[Federal Register Volume 82, Number 5 (Monday, January 9, 2017)]
[Proposed Rules]
[Pages 2251-2254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00013]


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 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 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.
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  Federal Register / Vol. 82, No. 5 / Monday, January 9, 2017 / 
Proposed Rules  

[[Page 2251]]



DEPARTMENT OF THE TREASURY

Community Development Financial Institutions Fund

12 CFR Part 1805


Announcement Type: Notice and Request for Information

SUMMARY: The Community Development Financial Institutions Fund (CDFI 
Fund), Department of the Treasury, requests comments from the public 
regarding the current policies and procedures to certify an 
organization as a Community Development Financial Institution (CDFI). 
Capitalized terms found in this notice are defined in the regulations 
that govern the CDFI Program, in our regulations.

DATES: Written comments must be received on or before March 10, 2017 to 
be assured of consideration.

ADDRESSES: Submit your comments via email to David Meyer, 
Certification, Compliance Monitoring and Evaluation (CCME) Manager, 
CDFI Fund, at [email protected].

FOR FURTHER INFORMATION CONTACT: David Meyer, CCME Manager, CDFI Fund, 
1500 Pennsylvania Avenue NW., Washington, DC 20220 or email to 
[email protected]. Information on CDFI Certification may be 
obtained on the CDFI Fund's Web site at https://www.cdfifund.gov/programs-training/certification/Pages/default.aspx.

SUPPLEMENTARY INFORMATION: Pursuant to the CDFI Fund's authorizing 
statute (the Community Development and Regulatory Improvement Act of 
1994, 12 U.S.C. 4701 et seq.) (the Act) and the regulations that govern 
the CDFI Program (12 CFR part 1805), a community development financial 
institution (CDFI) is a legal entity that: (i) Has a primary mission of 
promoting community development; (ii) serves an investment area or 
targeted population; (iii) provides development services in conjunction 
with equity investments or loans, directly or through a subsidiary or 
affiliate; (iv) maintains, through representation on its governing 
board or otherwise, accountability to residents of its investment area 
or targeted population; and (v) is not an agency or instrumentality of 
the United States, or of any State or political subdivision of a State.
    In accordance with the statutory definition, the CDFI Fund has 
established seven tests, described below, to certify an Applicant 
financial entity as a CDFI. Applicants provide legal documentation, 
narratives and financial data to demonstrate their ability to meet the 
certification criteria. Applications are accepted on a rolling basis 
and may be submitted more than once, if declined. Certified CDFIs must 
complete an annual recertification process to update the financial and 
organization data contained in the original certification application. 
CDFI certification application and supplemental information can be 
found on the CDFI Fund Web site.
    With this Request for Information (RFI), the CDFI Fund is embarking 
on a review of its CDFI certification tests to ensure that they 
continue to meet the statutory and regulatory requirements and the 
evolving nature of an industry that has changed significantly since the 
CDFI Fund's establishment in 1994. Since the first CDFIs were 
certified, the universe of certified CDFIs has grown from 196 in 1997 
to over a 1,000 in number today, with over $100 billion in total assets 
and headquarters in all fifty states and several territories. It is a 
goal of the CDFI Fund to foster a diversity of CDFI types, activities, 
and geographies, and to enable market-driven solutions to emerge in a 
constantly changing economic environment.
    In addition, the significance of CDFI certification has increased 
over the years. While CDFI certification continues to make an entity 
eligible for various programs at the CDFI Fund (CDFI Program, Native 
American CDFI Assistance Program, Capital Magnet Fund, and the CDFI 
Bond Guarantee Program), because it is seen as indicating a strong 
community development mission, it also has come to serve as a qualifier 
for other Federal government programs and benefits. These include, 
among others, the Small Business Administration's Community Advantage 
program and Federal Home Loan Bank membership, as well as consideration 
for certain investments under the Community Reinvestment Act and, 
pursuant to 12 CFR 1026.43(a)(3)(v)(A), an exemption from the Consumer 
Financial Protection Bureau's ``Ability to Repay'' rule. The CDFI Fund 
believes that it is important that certification remain a mark of 
confidence in an organization's commitment to a community development 
mission.
    It also is imperative that CDFI certification criteria continue to 
support, rather than inhibit, the growth and reach of CDFIs, especially 
as it relates to their ability to take advantage of new technologies. 
These new technologies create the potential for mission-driven 
organizations like CDFIs to extend their reach and impact in order to 
improve access to financial products and services for underserved 
communities and populations wherever they are. This raises questions, 
however, of whether CDFI certification--particularly in terms of a 
CDFI's ability to define a Target Market and demonstrate accountability 
to that Target Market--is currently designed to enable such scope, 
which was neither possible nor envisioned when the criteria were first 
established.
    Through this RFI, the CDFI Fund seeks feedback from the public on 
certain aspects of the certification criteria and process, as listed in 
Sections I and II. We also seek any additional information beyond these 
questions that members of the public believe would assist in updating 
the CDFI Fund's certification policies. The CDFI Fund intends to 
consider the feedback received through this RFI as it reexamines its 
current criteria and proposes any revisions to its CDFI certification 
policies. In making any changes to the existing criteria, the CDFI Fund 
will seek to ensure that certification continues to foster a diversity 
of CDFI types, activities, and geographies; allows for innovation that 
supports the growth and reach of CDFIs; and signifies confidence in a 
strong community development mission.

