wlm4 at cornell.edu (Will
01-18-1995, 06:33 AM
Cliff Rosenthal of The National Federation of Community Development Credit
Unions (NFDCDCU) has prepared this line by line analysis of the Key
Regulatory Issues in The CDFI Act. You may address comments to this list
of to NFCDCU at 120 Wall Street, NYC. 212-890-3274, (FAX) 212-513-7191,
70156.1074@compuserve.com
Part 2
SECTION-BY-SECTION COMMENTARY
SEC. 101. SHORT TITLE
The short title is the "Community Development Banking and Financial
Institutions Act of 1994."
SEC. 102. FINDINGS AND PURPOSES
This section talks about the problems in urban, rural, and Native American
communities, and the need for "coordinated development strategies. intensive
supportive services, and increased access to equity investments and loans
for development activities."
Comment: If your CDCU has not already begun communicating with other
community development organizations, it would be a good idea to start
discussions now to "coordinate" your strategies.
SEC.103. DEFINITIONS
Here are the definitions most relevant to CDCUs.
"Community Development Financial Institution." There are five
characteristics tests that a CDFI must have. To qualify as a CDFI, an
institution should:
1. have a "primary mission of promoting community development."
2. serve "an investment area or targeted population." ["Investment area"
and "targeted population" are defined and discussed below.]
3. provide "development services" [defined and discussed below].
4. maintain "representation" from, or "accountability to" the residents of
the investment area or targeted population.
5. not be an agency of the federal, state, or local government.
Comment: This definition raises a series of questions. How does an
applicant demonstrate its "primary mission"? Must it have a mission
statement with these words in it? Is it sufficient to have a mission
statement? that enough? Should an institutions be considered a CDFI only
because it has the "right" mission statement? Shouldn't an institution be
qualified as a CDFI if its past work centered around "community
development"--even if it doesn't have a mission statement that spells this
out?
Furthermore, what does "primary" mission mean? Does it mean that a certain
percentage of loans should go for "community development" purposes? That a
certain portion of the beneficiaries be low-income or disadvantaged?
Please consider and comment to NFCDCU on the following questions.
1. Should any credit union which is designated "low-income" by regulators
be automatically presumed to be a "community development financial
institution"?
An advantage of this approach is that it would allow the majority of CDCUs
to qualify with no fuss or bother; being listed by NCUA as "low-income"
would be sufficient.
A possible disadvantage of this approach is this. In the last two years,
many large employee-based credit unions have been designated as
"low-income." If we agree that low-income designation is enough, these
institutions will be likely to qualify.
2. Should credit unions which can demonstrate a history of service to
minority communities, a long-standing mission statement of community
development, or service to underserved communities qualify, even if they do
not have "low-income designation?"
3. Please keep in mind that some community development banks or loan funds
or microenterprise funds may, in fact, serve the small business community,
or mixed-income communities, or other groups which may be less disadvantaged
than a CDCU membership. Very likely, they will qualify as "CDFIs."
If that is the case, would you agree that it is better to keep the doors
open as widely as possible to as many CDCUs and other credit unions serving
low-income and/or minority communities--even if they have not
"traditionally" been associated with the CDCU movement?
"Community Partner"
The CDFI Act envisions a wide variety of "community partners" working with
CDFIs. These partners could include banks, credit unions, nonprofits, state
or local government agencies, and Small Business Investment Companies.
These community partners are supposed to be organizations that provide
"loans, equity investments, or development services."
Comment: Please note that this concept does provide a role for mainstream
credit unions, as well as other institutions, such as banks and nonprofits,
that CDCUs often work with. It could open up new horizons and resources for
some CDCUs. In particular, it could provide a way for "mainstream" credit
unions to aid in community development without actually extending their
fields of membership to low-income areas.
"Community Partnership"
This means an "agreement" between a Community Development Financial
Institution and a community partner, as defined above, to provide loans,
equity, and development services.
"Development Services"
These services may include business planning, financial and credit
counseling, and "marketing and management assistance" (presumably, to
small-business borrowers).
Comment: CDCUs should not have too much trouble proving that they provide
"development services," which could include budget counseling for low-income
consumers--something that virtually every CDCU has done at one time or
another. On the other hand, many CDCUs do not offer these "development
services" formally. And many CDCUs do not concentrate on assistance to
small businesses, an activity in which the CDFI Act is quite interested.
"Indian Reservation"
The definition tracks the Indian Child Welfare Act of 1978.
"Indian Tribe"
This includes groups "recognized as eligible for the special programs and
services provided by the United States to Indians because of their status as
Indians."
"Insured Community Development Financial Institution"
This section clearly includes credit unions which meet the definition of a
CDFI (see above).
"Insured Credit Union"
This refers to Sec. 101(7) of the Federal Credit Union Act. It means a
federally-insured credit union.
"Insured Depository Institution"
This refers to Sec. 3 of the Federal Deposit Insurance Act. It does NOT
include credit unions.
"Investment Area"
There are alternate ways of qualifying as an "investment area."
*The area (which may include an Indian reservation) may meet "objective
criteria of economic distress," which may include percentage of low-income
families, unemployment rate, rural outmigration, etc. In addition, the area
should have "significant unmet needs for loans or equity investments."
*Alternatively, the area may be one that "encompasses or is located in an
empowerment zone or enterprise community" according to an IRS definition of
1986.
"Low-Income"
For metropolitan areas, this means 80% or less of the area median
income--adjusted for family size.
For non-metro areas, there are two standards, of which the higher figure
may be used: (a) 80% of the area median income; OR
(b) 80% of the statewide nonmetro area median.
"Targeted Population"
The CDFI Act defines this term as individuals or an identifiable group--
including an Indian tribe--who are "low-income" or "otherwise lack adequate
access to loans or equity investments."
The Conference Report elaborates somewhat. It says that the CDFI Fund
"should focus on low income persons and those who are otherwise underserved
by financial institutions (including those historically denied access to
financial services based on their race, gender, ethnicity, or national
origin)."
Question: Does the "targeted population" have to consist entirely of
low-income persons or those lacking adequate access to financial
services--or can the population predominantly meet the test?
Comment: The Conference Report for this section also refers to Section 115,
under which "the Fund will require assisted institutions to compile and
maintain disaggregated data to ensure that targeted populations are
adequately served and to demonstrate success in meeting their performance
goals." In other words, if an applicant specifies it intends to target, for
example, a minority community, it will have to keep statistics that
demonstrate it actually is serving that community.
SEC. 104. ESTABLISHMENT OF
NATIONAL FUND FOR COMMUNITY DEVELOPMENT BANKING
The CDFI Fund will not be affiliated with any other Federal agency or
department.
There will be a 15-person Community Development Advisory Board appointed by
the President. In addition to Cabinet secretaries, the Board will include
nine private citizens, made up as follows:
2 who are officers of existing CDFIs
2 who are officers of insured depository institutions
2 who are officers of national consumer or public interest organizations
2 individuals with expertise in community development
1 individual "who has personal experience and specialized expertise in the
unique lending and community development issues confronted by Indian tribes
on Indian reservations."
Question: Can CDCUs qualify under both the categories of "existing CDFIs"
and "insured depositories"?
SEC. 105. APPLICATIONS FOR ASSISTANCE
New applications to the CDFI must address at least the elements below.
(more may be required by the Fund, if it wishes). Each application must:
(1) "establish that the applicant is, or will be, a community development
financial institution"
(2) "include a comprehensive strategic plan for the organization that
contains--
(A) a business plan of not less than 5 years in duration that demonstrates
that the applicant will be properly managed and will have the capacity to
operate as a community development financial institution that will not be
dependent upon assistance from the Fund for continued viability;
(B) an analysis of the needs of the investment area or targeted population
and a strategy for how the applicant will attempt to meet those needs;
(C) a plan to coordinate use of assistance from the Fund with existing
Federal, State, local, and tribal government assistance programs, and
private sector financial services;
(D) an explanation of how the proposed activities of the applicant are
consistent with existing economic, community, and housing development plans
adopted by or applicable to an investment area or targeted population; and
(E) a description of how the applicant will coordinate with community
organizations and financial institutions which will provide equity
investments, loans, secondary markets, or other services to investment areas
or targeted populations;"
(3) "include a detailed description of the applicant's plans and likely
sources of funds to match the amount of assistance requested from the Fund"
The Conference Report elaborates that the "central component of the
application is the institution's comprehensive strategic plan." It is
vital that the institution will become "financially viable (not dependent on
future assistance)". The institution will have to show that it is able to
"catalyze redevelopment."
