[Federal Register Volume 76, Number 127 (Friday, July 1, 2011)]
[Proposed Rules]
[Pages 38577-38580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16682]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 76, No. 127 / Friday, July 1, 2011 / Proposed 
Rules  

[[Page 38577]]



DEPARTMENT OF THE TREASURY

Community Development Financial Institutions Fund

12 CFR Chapter XVIII


Bond Guarantee Program

AGENCY: Community Development Financial Institutions Fund, U.S. 
Department of Treasury.

ACTION: Request for public comment.

-----------------------------------------------------------------------

SUMMARY: This notice invites comments from the public on issues 
regarding the Community Development Financial Institutions (CDFI) Bond 
Guarantee Program created by the Small Business Jobs Act of 2010. All 
materials submitted will be available for public inspection and 
copying.

DATES: All comments and submissions must be received by August 15, 
2011.

ADDRESSES: Comments may be sent by mail to: Jodie Harris, Policy 
Specialist, CDFI Fund, U.S. Department of the Treasury, 601 13th 
Street, NW., Suite 200 South, Washington, DC 20005; by e-mail to 
[email protected]; or by facsimile at (202) 622-7754. Please note 
this is not a toll free number.

FOR FURTHER INFORMATION CONTACT: Information regarding the CDFI Fund 
and its programs may be downloaded from the CDFI Fund's Web site at 
http://www.cdfifund.gov.

SUPPLEMENTARY INFORMATION: The Community Development Financial 
Institutions Fund (CDFI Fund) was created for the purpose of promoting 
economic revitalization and community development through investment in 
and assistance to CDFIs. Its vision is to economically empower 
America's underserved and distressed communities through the provision 
of low-cost capital to certified CDFIs. The CDFI Fund was established 
by the Riegle Community Development Banking and Financial Institutions 
Act of 1994.
    The CDFI Bond Guarantee Program (the program) was enacted through 
the Small Business Jobs Act of 2010 (Pub. L. 111-240) on September 27, 
2010. The CDFI Fund will serve as the program administrator and must 
administer the program in accordance with sections 1134 and 1703 of the 
Small Business Jobs Act, which amended the Community Development 
Banking and Financial Institutions Act of 1994, 12 U.S.C. 4701 et seq. 
(the Act) by adding a new section 114A.
    Section 114A authorizes the Secretary of the Treasury (through the 
CDFI Fund) to guarantee the full amount of notes or bonds, including 
the principal, interest, and call premiums not to exceed 30 years, 
issued by CDFIs to finance loans for eligible community or economic 
development purposes. The bonds or notes will support CDFI lending and 
investment by providing a source of long-term, patient capital to 
CDFIs. In accordance with Federal credit policy, moreover, the Federal 
Financing Bank (FFB), a body corporate and instrumentality of the 
United States Government under the general supervision and direction of 
the Secretary of the Treasury, finances obligations that are 100% 
guaranteed by the United States, such as the bonds or notes to be 
issued by CDFIs under the program. Because the FFB's cost of funds is 
equivalent to the current Treasury rates for comparable maturities, the 
FFB can provide CDFIs the least expensive funds to generate loans and 
represents the most efficient way for CDFIs to finance 100% Federally 
guaranteed obligations.
    The CDFI Fund is required by statute to promulgate program 
regulations by September 27, 2011 and to implement the program by 
September 27, 2012.
    The CDFI Fund invites and encourages comments and suggestions 
germane to the mission, purpose, and implementation of the CDFI Bond 
Guarantee Program. The CDFI Fund is particularly interested in comments 
in the following areas:

