• The U.S. Department of the Treasury’s Community Development Financial Institutions Fund released an updated Community Development Financial Institution (CDFI) Certification Application (Application).
• This updated Application is the result of two years of public commentary and aims to increase flexibility and transparency in the CDFI certification process.
• The updated Application introduces a list of practices that render applicants ineligible for CDFI status, a new process for applicants to give feedback on the CDFI certification standards, a new mechanism for reporting data through SAM.gov, and modifications to the target market benchmarks and target populations required to be certified as a CDFI.
• The updated Application does not require full compliance with the Consumer Financial Protection Bureau’s Ability-to-Repay/ Qualified Mortgage Rule.
• Non-certified organizations have been able to apply for certification with the new Application since December 20, 2023. Organizations that are currently certified as CDFI’s will have access to the new Application on August 1, 2024 and will be required to reapply by December 20, 2024 to maintain their certification.

The U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) released an updated Community Development Financial Institution (CDFI) Certification Application (Application) on December 7, 2023, with the goal of increasing flexibility and transparency in the CDFI certification process.¹ The updated Application was approved by the Office of Management and Budget, alongside the Annual Certification and Data Collection Report (ACR) and Transaction Level Report (TLR). For an overview of the CDFI program as it applies to Managers of Loan Funds and Venture Capital Funds please see our prior Dechert OnPoint on CDFIs.

Public Commentary Played a Key Role

The newly updated Application is the result of two years of public commentary and modifications. The CDFI Fund first began soliciting public commentary in May 2020.² In October 2022, the CDFI Fund released its proposed revisions to the Application and accompanying reporting tools, and the Office of Management and Budget followed shortly after, requesting a final round of public comments.³ The CDFI Fund originally provided a release date of April 2023 but postponed the timeline indefinitely through an update published on their website in January 2023. The CDFI Fund paused acceptance of any new Applications in October 2022 with the expectation that they would resume in April 2023,⁴ and the delay in the release of the updated Application extended the pause an additional eight months.⁵

Phased Implementation

The CDFI Fund’s Awards Management Information System (AMIS), the portal through which organizations can submit their Applications, will reopen to previously certified applicants and non-certified applicants on different dates. Non-certified organizations have had access to the AMIS portal since December 20, 2023.⁶ Certified CDFI’s will not have access to the AMIS until August 1, 2024, and will be required to reapply by December 20, 2024 to maintain their certification.⁷ In the meantime, these certified CDFIs will be in a grace period during which they will retain their status and remain eligible for CDFI programs, assuming they otherwise remain in good standing with reporting requirements.⁸ However, there is an option for certified CDFIs that would like to reapply before the December 2024 deadline: currently certified CDFIs can notify the CDFI Fund of their intent to submit an early Application before February 1, 2024 and then complete the reapplication process between May 31, 2024 and July 31, 2024.⁹ If applicants meet this early deadline, the CDFI Fund will provide them with a determination by October 31, 2024.¹⁰