I. Certification Criteria

    A. Legal Entity: To satisfy the legal entity test, the CDFI Fund 
requires evidence of an Applicant's incorporation/organization/
establishment, such as IRS documentation, establishing documents filed 
with appropriate authorities, or

[[Page 2252]]

charter numbers for Insured Depository Institutions and Credit Unions 
at the time of certification application.
    1. The statute does not indicate how long an organization must be 
in existence to be considered a ``person (other than an individual).'' 
Should there be a minimum period of time an organization should be in 
existence before applying for CDFI certification? If so, how long? If 
not, why not?
    2. Is there additional documentation, beyond an organization's 
establishing documents filed with State jurisdictions, that should be 
accepted to demonstrate that an organization is a legal entity?
    B. Primary Mission: The statute states that a CDFI must have ``a 
primary mission of promoting community development,'' but specifies few 
criteria for meeting that test. The CDFI Fund currently allows 
Applicants for certification to meet this test by providing board-
approved organizational documents that demonstrate that the Applicant 
has a primary mission of promoting community development along with a 
narrative statement describing how the Applicant's mission is 
consistent with the CDFI Fund's and a brief description of Financial 
Products offered. Insured Credit Unions that have received a Low Income 
Designation from the National Credit Union Administration are deemed to 
have met this criterion by virtue of their designation.
    1. Should the currently required board-approved documentation and 
narrative statement be sufficient to demonstrate an Applicant's primary 
mission, or should the CDFI Fund apply a more prescriptive primary 
mission test? For example, should the CDFI Fund provide a more 
explicit, possibly quantitative, definition of what it means to 
``promote community development'' that Applicants would be required to 
meet? If so, what should be the definition and what test should be 
applied? Are there criteria that the CDFI Fund should not consider and 
why?
    2. Should there be different standards for meeting the primary 
mission test for nonprofit versus for-profit organizations, 
particularly for-profits that are not Insured Depository Institutions? 
If so, what different standards should be applied?
    3. What evidence can the CDFI Fund use to confirm an Applicant's 
adherence to a stated community development mission? For example, how 
can the CDFI Fund distinguish between an organization that is fully 
committed to a community development mission and one that targets the 
same communities or populations as a CDFI and claims a community 
development mission, but whose actions do not demonstrate intent to 
create community development and/or are predatory in nature?
    4. To what extent should the CDFI Fund evaluate the Financial 
Products and/or Financial Services offered by an Applicant to determine 
its ability to meet the primary mission test? What test would the CDFI 
Fund apply in any such evaluation of Financial Products and/or 
Financial Services?
    5. Currently, by statute, Depository Institution Holding Companies 
wishing to be certified as CDFIs must provide documentation that their 
parent, Subsidiaries, and Affiliate organizations collectively meet the 
primary mission test. Should the CDFI Fund also make this a requirement 
for Non-Regulated CDFIs, for example, a Non-Regulated for-profit 
financial institution? Why or why not?
    C. Financing Entity: Insured Depository Institutions and Credit 
Unions are deemed to automatically meet this criterion. Non-Regulated 
CDFIs must demonstrate that they engage in direct financial activity 
(e.g., the provision of Financial Products, Financial Services, and 