1. Definitions

    (a) Section 114A(a) of the Act provides certain definitions 
applicable to the CDFI Bond Guarantee Program. In particular, Section 
114A(a)(2) of the Act defines eligible community or economic 
development purpose as any purpose described in section 108(b) [12 
U.S.C. 4707(b)] and includes the provision of community or economic 
development in low-income or underserved rural areas. The CDFI Fund is 
interested in comments regarding all definitions found in the Act as 
they relate to the program, including the following:
    (i) How should the term ``low-income'' be defined as such term is 
used in Section 114A(a)(2)?
    (ii) How should the term ``rural areas'' be defined as such term is 
used in Section 114A(a)(2)? For example, is a rural community any 
census tract that is not located in a metropolitan statistical area 
(MSA)? Respondents should discuss how a particular definition would 
enable the program to target businesses and residents in rural areas, 
and discuss whether there are particular measures that should not be 
used because they may inadvertently disadvantage certain populations 
(i.e., provide examples of particular households or communities that 
would not qualify under specific definitions).
    (iii) How should the term ``underserved'' be defined and/or 
measured?
    (iv) Should ``eligible community or economic development purpose'' 
be defined to allow a CDFI or its designated Qualified Issuer to only 
invest inside the CDFI Fund Target Market that it was certified to 
serve?

2. Use of Funds

    (a) The Act defines a loan as any credit instrument that is 
extended under the CDFI Bond Guarantee Program for any eligible 
community or economic development purpose. Section 114A(b) of the Act 
states that the Secretary of the Treasury (the Secretary) shall 
guarantee payments on bonds or notes issued by a qualified issuer if 
the proceeds of the bonds or notes are used in accordance with this 
section to make loans to eligible community development financial 
institutions (CDFIs)
    (1) For eligible community or economic development purposes; or
    (2) To refinance loans or notes issued for such purposes.
    The CDFI Fund invites and encourages comments and suggestions 
germane to the criteria and use of funds. The CDFI Fund is particularly 
interested in comments including the following:
    (i) Should there be any limitations on the types of loans that can 
be financed or refinanced with the bond proceeds? Are there any uses of 
bond or note proceeds that should be excluded or deemed ineligible 
regardless of the fact

[[Page 38578]]

that the use was in a low-income or underserved rural area?
    (ii) Should the capitalization of: (1) Revolving loan funds; (2) 
credit enhancement of investments made by CDFIs and/or others; or (3) 
loan loss reserves, debt service reserves, and/or sinking funds in 
support of a Federally guaranteed bond, be included as eligible 
purposes?
    (iii) Should there be any limits on the percentage of loans or 
notes refinanced with the bond proceeds? If so, what should they be?
    (iv) Should CDFIs be allowed to use bond proceeds to purchase loans 
from other CDFIs? If so, should the CDFI that sells the loans be 
required to invest a certain portion of the proceeds from the sale to 
support additional community development activities?
    (v) Should the CDFI Fund place additional restrictions on the 
awardees' loan products, such as a cap on the interest rate, fees and/
or late payment penalties or on the marketing and disclosure standards 
for the products? If so, what are the appropriate restrictions?
    (b) Section 114A(c)(1) states that a capital distribution plan 
meets the requirements of the subsection if not less than 90 percent of 
the principal amount of guaranteed bonds or notes (other than the cost 
of issuance fee) are used to make loans for any eligible community or 
economic development purpose, measured annually, beginning at the end 
of the one-year period beginning on the issuance date of such 
guaranteed bonds or notes. The CDFI Fund welcomes comments regarding 
this provision, specifically regarding what penalties the CDFI Fund 
should impose if an issuer is out of compliance.
    (c) Section 114A(c)(2) states that not more than 10 percent of the 
principal amount of guaranteed bonds or notes -, multiplied by an 
amount equal to the outstanding principal balance of issued notes or 
bonds, minus the risk-share pool amount--may be held in a relending 
account and may be available for new eligible community or economic 
development purposes.
    (i) How should the CDFI Fund define ``relending'' account as stated 
in Section 114A(c)(2)? How should it differ from the loans made under 
Section 114(c)(1)?
    (ii) If the capitalization of revolving loan funds is deemed an 
allowable use of funds under Section 114A(a)(4), what activities would 
be eligible under the relending account?
    (iii) If additional reserves are held, should they be permitted to 
be funded from the relending account?
    (iv) Should a sinking fund, or any other reserve to allow for the 
payment of debt service, be permitted to be funded from the relending 
account?
    (d) Section 114A(d) states that each qualified issuer shall, during 
the term of a guarantee provided under the CDFI Bond Guarantee Program, 
establish a risk-share pool, capitalized by contributions from eligible 
community development financial institution participants, of an amount 
equal to three percent of the guaranteed amount outstanding on the 
subject notes and bonds.
    (i) In the event that the CDFI Fund determines that there is a risk 
of loss to the government for which Congress has not provided an 
appropriation, what steps should the CDFI Fund take to compensate for 
this risk?
    a. Should the interest rate on the bonds be increased?
    b. Should a larger risk-share pool be required?
    c. Should the CDFI Fund require restrictions, covenants and 
conditions (e.g., net asset ratio requirement, first loss requirements, 
first lien position; over-collateralization, replacement of troubled 
loans)?
    (ii) How should the CDFI Fund assess and compensate for different 
levels of risk among diverse proposals without unduly restricting the 
flexible use of funds for a range of community development purposes? 
For example:
    a. Should the CDFI Fund take into account the participation of a 
risk-sharing partner? What should be the parameters of any such risk-
sharing?
    b. Should the Fund take into account an independent, third-party 
credit rating from a major rating agency?
    (iii) Are there restrictions, covenants, conditions or other 
measures the CDFI Fund should not impose? Please provide specific 
examples, if possible.
    (iv) Should the qualified issuer be allowed to set aside the three 
percent from the bond proceeds or should these funds be separate from 
the proceeds?