Comment: CDCUs should be in good shape in terms of demonstrating
financial viability. However, they may have to struggle with developing
comprehensive strategic plans to identify and address community needs.
Also, many CDCUs may be weaker in demonstrating that they serve "catalyzing"
roles--that is, CDCUs are not necessarily the institutions that "make things
happen" and draw in other resources.
SEC. 106 COMMUNITY PARTNERSHIPS
Section 103, "Definitions," listed the kinds of organizations which can
serve as community partners. This section, Sec. 106, addresses the nature
of the community partnerships. Applications to the CDFI for community
partnerships:
*must indicate the roles each partner will play
*indicate how the partnership "enhances" the CDFI's activities
*must indicate how the partnership is consistent with the strategic plan
Partnership applications will receive favorable consideration if they show:
*that the partner(s) of the CDFI are active participants
*that their role makes the CDFI's plan more likely to succeed
*that the partnership will provide better service to the investment area
or target community than the CDFI could alone.
The Fund may not provide assistance to the partner or its affiliates;
assistance may be provided only to the CDFI. It is also stated that "The
Fund may establish additional guidelines and restrictions on the use of
Federal funds to carry out community partnerships."
The Conference Report notes that it is the conferees' intent "to leverage
Federal resources and to encourage collaboration between community
development financial institutions and other organizations." However, the
Conference Report also mentions that it is "critical for the Fund to closely
scrutinize the relationship between community partners and community
development financial institutions." The goal is to assure that the partner
working with the CDFI has "a strong track record of promoting lending or
equity investments for community development purposes" and that an
improvement in services will result will result from the partnership.
Performance goals will have to be specified in the community partnership
agreement.
Comment: Among community groups, there is considerable wariness about the
possibility of partnerships which would serve the interests of third
parties, like banks. The CDFI Act and the Conference Report language show a
strong Congressional interest in preventing misuse of the CDFI Fund by third
parties.
SEC. 107. SELECTION OF INSTITUTIONS
This section describes (a) the specific criteria for selecting applicants;
(b) the desire for the Fund to "fund a geographically diverse group of
applicants, which shall include applicants from metropolitan,
nonmetropolitan, and rural areas."
There are 14 specific criteria.
"(1) the likelihood of success of the applicant in meeting the goals of its
comprehensive strategic plan"
Comment: This criterion favors groups with solid, well-developed and
feasible plans.
" (2) the experience and background of the management team"
Comment: This would appear to favor those with lengthy experience,
professional qualifications, expertise in a variety of community development
areas, etc. Newly-organized CDFIs would be at a disadvantage, unless they
hired experienced management.
"(3) the extent of need for equity investments, loans, and development
services within the investment areas or targeted populations"
Comment: This criterion could help CDCUs in very underserved areas, which
have few banks.
"(4) the extent of economic distress within the investment areas or the
extent of need within the targeted populations, as those factors are
measured by objective criteria"
Comment: Groups in very low-income areas would be favored by this criterion.
"(5) the extent to which the applicant will concentrate its activities on
serving its investment areas or targeted populations"
Comment: This might help groups with a clear, well-defined focus on the
poor, rather than those which serve a widespread, economically mixed area or
population.
"(6) the amount of firm commitments to meet or exceed the matching
requirements and the likely success of the plan for raising the balance of
the match"
Comment: This provision could help CDCUs and other CDFIs with large
retained earnings (see the discussion of retained earnings, below). It
would likely favor large, highly visible institutions with strong,
well-established linkages to banks, foundations, and corporations.
Conversely, the most isolated CDFIs and those serving the lowest-income
populations might be at a significant disadvantage.
CDCUs might want to consider obtaining deposit commitments from NFCDCU's
Capitalization Program, which may have a substantial amount of below-market
deposits available for matching purposes when the CDFI Fund opens the
application process.
"(7) the extent to which the matching funds are derived from private sources"
Comment: Similar to the previous criterion, this would tend to favor
CDFIs with strong bank, corporate, and foundation links. It might also help
CDCUs, which can draw on member deposits and/or donations, rather than
depending on local government.
"(8) the extent to which the proposed activities will expand economic
opportunities within the investment areas or the targeted populations"
Comment: It is not altogether clear which institutions would be favored
by this provision. It is likely that CDFIs with a strong job-creation focus
and track record would do well.
"(9) whether the applicant is, or will become, an insured community
development financial institution"
Comment: CDCUs, as well as community development banks, would be favored
in comparison to revolving loan funds and microenterprise funds.
"(10) the extent of support from the investment areas or targeted populations"
Comment: This provision ought to provide a competitive advantage to CDCUs,
which draw support as well as lend to large numbers of people and community
organizations within their service areas. Other CDFIs are often more
reliant on outside investors.
"(11) the extent to which the applicant is, or will be, community-owned or
community-governed"
Comment: This provision seems custom-made for CDCUs.
"(12) the extent to which the applicant will increase its resources through
coordination with other institutions or participation in a secondary market"
Comment: The level of involvement of CDCUs with other institutions or
secondary market is uneven; some do a substantial amount, while others do
little. Other types of CDFIs sometimes have a high level of involvement,
especially with banks. This would be a good time for CDCUs to consider
linking up with secondary market programs like Fannie Mae, Freddie Mac,
LISC, or others.
"(13) in the case of an applicant with a prior history of serving investment
areas or targeted populations, the extent of success in serving them"
Comment: A CDCU with a relatively long history and/or a large membership
and/or a history of making many loans to low-income people with a
respectable loan loss rate should do well under this criterion.
"(14) other factors deemed to be appropriate by the Fund."
Comment:
*Are there any other factors you believe should be considered?
*There is no indication that these criteria are necessarily listed in
terms of descending importance. Do you have views about their relative
importance and the weight that should be given to each?
*It is unlikely that any one candidate would achieve the highest scores
under each criterion. But CDCUs generally seem well-positioned according to
a number of the criteria. Where they may fare less well, on average, than
other CDFIs (including community development banks and large community
development corporations) could be in the areas of capacity, management,
and ability to leverage outside funds.
SEC. 108. ASSISTANCE PROVIDED BY THE FUND
(a) Forms of Assistance
The CDFI Fund may provide
(A) "financial assistance through equity investments, deposits, credit
union shares, loans, and grants; and
(B) technical assistance..."
Equity investments are not be of such an amount as to give the CDFI Fund
control over a CDFI; these investments are to be "transferable, nonvoting
equity."
Deposits are not subject to any requirement for collateral or security/
Comments:
*The description of equity investments clearly contemplates stock-type
investments. To be useful for credit unions, some issues will need to be
clarified. Can equity include "donated equity" to credit unions, as well as
other non-liability accounts? Can "equity" include deposits that are used
to collateralize loans? Will "equity investments" have to pay dividends back
to the CDFI Fund?
*Please see the Conference Report language below, which discusses
"retained earnings"
*It is very helpful that deposits will not be subject requirements for
collateral or security. When government agencies make deposits in financial
institutions in excess of $100,000, they often want additional security in
the form of Treasury bills, which makes those programs of considerably less
interest to CDCUs.
This is what the Conference Report says regarding "retained earnings."
The Conferees recognize that retained earnings enable community development
financial institutions, like conventional financial institutions, to
increase their ability to leverage new funds for the communities they serve
by building equity or net worth. For the purpose of meeting the matching
requirements of Section 108(e), it is the intent of the Conferees that
retained earnings of existing community development financial institutions
shall qualify as matching resources. However, it is not the intent of the
Conferees to permit applicants to pledge future earnings to meet their
matching requirements. Furthermore, it is not the intent of Congress to
limit the amount of such retained earnings that may used [sic] toward
meeting the matching requirements. Start-up or net worth financing shall
not be treated as retained earnings under this Subtitle.
Comment:
*One of NFCDCU's biggest victories was getting Conference Report language
allowing applicants to use accumulated retained earnings to meet the
matching requirements. Please note that this provision is not in the Act
itself. Report language is not absolutely binding the way the law itself
is. But we can make a strong case that it should be considered in writing
the regulations.
*Allowing retained earnings to count as match will greatly help many
CDCUs, which have generated their own internal capital over the years. The
more capital they have generated and kept, the better off they will be.
Some may not need to even look to outside sources, if retained earnings can
be fully counted.
*CDFIs which have been totally dependent on grants for operating support
and which haven't build up retained earnings may be at a disadvantage.
*New CDCUs won't get much help from this provision since they usually
haven't been able to build up much retained earnings yet (On the other
hand, new CDCUs are probably the ones that have been most successful at
raising grant dollars from outside sources.)
*The CDFI Fund may not be inclined to let CDFIs use only retained earnings
as matching funds, since this would not bring any "new money" into community
development.
Questions:
1. What should be included in the term "retained earnings"? Undivided
earnings? Net income? Contingency reserves? Allowance for loan losses?
Other accounts? Please specify.
2. Should there be any limit on the amount of retained earnings that can
be used as matching funds? The report language says there should not be a
restriction. But CDFI Fund transition team members have expressed concern
that the biggest institutions, with the most retained earnings, would get
the lion's share of the money. They ask whether perhaps there should be a
"sliding scale"--for example, retained earnings over a certain level ($1
million?) would only receive partial credit, so that the really big players
(including community development banks) won't have so great an advantage?
What do you think?
3. As a technical matter, do we need to define retained earnings as
"equity" so as to be sure to qualify for donations of equity from the CDFI Fund?
(b) Uses of financial assistance
Eligible uses for money received from the CDFI Fund include the following:
(A) commercial facilities that support revitalization, job creation, etc.
(B) businesses that provide for low-income people or are owned by
low-income people or make products and services more available to low-income
people
(C) community facilities
(D) "the provision of basic financial services"
(E) housing that is "principally affordable to low-income people," as well
as homeownership assistance for low-income people if these are not provided
by other lenders, or else complement the services and lending products of
other lenders.
(F) other businesses and activities that the Fund deems appropriate
Funds may NOT be used for lobbying or to influence public officials to
obtain public funds
Comment: NFCDCU fought successfully for inclusion of "basic financial
services" in the above listing, to ensure that those CDCUs which are
primarily involved in providing deposits and consumer loan services to their
members could qualify for the CDFI Fund.
(c) Uses of Technical Assistance
Capacity-building. training of management and other personnel, and
development of products and services qualify. CDFIs will be able to apply
for technical assistance even if they don't get financial assistance from
the Fund.
(d) Amount of Assistance:
Any one CDFI can only get $5 million in a three-year period--except that it
can get an additional $3.75 million to establish a subsidiary or affiliate
outside of its state and metropolitan area.
The Fund may disburse assistance in one lump sum, or over a period of time.
(e) Matching requirements:
This is what the CDFI Act states.
"Assistance other than technical assistance shall be matched with funds
from sources other than the Federal Government on the basis of not less than
one dollar for each dollar provided by the Fund. Such matching funds shall
be at least comparable in form and value to assistance provided by the Fund.
The Fund shall provide no assistance (other than technical assistance) until
a community development financial institution has secured firm commitments
for the matching funds required."
Under certain conditions, a less demanding match may be imposed on
applicants. But the CDFI Fund can put out no more than 1/4 of its annual
total under these lessened conditions in any year.
"In the case of an applicant with severe constraints on available sources
of matching funds, the Fund may permit an applicant to comply with the
matching requirements of paragraph (1) by--
(A) reducing such matching requirement by 50 percent;" or in the case of a
non-metro institution with less than $100,000 in assets and a request of no
more than $25,000, allowing the applicant to change the form of the match.
Comments:
*There is no apparent prohibition against seeking an operating grant from
the CDFI Fund, although the law clearly intends for CDFIs to become
"financially viable."
*Can an applicant request a combination of assistance in various
forms--e.g., grants plus deposits or shares? We think it should be able to.
*Can an applicant request a grant from the Fund for one purpose (e.g.,
building its equity) while matching it with a grant from a private source
that it uses for another purpose (e.g., for operations)?
*In judging whether an applicant has "severe constraints" on matching
funds, the CDFI Fund should take into account the degree of distress,
isolation, rural poverty, etc.
*What Is Section 105(a)(9) of the Housing and Community Development. Act
of 1974? These monies are to be considered Federal.
(f) Terms and Conditions
Before an applicant gets assistance, it must "enter into an agreement that
requires the institution to comply with performance goals and abide by other
terms and conditions..."
Performance goals are to be based upon an applicant's strategic plan.
According to the Conference Report language, "performance goals... will be
based on the assessment of community needs and plans for addressing the
needs described in the institution's strategic plan."
"Performance goals for insured community development financial institutions
shall be determined in consultation with the appropriate Federal banking
agency."
Comments:
*NCUA gets a role in determining the performance goals of a CDCU.
The Fund is directed to seek input on a CDFI's performance from any
appropriate tribal government when an assisted CDFI serves an investment
area which includes an Indian reservation or a targeted population that
includes a tribe.
(h) No Authority to Limit Supervision and Regulation
The CDFI Fund cannot limit the authority of banking regulatory agencies to
supervise and regulate.
Comment: This means that the CDFI Fund cannot override NCUA.
The Conference Report states that "the Fund will assist a variety of
different types of institutions that fall within the definition of community
development financial institution."
Comment: The CDFI will support a mix of community development banks,
loan funds, credit unions, microenterprise funds, and others. It is
possible that a weaker institution of one type could be funded rather than a
stronger one of another type, in the interests of diversity.
SEC. 109. TRAINING
The CDFI Fund is to provide "educational programs" to assist CDFIs and
other financial services providers in developing lending and investment
products, underwriting and servicing loans, providing development services, etc.
The Fund may contract with other organizations to provide training programs.
SEC. 110. ENCOURAGEMENT OF PRIVATE ENTITIES
The Fund may "facilitate" the organizing of corporations to assist CDFIs.
However, these corporations may not be operated by federal, state, or local
government agencies.
Comment: It is not clear what "facilitate" means. Is financial
assistance included? Are these "private entities" to be lending or
secondary-market institutions? Technical assistance organizations?
Advocacy groups?
SEC. 111. COLLECTION AND COMPILATION OF INFORMATION
The Fund is to gather information about CDFIs and make it available, for
the purpose of assisting and expanding CDFIs.
SEC. 112. INVESTMENT OF RECEIPTS AND PROCEEDS
Any money the CDFI Fund makes on its investments in equity, shares, or
deposits can be used for the purposes of the Fund.
SEC. 113. CAPITALIZATION ASSISTANCE TO ENHANCE LIQUIDITY
The Act states that "The Fund may provide assistance for the purpose of
providing capital to organizations to purchase loans or otherwise enhance
the liquidity of community development financial institutions..." The
purpose of the organization must be community development. All recipients
must match CDFI funds dollar for dollar, comparable in form and value to
CDFI Funds.
No single organization can obtain more than $5,00,000 during a three-year
period.
Comment: This provision was originally sought by the Local Initiatives
Support Corporation (LISC), which wanted to make its secondary-market
affiliate, LIMAC, eligible for the CDFI Fund. However, a number of other
organizations would seem to qualify, including NFCDCU's Capitalization
Program. A number of technical questions about this section remain to be
answered.
*Will retained earnings qualify as matching funds?
*Will these organizations be required to prepare a five-year business plan
and fulfill the other requirements applicable to CDFIs? Does the
organization need to serve an investment area or targeted population, or may
it be national in scope?
*Does receiving assistance under this provision prevent an organization
from becoming a contractual provider of technical assistance to the CDFI Fund?
SEC. 114. INCENTIVES FOR DEPOSITORY INSTITUTION PARTICIPATION
The Administrator of the CDFI Fund gains the powers that the "Community
Enterprise Assessment Credit Board" had under the original Bank Enterprise
Act of 1991 [which was passed but never funded). The Administrator can
designate those "qualified distressed communities" to which funding is directed.
Comment: The Bank Enterprise Act of 1991 was sponsored by Rep. Floyd
Flake, who is its strongest supporter. The intention was to give banks
monetary incentives to invest in community development activities as
outlined below. The program was not originally funded, but now will claim
one-third of the total appropriation of the CDFI Fund each year. However,
on the positive side: (a) the CDFI Administrator controls the program and
(b) there is an emphasis on using the program to support CDFIs.
Question: Can CDCUs participate in this program and receive cash awards?
If so, CDCUs will have two options--either applying for the "main" part of
the CDFI Program, which provides more money but requires matching funds; OR
applying for this "Bank Enterprise Act" program, which provides less money
but does not require a match. NFCDCU is currently seeking clarification
from the CDFI Fund transition team.
Awards under this program are to be made through a competitive process,
only to depository institutions, for "qualified activities" in "qualified
distressed communities."
"Qualified activities" may include
"the provision of new lifeline accounts by an insured depository institution"
loans (to develop or support commercial facilities that enhance
revitalization, for business creation, community facilities, affordable
home ownership, and rental housing)
providing technical assistance (through consumer education programs; to
newly formed small businesses; for loan servicing for low- and
moderate-income homeowners)
"any increase during the period in the amount of new equity investments in
community development financial institutions"
other activities as deemed appropriate
The Conference Report states that "the Administrator should allocate
appropriated funds, to the maximum extent practicable, to support equity
investment in community development financial institutions."
Comment:
*If CDCUs are allowed to participate in this program, can their basic
savings accounts be considered "lifeline accounts"? What characteristics do
these accounts need to have?
*Is there a need to define "equity investments" so as to explicitly
include CDCUs?
*What procedures will the Fund use in declaring "qualified distressed
communities?"
Amount of credit:
A depository institution that is not a CDFI may apply for an award equal to
5% of the value of its eligible qualifying activities. However, a CDFI
performing these activities and competing successfully may get an award
equal to 15%. A depository institution that makes an equity investment in a
CDFI qualifies to compete for an award of 15% of its total investment.
The Conference Report states that the amount of assistance to an
institution "is computed based on the weighted periodic increases in loans,
services, technical assistance, and investment by the applicant bank or
thrift." Furthermore, "Award caps are included to ensure that Section 114
assistance is distributed to maximize the benefit to a greater number of
underserved communities."
Double funding for the same activity is prohibited.
A CDFI cannot get an award under this program if it has recently gotten, or
has currently applied for, other financial support from the CDFI program.
Priority for support of CDFIs
The Act states that "The Board shall give priority to institutions that
have supported the efforts of community development financial institutions
in the qualified distressed community."
The Conference Report stresses that "the Conferees hope to immediately
affect economically distressed communities through infusion of private
dollars into loans, services, technical assistance, and equity investments
in community development financial institutions." They wish to create "a
priority for equity investments in community development financial
institutions...." Further, the Conferees "hope that Section 114 supported
investments in community development financial institutions will be a
catalyst for establishment of permanent private banking relationships to
ensure that CDFIs thrive for the benefit of the people in the neighborhoods
they serve."
Comment: The desire to channel as much of this program's money into CDFIs
seems quite clear. But banks and other depositories could get awards more
cheaply and easily by taking on "safe" projects like consumer education.
Other factors to consider
In reviewing applications, the CDFI Board is to consider degree of
difficulty of the qualifying activity of an applicant, community impact,
innovation, leverage, and size of assets, new entry into a designated
distressed community, need for subsidy, extent of distress.
Comment: The more strictly the CDFI Fund applies these criteria, the
more likely the program is to do some good for low-income
communities--rather than simply rewarding banks for noncontroversial,
risk-free activities that they might have undertaken anyway.
Applicants
Non-insured subsidiaries of depository institutions may not apply directly.
Neither can an insured depository institution apply in order to capitalize
its subsidiary.
SEC. 115. RECORDKEEPING
Each CDFI participating will be required "to compile such data, as is
determined to be appropriate by the Fund, on the gender, race, ethnicity,
national origin, or other pertinent information concerning individuals that
utilize the services of the assisted institution to ensure that targeted
populations and low-income residents of investment areas are adequately served."
Comment: It should not be the intent of the CDFI Fund to require a
survey of every account-holder or borrower at a CDFI. Obtaining income
statistics on every CDCU member would be burdensome, if not impossible
and/or inappropriate.
Each CDFI will have to submit an annual report to the Fund, detailing its
progress toward performance goals, financial status, etc.
Comment: The Conference Report makes reference to an audited financial
statement; however, this does not seem to be included in the law itself. If
this requirement is enforced, it should apply only to uninsured CDFIs, not
to credit unions are other regulated institutions.
SEC. 116. SPECIAL PROVISIONS WITH RESPECT TO INSTITUTIONS
THAT ARE SUPERVISED BY FEDERAL BANKING AGENCIES
The CDFI fund is to consult with banking agencies before providing
assistance to an insured CDFI, or to a CDFI that has an insured depository
as its community partner.
Before imposing reporting requirements on an insured CDFI, the Fund is to
determine whether it can get the necessary information from a banking
agency. It will try to eliminate duplicative requests.
The CDFI Act states that "Nothing in this section shall be construed to
permit the Fund to require an insured community development financial
institution... to obtain, maintain, or furnish an examination report of any
appropriate Federal banking agency or records contained in or related to
such a report." However, the CDFI Fund and banking agencies are to
"promptly notify each other of material concerns" about the CDFI. Before
the CDFI Fund imposes any sanctions, it is to notify the banking agency. If
the banking agency objects and determines that the sanction would have an
adverse effect on safety and soundness, it can block the sanction. The Fund
and the banking agency are to cooperate and respond to requests from each
other in a way that promotes safety and soundness.
Question: The Act seems to strike a fair balance between the need for
confidentiality and the need to consult and coordinate with regulators.
What do you think?
SEC. 117. STUDIES AND REPORTS, EXAMINATION AND AUDIT
The Fund is to carry out annual evaluations of its activities and those of
CDFIs. It is to conduct a study of lending and investment practices on
Indian reservations and trust lands to identify barriers to private
financing and the impact of such barriers on access to credit and capital
for Native Americans. Other optional studies may be done. Thirty months
after the appoint of the administrator, the Comptroller General is to submit
a report evaluating the Fund. Various agencies and organizations, including
consumer, community, and reinvestment organizations, are to be consulted.
According to the Conference Report, the annual performance report of the
CDFI Fund "will, among other things, analyze and compare the overall
leverage of Federal assistance provided pursuant to Sections 108, 113 and
114 with private resources, and the impact of the expenditure of such
resources on investment areas,' targeted populations,' and qualified
distressed communities.' The performance report should also describe the
Administrator's efforts to allocate, to the maximum extent practicable, the
funds authorized under section 121(a) to support the activities of community
development financial institutions."
Comment: This section reemphasizes the concern that the CDFI Fund
leverage private money. It also seems to repeat the concern that CDFIs be
helped by the Fund--possibly a worry that the Section 114 program (the
former "Bank Enterprise Act") could be used simply to enhance the financials
of banks.
SEC. 118. INSPECTOR GENERAL
One shall be appointed at the Fund.
SEC. 119. ENFORCEMENT
Regulations are to be issued within 180 days after the CDFI Administrator
is appointed. Conflict of interest situations should be addressed for
non-insured CDFIs.
Comment: Insured CDFIs, like CDCUs, will be governed by the conflict of
interest regulations they current live under.
SEC. 120. COMMUNITY DEVELOPMENT REVOLVING LOAN FUND
FOR CREDIT UNIONS
This section allows NCUA to invest idle funds and earn income for the
Community Development Revolving Loan Program for Credit Unions. It formally
allows NCUA to impose matching fund requirements and to use interest income
for technical assistance.
Comment: For years, whenever a CDCU paid money back to NCUA, it simply
sat in the Treasury until it was loaned out again. It did not earn interest
for the Program. If it had, the Revolving Loan Fund would probably be worth
$10 million or more by now, instead of $6.7 million. This provision makes a
long-overdue improvement to the Revolving Loan Fund.
SEC. 121. AUTHORIZATION OF APPROPRIATIONS
This provides the totals for the fiscal years 1995-1998: $60, 104, 107,
111 million.
Administrative expenses are not to exceed $5.5 million each year.
Technical assistance expenses are not considered administrative expenses.
Assistance to institutions which enhance liquidity shall not exceed 5% of
the authorized amounts.
One-third of the appropriated amounts shall be used for the Section 114
program [former Bank Enterprise Act].
"The Administrator shall allocate funds authorized under this section, to
the maximum extent practicable, for the support of community development
financial institutions."
The Community Development Loan Program for Credit Unions has the following
authorizations over Fiscal Years: $4, 2, 2, and 2 millions.
Appropriated amounts are subject to discretionary spending caps.
Expenditures for this program reduce the amount available for other
discretionary programs.
Comment:
*The figures here total $382 million; President Clinton has actually
requested a total of $500 million.
*While numbers are given here for the Community Development Revolving
Loan Program for Credit Unions, no appropriation was ever made. Until an
appropriation is made, the program will NOT be increased by a single dollar.
*The CDFI Fund is discretionary spending. If money is spent for this
program, there will be less available for other federal programs. This
means the CDFI Fund will have to compete with other housing and human
service programs.
This post transferred from the cdb-l mailing list
Unions (NFDCDCU) has prepared this line by line analysis of the Key
Regulatory Issues in The CDFI Act. You may address comments to this list
of to NFCDCU at 120 Wall Street, NYC. 212-890-3274, (FAX) 212-513-7191,
70156.1074@compuserve.com
Part 2
SECTION-BY-SECTION COMMENTARY
SEC. 101. SHORT TITLE
The short title is the "Community Development Banking and Financial
Institutions Act of 1994."
SEC. 102. FINDINGS AND PURPOSES
This section talks about the problems in urban, rural, and Native American
communities, and the need for "coordinated development strategies. intensive
supportive services, and increased access to equity investments and loans
for development activities."
Comment: If your CDCU has not already begun communicating with other
community development organizations, it would be a good idea to start
discussions now to "coordinate" your strategies.
SEC.103. DEFINITIONS
Here are the definitions most relevant to CDCUs.
"Community Development Financial Institution." There are five
characteristics tests that a CDFI must have. To qualify as a CDFI, an
institution should:
1. have a "primary mission of promoting community development."
2. serve "an investment area or targeted population." ["Investment area"
and "targeted population" are defined and discussed below.]
3. provide "development services" [defined and discussed below].
4. maintain "representation" from, or "accountability to" the residents of
the investment area or targeted population.
5. not be an agency of the federal, state, or local government.
Comment: This definition raises a series of questions. How does an
applicant demonstrate its "primary mission"? Must it have a mission
statement with these words in it? Is it sufficient to have a mission
statement? that enough? Should an institutions be considered a CDFI only
because it has the "right" mission statement? Shouldn't an institution be
qualified as a CDFI if its past work centered around "community
development"--even if it doesn't have a mission statement that spells this
out?
Furthermore, what does "primary" mission mean? Does it mean that a certain
percentage of loans should go for "community development" purposes? That a
certain portion of the beneficiaries be low-income or disadvantaged?
Please consider and comment to NFCDCU on the following questions.
1. Should any credit union which is designated "low-income" by regulators
be automatically presumed to be a "community development financial
institution"?
An advantage of this approach is that it would allow the majority of CDCUs
to qualify with no fuss or bother; being listed by NCUA as "low-income"
would be sufficient.
A possible disadvantage of this approach is this. In the last two years,
many large employee-based credit unions have been designated as
"low-income." If we agree that low-income designation is enough, these
institutions will be likely to qualify.
2. Should credit unions which can demonstrate a history of service to
minority communities, a long-standing mission statement of community
development, or service to underserved communities qualify, even if they do
not have "low-income designation?"
3. Please keep in mind that some community development banks or loan funds
or microenterprise funds may, in fact, serve the small business community,
or mixed-income communities, or other groups which may be less disadvantaged
than a CDCU membership. Very likely, they will qualify as "CDFIs."
If that is the case, would you agree that it is better to keep the doors
open as widely as possible to as many CDCUs and other credit unions serving
low-income and/or minority communities--even if they have not
"traditionally" been associated with the CDCU movement?
"Community Partner"
The CDFI Act envisions a wide variety of "community partners" working with
CDFIs. These partners could include banks, credit unions, nonprofits, state
or local government agencies, and Small Business Investment Companies.
These community partners are supposed to be organizations that provide
"loans, equity investments, or development services."
Comment: Please note that this concept does provide a role for mainstream
credit unions, as well as other institutions, such as banks and nonprofits,
that CDCUs often work with. It could open up new horizons and resources for
some CDCUs. In particular, it could provide a way for "mainstream" credit
unions to aid in community development without actually extending their
fields of membership to low-income areas.
"Community Partnership"
This means an "agreement" between a Community Development Financial
Institution and a community partner, as defined above, to provide loans,
equity, and development services.
"Development Services"
These services may include business planning, financial and credit
counseling, and "marketing and management assistance" (presumably, to
small-business borrowers).
Comment: CDCUs should not have too much trouble proving that they provide
"development services," which could include budget counseling for low-income
consumers--something that virtually every CDCU has done at one time or
another. On the other hand, many CDCUs do not offer these "development
services" formally. And many CDCUs do not concentrate on assistance to
small businesses, an activity in which the CDFI Act is quite interested.
"Indian Reservation"
The definition tracks the Indian Child Welfare Act of 1978.
"Indian Tribe"
This includes groups "recognized as eligible for the special programs and
services provided by the United States to Indians because of their status as
Indians."
"Insured Community Development Financial Institution"
This section clearly includes credit unions which meet the definition of a
CDFI (see above).
"Insured Credit Union"
This refers to Sec. 101(7) of the Federal Credit Union Act. It means a
federally-insured credit union.
"Insured Depository Institution"
This refers to Sec. 3 of the Federal Deposit Insurance Act. It does NOT
include credit unions.
"Investment Area"
There are alternate ways of qualifying as an "investment area."
*The area (which may include an Indian reservation) may meet "objective
criteria of economic distress," which may include percentage of low-income
families, unemployment rate, rural outmigration, etc. In addition, the area
should have "significant unmet needs for loans or equity investments."
*Alternatively, the area may be one that "encompasses or is located in an
empowerment zone or enterprise community" according to an IRS definition of
1986.
"Low-Income"
For metropolitan areas, this means 80% or less of the area median
income--adjusted for family size.
For non-metro areas, there are two standards, of which the higher figure
may be used: (a) 80% of the area median income; OR
(b) 80% of the statewide nonmetro area median.
"Targeted Population"
The CDFI Act defines this term as individuals or an identifiable group--
including an Indian tribe--who are "low-income" or "otherwise lack adequate
access to loans or equity investments."
The Conference Report elaborates somewhat. It says that the CDFI Fund
"should focus on low income persons and those who are otherwise underserved
by financial institutions (including those historically denied access to
financial services based on their race, gender, ethnicity, or national
origin)."
Question: Does the "targeted population" have to consist entirely of
low-income persons or those lacking adequate access to financial
services--or can the population predominantly meet the test?
Comment: The Conference Report for this section also refers to Section 115,
under which "the Fund will require assisted institutions to compile and
maintain disaggregated data to ensure that targeted populations are
adequately served and to demonstrate success in meeting their performance
goals." In other words, if an applicant specifies it intends to target, for
example, a minority community, it will have to keep statistics that
demonstrate it actually is serving that community.
SEC. 104. ESTABLISHMENT OF
NATIONAL FUND FOR COMMUNITY DEVELOPMENT BANKING
The CDFI Fund will not be affiliated with any other Federal agency or
department.
There will be a 15-person Community Development Advisory Board appointed by
the President. In addition to Cabinet secretaries, the Board will include
nine private citizens, made up as follows:
2 who are officers of existing CDFIs
2 who are officers of insured depository institutions
2 who are officers of national consumer or public interest organizations
2 individuals with expertise in community development
1 individual "who has personal experience and specialized expertise in the
unique lending and community development issues confronted by Indian tribes
on Indian reservations."
Question: Can CDCUs qualify under both the categories of "existing CDFIs"
and "insured depositories"?
SEC. 105. APPLICATIONS FOR ASSISTANCE
New applications to the CDFI must address at least the elements below.
(more may be required by the Fund, if it wishes). Each application must:
(1) "establish that the applicant is, or will be, a community development
financial institution"
(2) "include a comprehensive strategic plan for the organization that
contains--
(A) a business plan of not less than 5 years in duration that demonstrates
that the applicant will be properly managed and will have the capacity to
operate as a community development financial institution that will not be
dependent upon assistance from the Fund for continued viability;
(B) an analysis of the needs of the investment area or targeted population
and a strategy for how the applicant will attempt to meet those needs;
(C) a plan to coordinate use of assistance from the Fund with existing
Federal, State, local, and tribal government assistance programs, and
private sector financial services;
(D) an explanation of how the proposed activities of the applicant are
consistent with existing economic, community, and housing development plans
adopted by or applicable to an investment area or targeted population; and
(E) a description of how the applicant will coordinate with community
organizations and financial institutions which will provide equity
investments, loans, secondary markets, or other services to investment areas
or targeted populations;"
(3) "include a detailed description of the applicant's plans and likely
sources of funds to match the amount of assistance requested from the Fund"
The Conference Report elaborates that the "central component of the
application is the institution's comprehensive strategic plan." It is
vital that the institution will become "financially viable (not dependent on
future assistance)". The institution will have to show that it is able to
"catalyze redevelopment."
Comment: CDCUs should be in good shape in terms of demonstrating
financial viability. However, they may have to struggle with developing
comprehensive strategic plans to identify and address community needs.
Also, many CDCUs may be weaker in demonstrating that they serve "catalyzing"
roles--that is, CDCUs are not necessarily the institutions that "make things
happen" and draw in other resources.
SEC. 106 COMMUNITY PARTNERSHIPS
Section 103, "Definitions," listed the kinds of organizations which can
serve as community partners. This section, Sec. 106, addresses the nature
of the community partnerships. Applications to the CDFI for community
partnerships:
*must indicate the roles each partner will play
*indicate how the partnership "enhances" the CDFI's activities
*must indicate how the partnership is consistent with the strategic plan
Partnership applications will receive favorable consideration if they show:
*that the partner(s) of the CDFI are active participants
*that their role makes the CDFI's plan more likely to succeed
*that the partnership will provide better service to the investment area
or target community than the CDFI could alone.
The Fund may not provide assistance to the partner or its affiliates;
assistance may be provided only to the CDFI. It is also stated that "The
Fund may establish additional guidelines and restrictions on the use of
Federal funds to carry out community partnerships."
The Conference Report notes that it is the conferees' intent "to leverage
Federal resources and to encourage collaboration between community
development financial institutions and other organizations." However, the
Conference Report also mentions that it is "critical for the Fund to closely
scrutinize the relationship between community partners and community
development financial institutions." The goal is to assure that the partner
working with the CDFI has "a strong track record of promoting lending or
equity investments for community development purposes" and that an
improvement in services will result will result from the partnership.
Performance goals will have to be specified in the community partnership
agreement.
Comment: Among community groups, there is considerable wariness about the
possibility of partnerships which would serve the interests of third
parties, like banks. The CDFI Act and the Conference Report language show a
strong Congressional interest in preventing misuse of the CDFI Fund by third
parties.
SEC. 107. SELECTION OF INSTITUTIONS
This section describes (a) the specific criteria for selecting applicants;
(b) the desire for the Fund to "fund a geographically diverse group of
applicants, which shall include applicants from metropolitan,
nonmetropolitan, and rural areas."
There are 14 specific criteria.
"(1) the likelihood of success of the applicant in meeting the goals of its
comprehensive strategic plan"
Comment: This criterion favors groups with solid, well-developed and
feasible plans.
" (2) the experience and background of the management team"
Comment: This would appear to favor those with lengthy experience,
professional qualifications, expertise in a variety of community development
areas, etc. Newly-organized CDFIs would be at a disadvantage, unless they
hired experienced management.
"(3) the extent of need for equity investments, loans, and development
services within the investment areas or targeted populations"
Comment: This criterion could help CDCUs in very underserved areas, which
have few banks.
"(4) the extent of economic distress within the investment areas or the
extent of need within the targeted populations, as those factors are
measured by objective criteria"
Comment: Groups in very low-income areas would be favored by this criterion.
"(5) the extent to which the applicant will concentrate its activities on
serving its investment areas or targeted populations"
Comment: This might help groups with a clear, well-defined focus on the
poor, rather than those which serve a widespread, economically mixed area or
population.
"(6) the amount of firm commitments to meet or exceed the matching
requirements and the likely success of the plan for raising the balance of
the match"
Comment: This provision could help CDCUs and other CDFIs with large
retained earnings (see the discussion of retained earnings, below). It
would likely favor large, highly visible institutions with strong,
well-established linkages to banks, foundations, and corporations.
Conversely, the most isolated CDFIs and those serving the lowest-income
populations might be at a significant disadvantage.
CDCUs might want to consider obtaining deposit commitments from NFCDCU's
Capitalization Program, which may have a substantial amount of below-market
deposits available for matching purposes when the CDFI Fund opens the
application process.
"(7) the extent to which the matching funds are derived from private sources"
Comment: Similar to the previous criterion, this would tend to favor
CDFIs with strong bank, corporate, and foundation links. It might also help
CDCUs, which can draw on member deposits and/or donations, rather than
depending on local government.
"(8) the extent to which the proposed activities will expand economic
opportunities within the investment areas or the targeted populations"
Comment: It is not altogether clear which institutions would be favored
by this provision. It is likely that CDFIs with a strong job-creation focus
and track record would do well.
"(9) whether the applicant is, or will become, an insured community
development financial institution"
Comment: CDCUs, as well as community development banks, would be favored
in comparison to revolving loan funds and microenterprise funds.
"(10) the extent of support from the investment areas or targeted populations"
Comment: This provision ought to provide a competitive advantage to CDCUs,
which draw support as well as lend to large numbers of people and community
organizations within their service areas. Other CDFIs are often more
reliant on outside investors.
"(11) the extent to which the applicant is, or will be, community-owned or
community-governed"
Comment: This provision seems custom-made for CDCUs.
"(12) the extent to which the applicant will increase its resources through
coordination with other institutions or participation in a secondary market"
Comment: The level of involvement of CDCUs with other institutions or
secondary market is uneven; some do a substantial amount, while others do
little. Other types of CDFIs sometimes have a high level of involvement,
especially with banks. This would be a good time for CDCUs to consider
linking up with secondary market programs like Fannie Mae, Freddie Mac,
LISC, or others.
"(13) in the case of an applicant with a prior history of serving investment
areas or targeted populations, the extent of success in serving them"
Comment: A CDCU with a relatively long history and/or a large membership
and/or a history of making many loans to low-income people with a
respectable loan loss rate should do well under this criterion.
"(14) other factors deemed to be appropriate by the Fund."
Comment:
*Are there any other factors you believe should be considered?
*There is no indication that these criteria are necessarily listed in
terms of descending importance. Do you have views about their relative
importance and the weight that should be given to each?
*It is unlikely that any one candidate would achieve the highest scores
under each criterion. But CDCUs generally seem well-positioned according to
a number of the criteria. Where they may fare less well, on average, than
other CDFIs (including community development banks and large community
development corporations) could be in the areas of capacity, management,
and ability to leverage outside funds.
SEC. 108. ASSISTANCE PROVIDED BY THE FUND
(a) Forms of Assistance
The CDFI Fund may provide
(A) "financial assistance through equity investments, deposits, credit
union shares, loans, and grants; and
(B) technical assistance..."
Equity investments are not be of such an amount as to give the CDFI Fund
control over a CDFI; these investments are to be "transferable, nonvoting
equity."
Deposits are not subject to any requirement for collateral or security/
Comments:
*The description of equity investments clearly contemplates stock-type
investments. To be useful for credit unions, some issues will need to be
clarified. Can equity include "donated equity" to credit unions, as well as
other non-liability accounts? Can "equity" include deposits that are used
to collateralize loans? Will "equity investments" have to pay dividends back
to the CDFI Fund?
*Please see the Conference Report language below, which discusses
"retained earnings"
*It is very helpful that deposits will not be subject requirements for
collateral or security. When government agencies make deposits in financial
institutions in excess of $100,000, they often want additional security in
the form of Treasury bills, which makes those programs of considerably less
interest to CDCUs.
This is what the Conference Report says regarding "retained earnings."
The Conferees recognize that retained earnings enable community development
financial institutions, like conventional financial institutions, to
increase their ability to leverage new funds for the communities they serve
by building equity or net worth. For the purpose of meeting the matching
requirements of Section 108(e), it is the intent of the Conferees that
retained earnings of existing community development financial institutions
shall qualify as matching resources. However, it is not the intent of the
Conferees to permit applicants to pledge future earnings to meet their
matching requirements. Furthermore, it is not the intent of Congress to
limit the amount of such retained earnings that may used [sic] toward
meeting the matching requirements. Start-up or net worth financing shall
not be treated as retained earnings under this Subtitle.
Comment:
*One of NFCDCU's biggest victories was getting Conference Report language
allowing applicants to use accumulated retained earnings to meet the
matching requirements. Please note that this provision is not in the Act
itself. Report language is not absolutely binding the way the law itself
is. But we can make a strong case that it should be considered in writing
the regulations.
*Allowing retained earnings to count as match will greatly help many
CDCUs, which have generated their own internal capital over the years. The
more capital they have generated and kept, the better off they will be.
Some may not need to even look to outside sources, if retained earnings can
be fully counted.
*CDFIs which have been totally dependent on grants for operating support
and which haven't build up retained earnings may be at a disadvantage.
*New CDCUs won't get much help from this provision since they usually
haven't been able to build up much retained earnings yet (On the other
hand, new CDCUs are probably the ones that have been most successful at
raising grant dollars from outside sources.)
*The CDFI Fund may not be inclined to let CDFIs use only retained earnings
as matching funds, since this would not bring any "new money" into community
development.
Questions:
1. What should be included in the term "retained earnings"? Undivided
earnings? Net income? Contingency reserves? Allowance for loan losses?
Other accounts? Please specify.
2. Should there be any limit on the amount of retained earnings that can
be used as matching funds? The report language says there should not be a
restriction. But CDFI Fund transition team members have expressed concern
that the biggest institutions, with the most retained earnings, would get
the lion's share of the money. They ask whether perhaps there should be a
"sliding scale"--for example, retained earnings over a certain level ($1
million?) would only receive partial credit, so that the really big players
(including community development banks) won't have so great an advantage?
What do you think?
3. As a technical matter, do we need to define retained earnings as
"equity" so as to be sure to qualify for donations of equity from the CDFI Fund?
(b) Uses of financial assistance
Eligible uses for money received from the CDFI Fund include the following:
(A) commercial facilities that support revitalization, job creation, etc.
(B) businesses that provide for low-income people or are owned by
low-income people or make products and services more available to low-income
people
(C) community facilities
(D) "the provision of basic financial services"
(E) housing that is "principally affordable to low-income people," as well
as homeownership assistance for low-income people if these are not provided
by other lenders, or else complement the services and lending products of
other lenders.
(F) other businesses and activities that the Fund deems appropriate
Funds may NOT be used for lobbying or to influence public officials to
obtain public funds
Comment: NFCDCU fought successfully for inclusion of "basic financial
services" in the above listing, to ensure that those CDCUs which are
primarily involved in providing deposits and consumer loan services to their
members could qualify for the CDFI Fund.
(c) Uses of Technical Assistance
Capacity-building. training of management and other personnel, and
development of products and services qualify. CDFIs will be able to apply
for technical assistance even if they don't get financial assistance from
the Fund.
(d) Amount of Assistance:
Any one CDFI can only get $5 million in a three-year period--except that it
can get an additional $3.75 million to establish a subsidiary or affiliate
outside of its state and metropolitan area.
The Fund may disburse assistance in one lump sum, or over a period of time.
(e) Matching requirements:
This is what the CDFI Act states.
"Assistance other than technical assistance shall be matched with funds
from sources other than the Federal Government on the basis of not less than
one dollar for each dollar provided by the Fund. Such matching funds shall
be at least comparable in form and value to assistance provided by the Fund.
The Fund shall provide no assistance (other than technical assistance) until
a community development financial institution has secured firm commitments
for the matching funds required."
Under certain conditions, a less demanding match may be imposed on
applicants. But the CDFI Fund can put out no more than 1/4 of its annual
total under these lessened conditions in any year.
"In the case of an applicant with severe constraints on available sources
of matching funds, the Fund may permit an applicant to comply with the
matching requirements of paragraph (1) by--
(A) reducing such matching requirement by 50 percent;" or in the case of a
non-metro institution with less than $100,000 in assets and a request of no
more than $25,000, allowing the applicant to change the form of the match.
Comments:
*There is no apparent prohibition against seeking an operating grant from
the CDFI Fund, although the law clearly intends for CDFIs to become
"financially viable."
*Can an applicant request a combination of assistance in various
forms--e.g., grants plus deposits or shares? We think it should be able to.
*Can an applicant request a grant from the Fund for one purpose (e.g.,
building its equity) while matching it with a grant from a private source
that it uses for another purpose (e.g., for operations)?
*In judging whether an applicant has "severe constraints" on matching
funds, the CDFI Fund should take into account the degree of distress,
isolation, rural poverty, etc.
*What Is Section 105(a)(9) of the Housing and Community Development. Act
of 1974? These monies are to be considered Federal.
(f) Terms and Conditions
Before an applicant gets assistance, it must "enter into an agreement that
requires the institution to comply with performance goals and abide by other
terms and conditions..."
Performance goals are to be based upon an applicant's strategic plan.
According to the Conference Report language, "performance goals... will be
based on the assessment of community needs and plans for addressing the
needs described in the institution's strategic plan."
"Performance goals for insured community development financial institutions
shall be determined in consultation with the appropriate Federal banking
agency."
Comments:
*NCUA gets a role in determining the performance goals of a CDCU.
The Fund is directed to seek input on a CDFI's performance from any
appropriate tribal government when an assisted CDFI serves an investment
area which includes an Indian reservation or a targeted population that
includes a tribe.
(h) No Authority to Limit Supervision and Regulation
The CDFI Fund cannot limit the authority of banking regulatory agencies to
supervise and regulate.
Comment: This means that the CDFI Fund cannot override NCUA.
The Conference Report states that "the Fund will assist a variety of
different types of institutions that fall within the definition of community
development financial institution."
Comment: The CDFI will support a mix of community development banks,
loan funds, credit unions, microenterprise funds, and others. It is
possible that a weaker institution of one type could be funded rather than a
stronger one of another type, in the interests of diversity.
SEC. 109. TRAINING
The CDFI Fund is to provide "educational programs" to assist CDFIs and
other financial services providers in developing lending and investment
products, underwriting and servicing loans, providing development services, etc.
The Fund may contract with other organizations to provide training programs.
SEC. 110. ENCOURAGEMENT OF PRIVATE ENTITIES
The Fund may "facilitate" the organizing of corporations to assist CDFIs.
However, these corporations may not be operated by federal, state, or local
government agencies.
Comment: It is not clear what "facilitate" means. Is financial
assistance included? Are these "private entities" to be lending or
secondary-market institutions? Technical assistance organizations?
Advocacy groups?
SEC. 111. COLLECTION AND COMPILATION OF INFORMATION
The Fund is to gather information about CDFIs and make it available, for
the purpose of assisting and expanding CDFIs.
SEC. 112. INVESTMENT OF RECEIPTS AND PROCEEDS
Any money the CDFI Fund makes on its investments in equity, shares, or
deposits can be used for the purposes of the Fund.
SEC. 113. CAPITALIZATION ASSISTANCE TO ENHANCE LIQUIDITY
The Act states that "The Fund may provide assistance for the purpose of
providing capital to organizations to purchase loans or otherwise enhance
the liquidity of community development financial institutions..." The
purpose of the organization must be community development. All recipients
must match CDFI funds dollar for dollar, comparable in form and value to
CDFI Funds.
No single organization can obtain more than $5,00,000 during a three-year
period.
Comment: This provision was originally sought by the Local Initiatives
Support Corporation (LISC), which wanted to make its secondary-market
affiliate, LIMAC, eligible for the CDFI Fund. However, a number of other
organizations would seem to qualify, including NFCDCU's Capitalization
Program. A number of technical questions about this section remain to be
answered.
*Will retained earnings qualify as matching funds?
*Will these organizations be required to prepare a five-year business plan
and fulfill the other requirements applicable to CDFIs? Does the
organization need to serve an investment area or targeted population, or may
it be national in scope?
*Does receiving assistance under this provision prevent an organization
from becoming a contractual provider of technical assistance to the CDFI Fund?
SEC. 114. INCENTIVES FOR DEPOSITORY INSTITUTION PARTICIPATION
The Administrator of the CDFI Fund gains the powers that the "Community
Enterprise Assessment Credit Board" had under the original Bank Enterprise
Act of 1991 [which was passed but never funded). The Administrator can
designate those "qualified distressed communities" to which funding is directed.
Comment: The Bank Enterprise Act of 1991 was sponsored by Rep. Floyd
Flake, who is its strongest supporter. The intention was to give banks
monetary incentives to invest in community development activities as
outlined below. The program was not originally funded, but now will claim
one-third of the total appropriation of the CDFI Fund each year. However,
on the positive side: (a) the CDFI Administrator controls the program and
(b) there is an emphasis on using the program to support CDFIs.
Question: Can CDCUs participate in this program and receive cash awards?
If so, CDCUs will have two options--either applying for the "main" part of
the CDFI Program, which provides more money but requires matching funds; OR
applying for this "Bank Enterprise Act" program, which provides less money
but does not require a match. NFCDCU is currently seeking clarification
from the CDFI Fund transition team.
Awards under this program are to be made through a competitive process,
only to depository institutions, for "qualified activities" in "qualified
distressed communities."
