beneficiary by income level (i.e., when opening a checking account or helping a member balance their checkbook, the credit union does not ask the member about their income). A proxy for this type of information could be provided to give the CDFI Fund a greater understanding of the beneficiaries served—but not the actual data.
It is important to note that the Beneficiary Table breakdown of beneficiaries by income level (low income, very low income, etc.) will accurately reflect the beneficiaries served by a CDFI with a LITP Target Market. The Beneficiary Table breakdown for a CDFI with an IA Target Market, OTP Target Market or a blended Target Market, which are Target Markets not based on income (or blended with Target Markets not based on income), may reflect a significantly lower beneficiary breakdown percentage than the CDFI’s certification numbers based on actual loans made. As such, applicants are asked to discuss Beneficiary Table income percentages significantly higher than the income among borrowers the CDFI specializes in serving.
The CDFI Fund proposes requesting beneficiary data projections for the three-year performance period to help assess impact. This type of projection would be cumbersome for applicants. For example, each loan type would have its own unique methodology for calculating the beneficiaries of the loan. For example, a credit card loan might have just one beneficiary, whereas a commercial business loan would have many potential beneficiaries depending on the purpose of the loan. Is the commercial loan to a business? A grocery store? Etc.
Finally, it’s worth noting that while using proxy data to determine and break down the information requested does provide a more accurate depiction of beneficiaries served; it does require skill, making the application more difficult to complete—particularly for CDFIs sporadically applying on their own.
13. FA Objectives
The CDFI Fund proposes the elimination of several Financial Assistance Objectives in the interest of streamlining the application and has suggested that the Financial Assistance Objectives proposed for elimination are rarely used by applicants. While we would concur with the CDFI Fund’s proposal to eliminate the majority of these FA Objectives, we would suggest that the CDFI Fund retain the Financial Services FA Objective for the time being—only because this would be consistent with the department’s separate certification proposal which better recognizes the importance of Financial Services as a community development tool.
14. FA Objectives – Proposed Use of Multiplier
The CDFI Fund proposes changing the formula for establishing Performance Goals & Measures related to FAO 1-1: Increase the Volume of Financial Products and suggests the adoption of a multiplier in place of the current methodology. Using a multiplier would address several concerns and complications created by the current methodology but does not appear to overcome the difficulty of projecting future growth based on what may be anomalous historical lending.
First, the proposed multiplier methodology overcomes the long-standing difficulty of developing projections based on the receipt of a requested award amount and being held to those projections despite being awarded a lower award amount—a helpful change.
For awardees with more than one award during a three-year reporting period, the proposed multiplier methodology overcomes the difficulty of layering past awards. Currently, awardees with awards in more than one year must ensure that loan dollars are not counted toward more than one award. Moving to a multiplier would simplify and clarify the grant reporting process.
Unfortunately, the proposed multiplier methodology does not overcome the long-standing difficulty of developing projections based on a historical track record that may be anomalous. Recent examples impacting projections include Paycheck Protection Program loans and an enormous uptick in lending associated with extraordinarily active mortgage market. These dramatic swings in lending represent unsustainable anomalies. Using a multiplier, if these anomalies are removed to create a sustainable lending projection, the multiplier is likely to become negative. Alternatively, if the anomalies are left in the applicant’s historical lending and projections are based off anomalous loan growth, the projected loans become unsustainable. If the multiplier becomes a factor in making a due diligence decision or assessing an applicant’s award, a negative multiplier would be likely to disqualify otherwise eligible applicants with a proven track record of leveraging grant funds for community development impact. If the multiplier were in place today, it is reasonable to guess that nearly every credit union applicant’s growth multiplier would be negative because of factors entirely out of the applicant’s control—the financial market.
The CDFI Fund asks whether a standard multiplier should be chosen for the Financial Assistance award, or whether applicants should be able to choose a multiplier. Using matching funds requirements as a touchstone, core FA applicants are required to show “skin in the game” by providing a 1:1 match to funds awarded. This precedent would argue for a multiplier of at least 1:1. However, if the purpose of the CDFI’s grant program is to leverage federally appropriated funds to achieve their most significant community development impact, perhaps the CDFI Fund should consider a 1:1 multiplier baseline for the application and allow applicants to choose a higher multiplier. Applicants with a higher multiplier should be evaluated more positively as part of the evaluation process because they can leverage grant dollars for greater impact.
Whether or not the CDFI Fund adopts a multiplier formula for establishing Performance Goals & Measures related to FAO 1-1, we encourage the CDFI Fund to reassess its definition of “loans granted.” The definition of “loans granted” used to calculate projections in the application includes purchased and refinanced loans (which do not represent new loans into the community). Instead, we encourage the CDFI Fund to look to “loans originated” in its calculations. This subtle change in definition can make a dramatic difference in calculating projections to a CDFI’s Target Market and represents a more accurate description of new loans deployed to the Target Market.