3. Guarantee Provisions

    (a) Section 114A(a)(3) defines a guarantee as a written agreement 
between the Secretary and a qualified issuer (or trustee) pursuant to 
which the Secretary ensures repayment of the verifiable losses of 
principal, interest, and call premium, if any, on notes or bonds issued 
by a qualified issuer to finance or refinance loans to eligible CDFI. 
The CDFI Fund invites and encourages comments and suggestions relating 
to the guarantee provisions, especially:
    (i) How should the CDFI Fund define and determine ``verifiable 
losses of principal, interest, and call premium''?
    (ii) Should the CDFI Fund permit a call upon the guarantee at any 
point prior to the issuer liquidating the available assets? If so, 
under what condition should a call on the guarantee be permitted?
    (b) Section 114A(e)(1) indicates that the Treasury guarantee shall 
be for the full amount of a bond or note, including the amount of 
principal, interest, and call premiums not to exceed 30 years. The 
Treasury may not guarantee any amount less than $100 million per 
issuance.
    (i) Should the CDFI Fund set specific guidelines or prohibitions 
for the structure of the bond (e.g., callable, convertible, zero-
coupon)?
    (ii) Should bonds that are used to fund certain asset classes be 
required to have specific terms or conditions? Should riskier asset 
classes or borrowers require additional enhancements?
    (c) Section 114A(e)(2) states limitations on the guarantees.
    (1) The Secretary shall issue not more than 10 guarantees in any 
calendar year under the program.
    (2) The Secretary may not guarantee any amount under the program 
equal to less than $100 million but the total of all such guarantees in 
any fiscal year may not exceed $1 billion.
    (i) Can qualified issuers apply for multiple issuances? Should 
there be a limit per qualified issuer? If so, what should that limit 
be?