Key Changes in the Updated CDFI Certification Application¹¹

• Practices that deem applicants ineligible for CDFI certification: The updated Application expands the list of practices that deem applicants per se ineligible for CDFI certification to limit applicants who abuse consumers from obtaining CDFI status. These practices include offering loans with an annual percentage rate of over 36% that also have an annual default rate over five percent, loans that include a leverage payment mechanism, loans of $1,000 or less with repayment timeframes of over twelve months or loans with other criteria the CDFI Fund has deemed to be abusive to consumers.
• ·Board compensation and target market accountability: The previous Application stated that any board member who received compensation for their membership could not be considered accountable to a target market due to a conflict of interest. Due to comments that critiqued this practice as a non-industry standard, the updated Application has been modified to permit board members who receive compensation to be considered accountable to a target market, assuming they meet all other criteria.
• Feedback on Application lists and standards: Public commentary requested both greater flexibility and greater specificity over the production of lists and standards for CDFI certification. As a result, the updated Application allows for applicants to request changes to the lists and standards used in the application process, creating an efficient delivery of feedback to the CDFI Fund. If a request is approved, the CDFI Fund will publish an update.
• Removal of loan purpose tables: The previous Application included two tables, a “Financial Products Information” table and a “Financial Services Information” table, collectively referred to as “loan purpose tables.” Due to feedback that the process to complete the tables was too burdensome, these tables have been removed from the updated Application and have been replaced with a few questions targeting the same material in the Application and TLR.
• Incorporation of SAM.gov: SAM.gov is the official government website for entity registration and reporting.¹² The previous Application required data and document collection to provide proof of legal entity status. By incorporating SAM.gov into the AMIS portal, the updated Application has greatly reduced the application burden for those applicants who are already registered on SAM.gov.
• Alternatives to strategic plans permitted: The previous Application required applicants to produce a strategic plan to prove their primary mission is to promote community development. The updated Application allows the submission of a board- or owner-approved narrative describing expected community development outcomes.
• Narrative on interpretation of responsible financing standards: The Application requires applicants to submit information on their financing practices to meet the CDFI certification requirements for responsible reporting standards. Due to comments requesting increased transparency on how this information will be interpreted and increased specificity of responsible financing standards, the updated Application includes an informational narrative reflecting the requirements for this section.
• Update to list of practices not promoting a community development mission: The previous Application included a list of practices inconsistent with a community development mission, and this remains in the updated Application. However, the list has been modified to remove certain practices that were previously on this list, and a separate list has been created for practices that are not automatically deemed to be inconsistent with a community development mission but will require the applicant to explain how they promote community development. Additional questions in the Application will be used to determine if the applicant uses these practices in a way that does in fact promote community development.
• Updates to requirements for specific products and services: The updated Application reflects changes to the definitions, standards, and questions regarding specific types of products and services such as mortgage lending, consumer lending and small business lending.
• Financing Entity predominance test update: The Application requires an applicant to demonstrate that the provision of financial products or services is its predominant business activity, which requires a presentation of all the applicant’s assets and staff time. The updated Application updates what constitutes predominant business activity, with a focus on what qualifies as “development services.”
• Target market benchmarks extended: The Application requires an applicant to show that it directs 60% of both “quantity and dollar volume of arm’s-length, on-balance sheet Financial Products to one or more eligible ‘target markets.’” The updated Application allows for CDFIs to fail to meet that target market benchmark within a single fiscal year if they can demonstrate that they have met that benchmark over the last three-year period. Similarly, the depository institutions and investment areas permitted to meet target market benchmarks have been expanded.
• Addition of people with disabilities to “Other Targeted Populations”: The updated Application includes people with disabilities¹³ in the “Other Targeted Populations” criteria for determining target markets.

Annual Certification and Data Collection Report and Transaction Level Report Modifications

In addition to the revisions to the Application, the ACR and TLR were also updated, along with policies for reporting generally. Under these new policies, both new applicants and currently certified CDFIs will need to submit initial and annual TLRs, although the specific versions of the TLR will vary by the award status sought.¹⁴ The previous policies also required the submission of an ACR annually within 90 days of the end of the certified CDFI’s fiscal year.¹⁵ The new policies require that any organizations that become certified under the updated Application submit the new ACR form within 180 days of the end of their fiscal year.¹⁶ Currently certified CDFIs that have not yet reapplied will follow the current ninety-day deadline until they are recertified.¹⁷

Potential Impact to Residential Mortgage-Backed Securitizations

Some of the changes that the CDFI Fund has implemented in the CDFI certification process to increase consumer protections—particularly, establishing lender verification requirements in mortgage lending—could have a positive effect on residential mortgage-backed (RMB) securitizations backed by CDFI loans, which carry certain risks that are not necessarily found in other types of residential mortgage loans.

Investor interest in securities backed by CDFI-originated loans has been on the rise in recent years. The first securitization of first lien residential mortgage loans exclusively originated by a CDFI took place in 2022.¹⁸ In 2023, the same CDFI issued its first AAA-rated securitization for the senior A1 class, attracting 16 investors.¹⁹ This growing interest is attributed to the prime credit metrics of the underlying loans and the attractive discounts compared to other non-qualified mortgage securitizations.

In its overview of key updates to the Application, the CDFI Fund confirmed that applicants are not required to fully comply with the Consumer Financial Protection Bureau’s (CFPB) Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule).²⁰ This exemption is crucial for expanding homeownership to low- and moderate-income consumers as it allows institutions like CDFIs more underwriting flexibility to better align their practices to their target populations’ financial circumstances.²¹ Despite concerns that the draft Application would subject CDFIs to the ATR/QM Rule, the CDFI Fund clarified that, while the updated Application may use concepts from the ATR/QM Rule, the certification process does not impose the rule’s strict underwriting requirements on CDFIs.²² The updated Application, however, does incorporate certain consumer-protection practices from the ATR/QM Rule. For example, the updated Application includes a question that requires applicants engaged in mortgage lending to attest that they verify borrowers’ income or assets for certain covered mortgage loan products.²³ This question effectively bars lenders who engage in “no documentation” review practices from obtaining CDFI certification, as such practices are often linked to predatory lending and the increased the risk of a borrower defaulting.²⁴

The updates to the certification process, while preserving access to the mortgage lending market for low- and moderate-income consumers and enhancing consumer protections, may also mitigate some risks associated with RMB securitizations backed by CDFI-originated loans. For example, the exemption from the ATR/QM Rule is a factor that rating agencies often view negatively when rating securitizations backed by CDFI-originated loans.²⁵ While the modifications to the certification process do not address all of the risks of CDFI-originated non-qualified mortgage loans, they ensure that no future CDFI-originated loans will be “no-doc” loans, closing off this stream of higher risk loans into future RMB securitizations. CDFI-originated loans possess several attributes that contribute positively to their ratings, but this particular limitation could be seen as enhancing the stability and reliability of the securities they back.

As the CDFI Fund continues to refine the CDFI certification process, it should implement changes that both strengthen consumer protections and encourage direct and indirect investments in underserved communities. These can further support affordable housing and create significant social impact.

The authors would like to Meagan Cox for her contributions to this OnPoint.

1. CDFI Fund, CDFI Fund Releases Final Revised CDFI Certification Application (December 7, 2023).
2. CDFI Fund, CDFI CERTIFICATION APPLICATION & DATA COLLECTION REPORTING REVISIONS.
3. CDFI Fund, Opportunity to Comment on the New CDFI Certification Application (November 4, 2022).
4. CDFI Fund, CDFI Fund Update on CDFI Certification Application Process (July 20, 2022).
5. CDFI Fund, An Update on the CDFI Fund’s Certification Application Review Process (January 24, 2023).
6. CDFI Fund, CDFI Fund Releases Final Revised CDFI Certification Application (December 7, 2023).
7. Id.
8. Id.
9. Id.
10. Id.
11. Department of the Treasury, An Overview of Key Updates to the CDFI Certification Application (December 7, 2023).
12. SAM.gov, About This Site: What is SAM.gov?.
13. The CDFI Fund relies on the American Disabilities Act definition of a person with a disability which states that “a person who has a physical or mental impairment that substantially limits one or more major life activities, a person who has a history or record of such an impairment, or a person who is perceived by others as having such an impairment.” 42 USC § 12102; See CDFI Fund, Pre-Approved Target Market Assessment Methodologies (December 2023).
14. CDFI Fund, CDFI Fund Releases Final Revised CDFI Certification Application (December 7, 2023).
15. Id.
16. Id.
17. Id.
18. The Change Company, Investor Demand Rising for CDFI RMBS Securitizations (March 14, 2023).
19. National Mortgage Professional, Change Lending Issues Its 1st AAA-Rated Securitization (June 20, 2023).
20. Department of the Treasury, An Overview of Key Updates to the CDFI Certification Application (December 7, 2023).
21. The ATR/QM Rule was implemented after the 2008 housing collapse to prevent lenders from originating mortgage loans to consumers without considering the consumers’ ability to repay the loans. Among other requirements, the rule requires lenders to review consumers’ financial information and determine whether they can pay back the loan. Consumer Financial Protection Bureau, Consumer Financial Protection Bureau Issues Rule to Protect Consumers from Irresponsible Mortgage Lending (January 10, 2013). However, these practices are regarded as mortgage credit availability to certain consumers, particularly those who are low- and moderate-income. See Office of the Comptroller of the Currency, Affordable Mortgage Lending Opportunities: Exemptions Under the Ability-to-Repay Rule (December 2015).
22. Department of the Treasury, An Overview of Key Updates to the CDFI Certification Application (December 7, 2023).
23. Id.
24. Consumer Financial Protection Bureau, Consumer Financial Protection Bureau Issues Rule to Protect Consumers from Irresponsible Mortgage Lending (January 10, 2013).
25. See e.g., Fitch Ratings, Fitch Assigns Expected Ratings to CHNGE 2023-2; Presale Issued (May 19, 2023).