General Input on TA Application Content
Speaking generally to the CDFI Fund’s proposed changes to its Technical Assistance Application, the proposed TA application incorporates many of the certification changes proposed last Fall, such as requiring a board-certified strategic plan evidencing a community development strategy, accountability changes and establishing product approval standards. Because the CDFI Fund is still actively reviewing comments on these changes and has indicated that it is conducting public outreach that includes discussions with functional regulators concerning the impact of these proposed changes, we urge the CDFI Fund to similarly pause any proposed changes to the TA Application, allowing the CDFI Fund to consider stakeholder input.
Other CDFI Program and NACA Program-Related Topics and Considerations
With its request for comments, the CDFI Fund asks for responses to CDFI and NACA Program policy topics. The following comments and feedback are labeled using the numbering structure provided in the request for comments and only include those topics where we are providing specific feedback (and are not, therefore, consecutive).
2. Deep Impact Lending
The CDFI Fund asks whether its FA/TA applications should incorporate the applicant’s commitment to deep-impact lending as part of the application evaluation process. Deep-impact lending was incorporated into the Emergency Capital Investment Program (ECIP) and represents financing activities that reach the hardest to serve borrowers and underserved communities. Under ECIP, deep-impact lending resulted in a rate reduction on subordinated debt provided to the participating applicant. Recognizing service to these populations or communities encourages applicants to increase outreach to the hardest-to-serve borrowers and underserved communities, but it also represents additional risk. Consistent with ECIP, if the CDFI Fund weaves the concept of deep-impact lending into its application (or evaluation process), we encourage an increase in deep-impact lending (or investing) to be commensurate with an increased grant award.
3. Net Asset Ratio
Recognizing that a CDFI’s net asset ratio represents a good measure of the organization’s overall capital structure, the CDFI Fund asks whether a CDFI’s net asset ratio is the appropriate measure to assess if a CDFI is effectively leveraging its assets. Among credit unions, this ratio is described as a net worth ratio.
The CDFI Fund’s proposal seems consistent with the department’s past practice of prioritizing awards to those organizations that are both financially healthy and able to effectively leverage grant awards for greater impact. However, if the CDFI Fund establishes net asset ratio benchmarks used as part of an award evaluation process, we urge the department to provide a transparent, bright line guidelines concerning the net asset ratio range considered acceptable or, alternatively, how the applicant’s net asset ratio will be evaluated (i.e., 7%-9% is excellent, 9.01% - 11% is good, etc.). To avoid confusion, if the CDFI Fund adopts these benchmarks, we urge the department to rely on the categories created by the applicant’s functional regulator if the applicant is a regulated financial institution.
5. Small and Emerging CDFI Assistance
The CDFI Fund requests input on the threshold for defining a small credit union for the purpose of qualifying to apply as a Small and Emerging CDFI. The current $100 million threshold aligns with the definition of a small credit union established by the National Credit Union Administration. While we would encourage the CDFI Fund to remain consistent with regulatory standards, in this circumstance, we’d encourage the CDFI to establish a higher threshold for defining a “small credit union” because the current definition could more accurately define a “very small credit union” as the average asset size of American credit unions continues to grow. Although the NCUA has not updated its definition since 2015, we hope to encourage the NCUA to update its definition soon. The definition proposed to define a small depository institution or depository institution holding company ($346 million) is a more reasonable definition of a “small credit union” in today’s market.
The CDFI Fund asks if CDFIs that qualify as “Small and Emerging” should be prohibited from applying as Core applicants. While a SECA-qualified applicant may be a smaller organization, many American credit unions have almost one hundred years of operational experience. Some would be well advised to apply as Small and Emerging CDFIs. Others have the sophistication to qualify as a Core applicants. Therefore, we would encourage the CDFI Fund to allow SECA-qualified applicants to apply in either category.
8. Funding Levels for CDFIs
The CDFI Fund asks whether larger CDFIs that qualify for an award should have the dollar amount of their awards limited within a provided timeframe. The CDFI Fund’s mission is to expand economic opportunity for underserved people and communities by supporting the growth and capacity of CDFIs. Large CDFIs are often the most capable of leveraging award dollars for impact, which aligns with the department’s mission. We encourage the CDFI Fund to continue to make awards based on community development impact, which we believe would be counterintuitive to limiting dollar awards to larger CDFIs, which, in some circumstances, are more effective at leveraging award dollars to expand economic opportunity for underserved people and communities.
Thank you for the opportunity to provide our input on the CDFI Fund’s proposed changes to its Financial Assistance and Technical Assistance grant applications. We hope that our suggestions are helpful to the CDFI Fund as it works to finalize its proposal. If you have any questions concerning these comments, please do not hesitate to reach out.
Stacy S. Augustine