4. Eligible Entities

    (a) Section 114A(a)(1) defines an eligible entity as a CDFI (as 
described in section 1805.201 of title 12, Code of Federal Regulations, 
or any successor thereto) certified by the Secretary that has applied 
to a qualified issuer for, or that has been granted by a qualified 
issuer, a loan under the program. The CDFI Fund welcomes comments on 
issues relating to eligible entities, particularly with respect to the 
following questions:
    (i) Should the CDFI Fund require one qualified issuer (or appointed 
trustee) for all bonds and notes issued under the program?
    (ii) Should the CDFI Fund permit an entity not yet certified as a 
CDFI to apply for CDFI certification simultaneous with submission of a 
capital distribution plan?
    (iii) Should the CDFI Fund allow all existing CDFIs to apply, or 
should there be minimum eligibility criteria?
    (iv) The Act states that a qualified issuer should have 
``appropriate expertise, capacity, and experience, or otherwise be 
qualified to make loans for eligible community or economic development 
purposes.'' How should

[[Page 38579]]

the CDFI Fund determine that a qualified issuer meets these 
requirements?
    (v) What penalties should be imposed in the event that a CDFI 
participating in the program ceases to be a certified CDFI? What 
remedies and cure periods should the CDFI Fund allow in the event of a 
lapse in CDFI certification?
    (b) Section 114A(a)(5) defines a master servicer as an entity 
approved by the Secretary in accordance with subparagraph (B) to 
oversee the activities of servicers, as provided in subsection (f)(4).
    (i) Should the CDFI Fund require one servicer for all bonds and 
notes issued under the program?
    (ii) Should the CDFI Fund require the master servicer and servicers 
to have a track record of providing similar services? How should the 
CDFI Fund evaluate the capabilities of prospective servicers and master 
servicers?
    (iii) Should the CDFI Fund pre-qualify servicers and make those 
groups known to CDFIs wishing to submit a capital distribution plan for 
consideration?
    (iv) Should a CDFI issuer be allowed to serve as its own servicer?
    (v) Should the master servicer be eligible to serve as a program 
administrator or servicer for a qualified issuer? If so, how should 
potential conflicts of interest be managed?
    (c) Section 114(a)(8) defines qualified issuers as a CDFI (or any 
entity designated to issue notes or bonds on behalf of such CDFI) that 
meets certain qualifications: (1) Have appropriate expertise, (2) have 
an acceptable capital distribution plan, and (3) be able to certify 
that the bond proceeds will be used for community development.
    (i) How should a CDFI demonstrate its expertise?
    (ii) Are there any institutions that should be prohibited from 
serving as qualified issuers?
    (iii) Should the CDFI Fund establish minimum criteria for serving 
as a qualified issuer?
    (iv) Should the CDFI Fund set a minimum asset size for CDFI 
participation as a qualified issuer?
    (v) Should the CDFI Fund require the issuer to have a minimum net 
capital (real equity capital) and require a set amount of net capital 
be held for the term of the bond? If so, what is a reasonable level to 
require?
    (vi) Should qualified issuers be required to obtain an independent, 
third-party credit rating from a major rating agency?

5. Capital Distribution Plan

    (a) Section 114A(a)(8)(B)(ii)(II) states that a qualified issuer 
shall provide to the Secretary: (aa) an acceptable statement of the 
proposed sources and uses of the funds and (bb) a capital distribution 
plan that meets the requirements of subsection (c)(1). The CDFI Fund 
seeks comments relating to the capital distribution plan requirement, 
specifically:
    (i) What elements should be required in an acceptable statement of 
proposed sources and uses of the funds? How should the CDFI Fund 
measure acceptability?
    (ii) What elements should be required in a capital distribution 
plan? Are there examples of such plans, Federal or otherwise, upon 
which the CDFI Fund should model the CDFI Bond Guarantee Program's 
capital distribution plan requirements and application materials?
    (iii) Should the CDFI Fund require specific intended uses of all 
the bond proceeds in the capital distribution plan or should the 
qualified issuers just be required to demonstrate an intended pipeline 
of underlying assets?
    (iv) Should the CDFI Fund set minimum underwriting criteria for 
borrowers? Should applicants be required to demonstrate satisfaction of 
those criteria in the capital distribution plan?

