For Community Development Financial Institutions, new rules are on the way
The Treasury is changing the certification process for the first time in more than two and a half decades.
Changes are coming for the more than 1,300 federally-certified Community Development Financial Institutions, or CDFIs.
Those comprise mission-driven banks, loan funds and credit unions that aim to fill gaps in credit access in low-income and otherwise underserved communities.
The CDFI label makes them eligible for federal grants and subsidies. Now, the Treasury Department is giving the certification process a refresh for the first time since 1997. It intended to roll out the new rules in April but has put the process on hold to consider a flood of public comments.
Baltimore Community Lending is a non-profit CDFI that serves clients traditional banks might see as risky.
“We work with those businesses that do not have perfect credit, that do not have collateral,” said president and CEO Watchen Bruce. “So we fill a lot of gaps.”
In theory, the goal of every CDFI should be to “provide capital where capital doesn’t always flow,” according to Greg Fairchild at the University of Virginia School of Business.
But in the 25 years since Treasury created the CDFI Fund, there seems to have been some mission creep.
“Whether the institutions that are calling themselves CDFIs are truly serving the people who would otherwise be passed over, that’s an important question,” Fairchild said. It’s a question Treasury has been taking a hard look at.
The department’s proposal for new certification standards includes a requirement that CDFIs provide most of their financial products to underserved clients.
“And for that reason, I have been one of those who’ve been cheering,” said Lenwood V. Long, head of the African American Alliance of CDFI CEOs. “I think the CDFI brand was really not a so-called popular [one] pre-pandemic.”
Now, Long said more institutions are hopping on the bandwagon and truly mission-driven lenders have steeper competition for funding. So, he supports a higher entry point. But some longstanding community lenders fear they’ll be shut out.
A survey of Indigenous-serving CDFIs found that 70% are gravely concerned about a new ban on certain non-traditional mortgages and worry they won’t be recertified.
“There are questions about unintended consequences to those who really do meet the mission,” said Michael Swack, who directs the University of New Hampshire’s Center for Impact Finance.
He said the CDFI Fund is trying to thread a tricky needle: vetting these institutions without bleeding them dry.