Responding to Requests for Comments on the CDFI Program
The CDFI Fund recently issued a request for comments on the CDFI Program, which provides Financial Assistance (FA) and Technical Assistance (TA) awards to both emerging and certified CDFIs across the country. According to the CDFI Fund, in FY 2012 it received 403 applications requesting approximately $395.7 million in funds – a slight increase in the number of applications it received in FY 2011 (393) – a figure which represents a little over three times the funding available for the program.
The CDFI Program is an important tool that helps CDFIs build their capacity and leverage additional resources to continue providing credit, capital, and financial services in underserved communities. FUND Consulting has helped to prepare over 300 applications for the CDFI Program and we felt particularly compelled to respond to the CDFI Fund’s request for comments this year due to application changes which impacted our own clients, and no doubt presented a challenge to many other organizations that applied.
Below are excerpts from FUND’s own comment letter highlighting three key issues that were raised by the FY 2012 application (the full comment letter can be viewed here). What are your thoughts on the CDFI Program and the changes to this year’s application? How did these changes impact your organization? Do you think that the application fairly assesses applicants?
Targeting CDFI program award funds into highly distressed communities
The CDFI Fund’s goal of targeting CDFI program funds into highly distressed areas is an important strategy and one that is essential in fulfilling the Fund’s mission to build the capacity of CDFIs to provide credit, capital and financial services in communities that need it most, but which are often overlooked. However, the means by which the CDFI Fund currently selects these communities – through the use of a priority point system to target specific geographic areas – does not always serve in the best interest of achieving this goal.
In the past, the market study section of the application served this goal well – it provided applicants with the opportunity to clearly describe the communities within their designated Target Market that demonstrated the greatest need and demand for capital and financial services. More importantly, the market study section of the application served to highlight an applicant’s understanding of its Target Market and its direct relationship with the organization’s mission, products, and real world business plan.
Although not the intent of the priority point system, because the application round is highly competitive, the reality of the system is that applicants feel as if they must commit to priority point areas in order to receive an award. Therefore, the priority points system pigeonholes most applicants, compelling them to selectively target geographic areas in order to receive priority points – even when such a strategy is not a good fit for the organization. One possible solution to this problem that would maintain the intent of the system would be to determine priority points based on the percentage of an organization’s past activities provided to highly distressed communities. This system would also build on the CDFI Fund’s goal of capacity building through the CDFI program. By awarding priority points to applicants that have a track record of serving highly distressed communities, the CDFI Fund will be supporting CDFIs that have demonstrated serving these communities as part of their business plan. It would also seek to highlight those CDFI’s with the greatest capacity and ability to effectively serve highly distressed communities.
In addition, the current priority points system excludes applicants primarily serving Other Target Populations or Low-Income Target Populations. These CDFIs are at a disadvantage due to the fact that the priority points system focuses on geographic location, thus favoring applicants whose primary Target Market is an Investment Area.
Determining applicants’ financial health and viability
The financial data that the CDFI Fund currently requests from applicants is not comparable to the actual structure of most organizations’ finances and financial statements. As such, the data collected should be more closely aligned with the way that organizations track and maintain their own finances and the manner in which audits are completed in order to streamline the information collected.
In addition, the financial data requested of regulated institutions is not consistent with the financial reviews completed by regulators. By requesting regulated entities to complete the table in the application and submit Call Reports, which are standardized among banking institutions as well as credit unions, the CDFI Fund is increasing the paperwork burden and duplicating the information provided. More importantly, the CDFI Fund should request specific peer data to provide a consistent comparison and a benchmark for regulated entity performance ratios.
Further, applicants should only be required to provide three years of financial projections instead of five. Requesting that applicants provide five years of financial projections does not align with the three year performance period for FA awardees. Additionally, projections beyond three years are not typical for business plans as they are not very accurate. Projecting out five years is difficult with the many environmental and organization changes that can take place over the course of five years.
Finally, FUND felt it was important to voice its concern over the restrictions placed on CDFI holding companies in FY 2012 and the impact it has on the future of CDFI banks and the CDFI Program:
CDFI program restrictions on CDFI holding companies
As stated in the FY 2012 NOFA, transfer of an award from a bank holding company to a subsidiary CDFI bank is not permitted. This restriction severely limits the potential impact of the award dollars as well as the strengthening of CDFI banks’ core financial strength. Further, the restriction acts as a disincentive to CDFI banks and their holding companies to participate in the CDFI program.
While an award made directly to a CDFI bank is not recognized by bank regulators as Tier 1 capital, an award transferred from a holding company to a subsidiary bank is recognized as Tier 1 capital. Tier 1 capital is considered a core financial strength by bank regulators and enables banks to leverage these dollars at a much higher rate. In short, the exact same dollars awarded by the CDFI Fund would result in much greater leverage when awarded at the holding company level. As such, the CDFI Fund should reconsider this provision to increase the impact of its awards, the resources CDFI bank awardees are able to leverage, and the services provided to underserved communities. Although currently this provision mostly affects depository institutions, we are starting to see the holding company structure more and more frequently in the nonprofit loan fund sector as well. As such, FUND Consulting respectfully requests that the CDFI Fund reexamine its position on holding companies in general, as they are a vital corporate structure to help mitigate risk for both depository institutions and loan funds alike.