6. Accountability of Qualified Issuers

    (a) The CDFI Fund welcomes comments on how to monitor the use of 
proceeds and financial performance of qualified issuers, particularly 
with respect to the following questions:
    (a) What tests should the CDFI Fund use to evaluate if 90 percent 
of bond proceeds have been invested in qualified loans? Should reports 
be required from the qualified issuer more frequently than on an annual 
basis?
    (c) What types of tests should the CDFI Fund use to evaluate 
satisfaction of the low-income or rural requirement set forth in 
Section 114A(a)(2)?
    (d) What support, if any, would applicants and awardees like to 
receive from the CDFI Fund after having issued a bond?
    (e) What specific industry standards for impact measures 
(businesses financed, units of affordable housing developed, etc.) 
should the CDFI Fund adopt for evaluating and monitoring loans financed 
or refinanced with proceeds of the guaranteed notes or bonds?
    (f) Should achievement of some standards or outcome measures be 
mandatory?
    (g) Are the approval criteria for qualified issuers as listed in 
Section 114A(a)(8)(B) adequate? If not, what else should be included?

7. Prohibited Uses

    (a) Section 114A(b)(5) provides certain prohibitions on use of 
funds including, ``political activities, lobbying, outreach, counseling 
services, or travel expenses.'' The CDFI Fund encourages comments and 
suggestions germane to prohibited uses established in the Act, 
specifically as to whether there are other prohibited uses that the 
CDFI Fund should include.

8. Servicing of Transactions

    (a) Section 114A(f) states that, in general, to maximize 
efficiencies and minimize cost and interest rates, loans made under 
this section may be serviced by qualified program administrators, bond 
servicers, and a master servicer. This section further outlines the 
duties of the program administrator, servicers, and the master 
servicer. Comments regarding the servicing of transactions are welcome, 
specifically:
    (i) The Act lists certain duties of a program administrator. Should 
there be other requirements?
    (ii) The duties of a program administrator suggest that the CDFI 
Fund will serve as the program administrator for all issuances. Should 
the CDFI Fund require that each qualified issuer have a designated 
program administrator as suggested in section 114A(a)(7)?
    (iii) If so, should the servicer be eligible to serve as a program 
administrator for a qualified issuer?
    (iv) Who should be responsible for resolving troubled loans?
    (v) On what basis should servicers be compensated?
    (vi) Are there any duties not listed that should be included in 
sections 114A(f)(2) through 114A(f)(4)? Are there any prohibitions or 
limitations that should be applied?

9. General Compliance

    The CDFI Fund welcomes comments on general compliance issues 
related to monitoring the guarantee portfolio, particularly with 
respect to the following questions:
    (i) What types of compliance measures should be required by the 
CDFI Fund? Should the CDFI Fund mandate specific reports to be 
collected and reviewed by the servicer and ultimately the master 
servicer? If so, please provide examples.
    (ii) The Act states that ``repayment shall be made on that portion 
of bonds or notes necessary to bring the bonds or notes that remain 
outstanding after such repayment into compliance with the 90 percent 
requirement of paragraph (1).''

[[Page 38580]]

How should the CDFI Fund enforce this requirement?
    (iii) What penalties should the CDFI Fund impose if a qualified 
issuer is deemed noncompliant?
    (iv) The Act provides that the qualified issuer pay a fee of 10 
basis points annually. What penalties should be imposed for failure to 
comply?

10. General Comments

    The CDFI Fund is also interested in receiving any general comments 
and suggestions regarding the structure of the CDFI Bond Guarantee 
Program that are not addressed above.

    Authority:  Pub. L. 111-240.

    Dated: June 23, 2011.
Donna J. Gambrell,
Director, Community Development Financial Institutions Fund.
[FR Doc. 2011-16682 Filed 6-30-11; 8:45 am]
BILLING CODE P