What's the Deal with CDFI Certification?

Note: Friedman Associates is not affiliated with the CDFI Fund

The Current Situation

Our CDFI consulting firm does a strong business in preparing CDFI certification applications, and we are very proud of our success rate. Since the pandemic hit, the traffic to our website increased by 250%, including requests for certification application support. With the recent announcement by the CDFI Fund that a freeze on applications will be in place from October 1st, 2022 through April 1st, 2023, the rush to certification has intensified; we've received no less than a dozen inquiries.

On the surface, the rapid growth in the number of certified CDFIs seems like a good thing. The increased awareness of the role and impact of CDFIs has never been higher. At the same time, there has been a dramatic slowdown in the number of new certified CDFIs in the past year. In June and July, no organizations were certified. None? How many were declined? We don’t know. Every month, the CDFI Fund publishes only the total number of certified organizations by type.

Today, it is not unusual for applicants to wait up to nine months or more to receive a determination. Applicants would be hard pressed to tell a colleague at another organization that the CDFI application process is transparent, or that the CDFI Fund provides regular and meaningful communication regarding expected approval times. This has not gone unnoticed; in January, the National Association of Federally-Insured Credit Unions (NAFCU) wrote?to the CDFI Fund requesting enhanced transparency and communication on pending applications for credit unions seeking CDFI certification.

To be fair, if you pull back the curtain, you would see that the staff have been overwhelmed with reviewing the increasing number of applications, handling compliance issues, and pitching in on the Recovery Act programs. It’s not a sustainable situation.

The Watering Down of the CDFI “Brand”

I think there is another, and more important, reason for the slowdown. I believe that increased visibility of CDFIs has led to a deluge of applications from entities that don’t bear any resemblance to what the founders of the movement had in mind in 1995. That’s not necessarily a bad thing; today there are some very unique and innovative models in the industry. But I’m not standing alone in Right Field in saying that the generally understood ‘profile’ of a CDFI has been distorted, and the CDFI ‘brand’ has been watered down. In late 2020, a group of national and state consumer, civil rights, and housing organizations wrote a letter to the CDFI Fund on proposed changes to the Certification Application:

“It is becoming difficult to keep track of all the affirmatively harmful financial products and practices being encouraged in recent years in the name of ