In October 2016, the CDFI Fund released a five-year strategic plan. You can read the plan here. One of the opportunities we saw was the need to re-examine our CDFI certification policies so that the certification reflects the flexibility needed to reach effectively into every community that CDFIs can serve - to more nimbly respond to changes in the financial services sector while still adhering to the primary mission of community development.
We believe that engagement of the CDFI Fund network, practitioners, and the public is a vital part of this effort, so we are calling for the public’s thoughts and ideas about CDFI Certification. On January 6, the CDFI Fund issued a Request for Information (RFI), which was published in the Federal Register.
Certification as a CDFI is the first step many community–based organizations take to access CDFI Fund programs and training. Since the CDFI Fund certified its first CDFIs more than 20 years ago, their population has grown from just under 200 certified organizations in 1997 to more than 1,000 today, with total combined assets in excess of $100 billion. While this is great news, the financial sector continues to evolve and there remains room for growth of the CDFI Fund network. Having the right certification policies will aid in this effort.
CDFI investment and lending activity touches just about every facet of finance—including lending to microenterprises and entrepreneurs; commercial and residential real estate; infrastructure investment; and financial literacy training and counseling—all of which focus on providing access to critically needed capital and credit to businesses and families overlooked by the greater economic mainstream. Last year alone, CDFIs originated over $3.6 billion in loans and investments; financed 33,500 units of affordable housing; and made loans to over 11,000 small businesses. This growth is a reflection of the critical demand for the vital financial services provided by CDFIs, as well as the impact they have in underserved communities.
CDFIs have matured and evolved over the past two decades, as have the tools and opportunities available to them. The processes and policies of CDFI certification, originally established in the 1990s, need to ensure that CDFIs are able to develop operating models, products, and services to take advantage of these new tools and opportunities in order to meet the needs of underserved and distressed communities while still meeting the statutory requirements for certification.
The CDFI Fund has heard from organizations that are having difficulty utilizing new tools and growing to scale while still maintaining their CDFI certification under existing policies. For example, new financing technologies create the potential for mission-driven organizations like CDFIs to extend their reach and impact in order to improve access to financial products and services for underserved communities and populations wherever they are.
This raises questions, however, of whether CDFI certification – particularly in terms of a CDFI's ability to define a Target Market and demonstrate accountability to that Target Market – is currently designed to enable such scope, which was neither possible nor envisioned when the certification criteria were first established.
For instance, there may be a certified CDFI that has long worked in a local or statewide Investment Area that is growing in volume of activity as well as in the sophistication of their financing operation. However, if this CDFI upgrades its technical ability and begins to underwrite products for customers nationwide, in areas far beyond its historic geographic footprint, it may create a challenge for the CDFI to maintain its CDFI certification.
To meet the accountability test for CDFI certification, CDFI Fund policy currently requires the CDFI to include members on its governing and/or advisory board(s) who are residents or otherwise that can represent the needs of the residents of the CDFI’s Investment Area and/or the CDFI's Targeted Population(s). Although the CDFI in this example historically has provided appropriate accountability through its governing board, it now would be challenged to include sufficient representation to demonstrate accountability to the communities it would be serving with a nationwide Investment Area. However, the CDFI is still a mission-driven organization, and the increased volume from an expanded geographic market will likely strengthen their ability to further achieve their mission.
To help explore circumstances such as this one, the CDFI Fund is seeking feedback on questions such as “How should a CDFI demonstrate accountability to a national Target Market, in particular an Investment Area national in scope? Should there be a requirement to have local accountability to supplement a national governing or advisory board? In this context, how should the term "local” be defined?"
The CDFI Fund will tackle these and other questions – such as how the primary mission test should be met or what the criteria should be for serving Investment Areas and Targeted Populations -- when reviewing the certification criteria.
CDFI Certification represents the backbone of the nation’s on-the-ground community development finance infrastructure, and there is an enduring need to ensure this network is relevant, responsive, reliable, and representative of the CDFI Fund’s community development mission. We hope to receive thoughtful feedback from CDFIs, community development practitioners, and the general public on how we can improve and modernize the CDFI certification process.
View the full Federal Register notice here. Comments are due by March 10, 2017.
David Meyer is the Manager of the CDFI Fund's Office of Certification, Compliance Monitoring and Evaluation.