"Qualified activities" may include
"the provision of new lifeline accounts by an insured depository institution"
loans (to develop or support commercial facilities that enhance
revitalization, for business creation, community facilities, affordable
home ownership, and rental housing)
providing technical assistance (through consumer education programs; to
newly formed small businesses; for loan servicing for low- and
moderate-income homeowners)
"any increase during the period in the amount of new equity investments in
community development financial institutions"
other activities as deemed appropriate
The Conference Report states that "the Administrator should allocate
appropriated funds, to the maximum extent practicable, to support equity
investment in community development financial institutions."
Comment:
*If CDCUs are allowed to participate in this program, can their basic
savings accounts be considered "lifeline accounts"? What characteristics do
these accounts need to have?
*Is there a need to define "equity investments" so as to explicitly
include CDCUs?
*What procedures will the Fund use in declaring "qualified distressed
communities?"
Amount of credit:
A depository institution that is not a CDFI may apply for an award equal to
5% of the value of its eligible qualifying activities. However, a CDFI
performing these activities and competing successfully may get an award
equal to 15%. A depository institution that makes an equity investment in a
CDFI qualifies to compete for an award of 15% of its total investment.
The Conference Report states that the amount of assistance to an
institution "is computed based on the weighted periodic increases in loans,
services, technical assistance, and investment by the applicant bank or
thrift." Furthermore, "Award caps are included to ensure that Section 114
assistance is distributed to maximize the benefit to a greater number of
underserved communities."
Double funding for the same activity is prohibited.
A CDFI cannot get an award under this program if it has recently gotten, or
has currently applied for, other financial support from the CDFI program.
Priority for support of CDFIs
The Act states that "The Board shall give priority to institutions that
have supported the efforts of community development financial institutions
in the qualified distressed community."
The Conference Report stresses that "the Conferees hope to immediately
affect economically distressed communities through infusion of private
dollars into loans, services, technical assistance, and equity investments
in community development financial institutions." They wish to create "a
priority for equity investments in community development financial
institutions...." Further, the Conferees "hope that Section 114 supported
investments in community development financial institutions will be a
catalyst for establishment of permanent private banking relationships to
ensure that CDFIs thrive for the benefit of the people in the neighborhoods
they serve."
Comment: The desire to channel as much of this program's money into CDFIs
seems quite clear. But banks and other depositories could get awards more
cheaply and easily by taking on "safe" projects like consumer education.
Other factors to consider
In reviewing applications, the CDFI Board is to consider degree of
difficulty of the qualifying activity of an applicant, community impact,
innovation, leverage, and size of assets, new entry into a designated
distressed community, need for subsidy, extent of distress.
Comment: The more strictly the CDFI Fund applies these criteria, the
more likely the program is to do some good for low-income
communities--rather than simply rewarding banks for noncontroversial,
risk-free activities that they might have undertaken anyway.
Applicants
Non-insured subsidiaries of depository institutions may not apply directly.
Neither can an insured depository institution apply in order to capitalize
its subsidiary.
SEC. 115. RECORDKEEPING
Each CDFI participating will be required "to compile such data, as is
determined to be appropriate by the Fund, on the gender, race, ethnicity,
national origin, or other pertinent information concerning individuals that
utilize the services of the assisted institution to ensure that targeted
populations and low-income residents of investment areas are adequately served."
Comment: It should not be the intent of the CDFI Fund to require a
survey of every account-holder or borrower at a CDFI. Obtaining income
statistics on every CDCU member would be burdensome, if not impossible
and/or inappropriate.
Each CDFI will have to submit an annual report to the Fund, detailing its
progress toward performance goals, financial status, etc.
Comment: The Conference Report makes reference to an audited financial
statement; however, this does not seem to be included in the law itself. If
this requirement is enforced, it should apply only to uninsured CDFIs, not
to credit unions are other regulated institutions.
SEC. 116. SPECIAL PROVISIONS WITH RESPECT TO INSTITUTIONS
THAT ARE SUPERVISED BY FEDERAL BANKING AGENCIES
The CDFI fund is to consult with banking agencies before providing
assistance to an insured CDFI, or to a CDFI that has an insured depository
as its community partner.
Before imposing reporting requirements on an insured CDFI, the Fund is to
determine whether it can get the necessary information from a banking
agency. It will try to eliminate duplicative requests.
The CDFI Act states that "Nothing in this section shall be construed to
permit the Fund to require an insured community development financial
institution... to obtain, maintain, or furnish an examination report of any
appropriate Federal banking agency or records contained in or related to
such a report." However, the CDFI Fund and banking agencies are to
"promptly notify each other of material concerns" about the CDFI. Before
the CDFI Fund imposes any sanctions, it is to notify the banking agency. If
the banking agency objects and determines that the sanction would have an
adverse effect on safety and soundness, it can block the sanction. The Fund
and the banking agency are to cooperate and respond to requests from each
other in a way that promotes safety and soundness.
Question: The Act seems to strike a fair balance between the need for
confidentiality and the need to consult and coordinate with regulators.
What do you think?
SEC. 117. STUDIES AND REPORTS, EXAMINATION AND AUDIT
The Fund is to carry out annual evaluations of its activities and those of
CDFIs. It is to conduct a study of lending and investment practices on
Indian reservations and trust lands to identify barriers to private
financing and the impact of such barriers on access to credit and capital
for Native Americans. Other optional studies may be done. Thirty months
after the appoint of the administrator, the Comptroller General is to submit
a report evaluating the Fund. Various agencies and organizations, including
consumer, community, and reinvestment organizations, are to be consulted.
According to the Conference Report, the annual performance report of the
CDFI Fund "will, among other things, analyze and compare the overall
leverage of Federal assistance provided pursuant to Sections 108, 113 and
114 with private resources, and the impact of the expenditure of such
resources on investment areas,' targeted populations,' and qualified
distressed communities.' The performance report should also describe the
Administrator's efforts to allocate, to the maximum extent practicable, the
funds authorized under section 121(a) to support the activities of community
development financial institutions."
Comment: This section reemphasizes the concern that the CDFI Fund
leverage private money. It also seems to repeat the concern that CDFIs be
helped by the Fund--possibly a worry that the Section 114 program (the
former "Bank Enterprise Act") could be used simply to enhance the financials
of banks.
SEC. 118. INSPECTOR GENERAL
One shall be appointed at the Fund.
SEC. 119. ENFORCEMENT
Regulations are to be issued within 180 days after the CDFI Administrator
is appointed. Conflict of interest situations should be addressed for
non-insured CDFIs.
Comment: Insured CDFIs, like CDCUs, will be governed by the conflict of
interest regulations they current live under.
SEC. 120. COMMUNITY DEVELOPMENT REVOLVING LOAN FUND
FOR CREDIT UNIONS
This section allows NCUA to invest idle funds and earn income for the
Community Development Revolving Loan Program for Credit Unions. It formally
allows NCUA to impose matching fund requirements and to use interest income
for technical assistance.
Comment: For years, whenever a CDCU paid money back to NCUA, it simply
sat in the Treasury until it was loaned out again. It did not earn interest
for the Program. If it had, the Revolving Loan Fund would probably be worth
$10 million or more by now, instead of $6.7 million. This provision makes a
long-overdue improvement to the Revolving Loan Fund.
SEC. 121. AUTHORIZATION OF APPROPRIATIONS
This provides the totals for the fiscal years 1995-1998: $60, 104, 107,
111 million.
Administrative expenses are not to exceed $5.5 million each year.
Technical assistance expenses are not considered administrative expenses.
Assistance to institutions which enhance liquidity shall not exceed 5% of
the authorized amounts.
One-third of the appropriated amounts shall be used for the Section 114
program [former Bank Enterprise Act].
"The Administrator shall allocate funds authorized under this section, to
the maximum extent practicable, for the support of community development
financial institutions."
The Community Development Loan Program for Credit Unions has the following
authorizations over Fiscal Years: $4, 2, 2, and 2 millions.
Appropriated amounts are subject to discretionary spending caps.
Expenditures for this program reduce the amount available for other
discretionary programs.
Comment:
*The figures here total $382 million; President Clinton has actually
requested a total of $500 million.
*While numbers are given here for the Community Development Revolving
Loan Program for Credit Unions, no appropriation was ever made. Until an
appropriation is made, the program will NOT be increased by a single dollar.
*The CDFI Fund is discretionary spending. If money is spent for this
program, there will be less available for other federal programs. This
means the CDFI Fund will have to compete with other housing and human
service programs.
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