Development Services) as reflected on financial statements and executed 
notes, and must dedicate a predominance of their assets to Financial 
Products, Development Services, and/or similar financing.
    1. The CDFI Fund does not currently define the term 
``predominance,'' but in practice accepts a plurality of assets as 
meeting this criterion. Should the term ``predominance'' be defined 
more specifically, and if so, how?
    2. Should entities that provide less than a plurality of financing 
activity ever be considered Financing Entities? If so, under what 
circumstances and is there a minimum level of activity that should be 
required?
    3. Currently, the amount of assets and staff time dedicated to 
financing activities are used to measure the level of a CDFI's 
financing activity. How else could a CDFI's level of financing activity 
be measured?
    4. For Non-Regulated CDFIs, is the current ``predominance of 
assets'' test appropriate, or should alternatives or additional 
considerations be permitted?
    5. Should Non-Regulated CDFIs be permitted to include the financing 
or Financial Services activity of a mission-driven Subsidiary as part 
of the assessment of the parent CDFI's financing activities?
    6. Should Non-Regulated CDFIs be permitted to rely upon the 
financing or Financial Services activity of a parent CDFI as part of 
the assessment of the Subsidiary's or Affiliate's financing activities?
    7. Should an organization applying for CDFI certification be 
required to transact a minimum number or dollar amount of loan or 
equity investments to be considered a financing entity? Should the 
Applicant be required to have at least one or more years of loan or 
equity investment origination? If so, what should those rules be?
    8. Should an organization that only services loans or Equity 
Investments or has very few transactions be considered a financing 
entity?
    9. Should certified CDFIs be required to offer loans or Equity 
Investments each year, in order to maintain certification status?
    10. Currently, non-arms-length transactions do not contribute to 
meeting the financing entity criteria. For example, transactions made 
with Subsidiaries and/or Affiliates are not considered to be arms-
length transactions. Should some transactions with Affiliates be 
permissible as evidence of an organization being a financing entity? If 
so, which ones? How should an ``arms-length transaction'' be defined?
    11. Should Applicants be required to disclose the expected amount 
and types of lending that may be made to Affiliates and Insiders in 
their certification applications? Should such transactions be limited 
as a condition of certification? Why or why not?
    12. Current CDFI Program regulations use the term ``similar 
financing activities'' in its definition of the term ``Financial 
Products.'' How should the CDFI Fund determine what is included in 
``similar financing activities?''
    D. Serves an Investment Area or Targeted Population: Applicants for 
certification must identify the Investment Area(s) and/or Targeted 
Population(s) they intend to serve as their Target Market.
    1. Threshold Target Market Test: Although no threshold level of 
service is indicated in the statute or regulation, current CDFI Fund 
policy requires that an organization must serve at least one eligible 
Target Market and must direct at least 60 percent of all of its 
Financial Product activities to one or more eligible Target Market to 
qualify for certification. In general, both the number and dollar 
amount of the organization's Financial Product activities should be at 
least 60 percent of all of its Financial Product activities in the most 
recent fiscal year. If an organization does not meet the 60 percent 
threshold in terms of either number or dollar amount of transactions 
(but not both), the organization can

[[Page 2253]]

provide an argument as to why the figure is less than 60 percent and 
the CDFI Fund reserves the right to accept or reject the explanation.
    a. Is the current standard that 60 percent of a CDFI's Financial 
Product activities must be in qualified Target Markets the right 
standard? If not, what percentage of transactions should be in and/or 
to a qualified Target Market to demonstrate that an organization serves 
that Target Market and why?
    b. Should there be different thresholds for different institution 
types (i.e., Insured Depository Institutions and Credit Unions, 
nonprofit loan funds, and venture capital funds)?
    c. The CDFI Fund currently relies on self-reported summary data 
submitted by Applicants to demonstrate that they meet the Target Market 
threshold test. Should statistical sampling of transactions be required 
to establish a current baseline of activity and document the Target 
Markets that they are serving?
    d. The August 31, 2015 Interim CDFI Program Regulations added the 
provision of Financial Services as a means of demonstrating that an 
applicant serves a Target Market. However, the CDFI Fund does not 
currently have a method of recognizing or applying the provision of 
Financial Services toward the current 60 percent threshold test for 
certification. In addition to the level of Financial Products provided 
by an Applicant, how should an Applicant receive credit for the 
provision of Financial Services toward meeting any threshold test? How 
should this be measured? If an Applicant requests credit for providing 
Financial Services, should there be a separate minimum level of 
Financial Products that must be provided by the Applicant?
    e. The CDFI Fund currently first considers an Applicant's financial 
activity during its most recent fiscal year in determining whether it 
meets the threshold test. Is this the appropriate time period to 
consider, or should a longer period of time be considered? If so, 
should the applicant be required to meet the threshold in each year of 
the test, for a time period, or should an average be considered? Should 
the CDFI Fund consider an Applicant's portfolio of loans outstanding?
    2. Investment Areas: The statute requires that an Investment Area 
must meet at least one of the economic distress criteria (poverty rate 
greater than 20 percent; Median Family Income (MFI) at 80 percent or 
below specific MFI benchmarks; unemployment rate 1.5 times the national 
average) and has significant unmet needs for Financial Products and 
Services, or is wholly located within an Empowerment Zone or Enterprise 
Community.
    a. The CDFI Fund's current practice is to define Investment Areas 
that are composed of one or more units of geography that meet certain 
distress criteria. Units include but are not limited to counties, 
census tracts, and Indian Reservations. Should the CDFI Fund change 
this practice? If so, how?
    b. Currently the CDFI Fund allows Investment Areas to be composed 
of a set of contiguous geographic units that may include a small 
portion of units that individually do not qualify as Investment Areas. 
Should the CDFI Fund continue this practice, or should all units within 
the Investment Area meet the Investment Area qualifications?
    3. Targeted Populations: Targeted Populations include Low Income 
Targeted Populations (LITP) and Other Targeted Populations (OTP) for a 
specific geographic unit. LITP, for a specified geographic unit, by 
statute includes individuals whose family income (adjusted for family 
size) is 80 percent of the area MFI (for metropolitan areas). LITP in 
non-Metropolitan Areas is the greater of 80 percent of the area MFI; or 
80 percent of the statewide non-Metropolitan Area MFI. The CDFI Fund 
currently includes, for a specific geographic unit(s), African-
Americans, Hispanics, Native Americans, Native Alaskans, Native 
Hawaiians, and Other Pacific Islanders among the groups automatically 
considered eligible for an OTP Target Market. Applicants are permitted 
to seek OTP recognition for other populations by demonstrating that the 
group lacks access to capital.
    a. Should the Targeted Populations be expanded to automatically 
accept more specifically defined Other Targeted Populations that are 
eligible for other Federal programs that support economic development 
in Low-Income communities? If so, which ones and why?
    b. CDFIs currently are approved to serve Targeted Populations 
within a defined geographic unit at below and up to a national level. 
Should all Applicants proposing to serve Targeted Populations be 
approved to serve such Target Markets nationally?
    4. National Target Markets: Currently, in order to be certified 
with a Target Market national in geographic scope, CDFIs need to show 
that they have conducted their financing activities broadly across the 
variously defined regions of the country, (e.g. Northeast, West, 
Midwest, South, Southeast, etc.)
    a. Given that it is unlikely that most CDFIs that work broadly 
across the nation will complete transactions in every State every year, 
how can organizations demonstrate that they serve a national Target 
Market, whether for an Investment Area or for a Targeted Population? 
Should there be a certain minimum geographic dispersion of actual 
investments?
    b. Some CDFIs serve multiple markets that are part of a multi-State 
region or are comprised of geographically unconnected markets. When 
should the CDFI Fund recognize these practices as constituting a 
national Target Market?
    E. Development Services: A CDFI directly, through an Affiliate, or 
through a contract with another provider, must have a track record of 
providing Development Services in conjunction with its Financial 
Products and/or Financial Services. Development Services means 
activities undertaken by a CDFI, its Affiliate or contractor that 
promote community development and shall prepare or assist current or 
potential borrowers or investees to use the CDFI's Financial Products 
or Financial Services. For example, such activities include, but are 
not limited to, financial or credit counseling; homeownership 
counseling; and business planning and management assistance.
    1. Should the CDFI Fund more explicitly define Development 
Services? If so, how should it be defined?
    2. Should the CDFI Fund require CDFIs to provide a corresponding 
Development Service for each Financial Product and Financial Service?
    3. Should a certified CDFI be required to offer each Development 
Service each year to maintain certification status?
    F. Accountability: The CDFI Fund currently requires that a CDFI 
maintain accountability to its Target Market through representation on 
its governing board and/or advisory boards. Prior to recent changes in 
the regulation, a CDFI could demonstrate accountability through other 
mechanisms such as focus groups, community meeting, and/or customer 
surveys.
    1. What percentage of a CDFI's board members should satisfy 
accountability rules? Should different percentages apply to different 
types of boards, i.e. governing vs. advisory boards?
    2. Is representation on an advisory board sufficient to demonstrate 
accountability?
    3. Should CDFIs be able to demonstrate accountability through means 
other than board membership? If so, how?
    4. Is a business plan and a stratified, statistically significant 
random sample

[[Page 2254]]

of lending by asset class and location sufficient to document 
accountability? Under what circumstances?
    5. Should accountability requirements differ based on a CDFI's type 
of Target Market, and if so, how?
    6. How should the CDFI Fund assess accountability if a CDFI's 
Target Market includes borrowers or investees who are not members of a 
Targeted Population themselves (e.g., small businesses, micro 
businesses, and affordable housing developers, charter schools), but 
whose ``end-beneficiaries'' are?
    7. How should a CDFI demonstrate accountability to a national 
Target Market, in particular an Investment Area national in scope? 
Should there be a requirement to have local accountability to 
supplement a national governing or advisory board? In this context, how 
should the term ``local'' be defined?
    8. How should an Applicant that utilizes a web-based lending 
platform, especially one that serves a national Target Market, 
demonstrate accountability?
    G. Non-Governmental Entity: By statute, a CDFI Shall not be an 
agency or instrumentality of the United States, or any State or 
political subdivision thereof. An entity that is created by, or that 
receives substantial assistance from, one or more government entities 
may be a CDFI provided it is not controlled by such entities and 
maintains independent decision-making power over its activities. In the 
CDFI Certification application, the Applicant must respond to a series 
of questions designed to surface/discover issues or circumstances that 
may prevent an Applicant from meeting this criteria.
    1. Are the current standards for establishing that an Applicant is 
not owned or controlled by a governmental entity sufficient?
    2. Are there additional or alternative questions and/or 
documentation the CDFI Fund should require to determine if an Applicant 
is an agency or instrumentality of a Federal, State or local 
government?

II. Certification Policy and Procedures

    A. Should the CDFI Fund request information on the reason for 
applying for certification and intended use (e.g., funding requirement, 
marketing)?
    B. Are there additional sources of data collected by other federal 
agencies that can be used to meet any of the seven certification tests? 
If so, please describe.

III. General Certification Questions for Public Comment: Through This 
RFI, the CDFI Fund Invites Comments and Responses to the Following 
Questions Regarding CDFI Certification

    A. ``Community-based'' is a term often used to describe CDFIs. How 
should ``community-based'' be defined and what does it mean for CDFIs 
to be ``community-based?''
    B. Although not defined in statute, the CDFI Fund allows Applicants 
that serve Native communities to self-designate themselves as Native 
CDFIs and apply for Financial Assistance and Technical Assistance 
through the Native CDFI Program. Applicants that self-designate as a 
Native CDFI must attest to providing 50 percent or more of their 
products and services to Native lands or Native populations. Should the 
CDFI Fund continue to allow Applicants to self-designate as Native 
CDFIs or should there be more defined standards that the CDFI Fund 
should verify? If so, what should they be?
    C. Should CDFIs be allowed to be composed of multiple legal 
entities (Subsidiaries and/or Affiliates)? And if so, must a CDFI 
include all of its Subsidiaries and/or Affiliates for consideration?
    D. Should CDFI certification standards have more ``bright-line'' 
tests, i.e. specific thresholds and benchmarks that are, where 
possible, quantitative in nature, or should the CDFI Fund maintain 
flexibility to evaluate Applicants on a case by case basis, even at the 
expense of certainty for applicants?
    E. In addition to earlier questions regarding potentially different 
Primary Mission or Target Market standards based on institution type, 
are there other CDFI certification criteria standards that should vary 
based on institution type or the type of CDFI?
    F. Should ``start-up'' entities be able to be certified? How should 
the term ``start-up'' be defined?
    G. Are there additional areas of CDFI certification policy or the 
CDFI certification application review process that could use 
improvement? If so, how?

    Authority: 12 U.S.C. 4701 et seq.; 12 CFR 1805.

Mary Ann Donovan,
Director, Community Development Financial Institutions Fund.
[FR Doc. 2017-00013 Filed 1-6-17; 8:45 am]
 BILLING CODE 4810-70-P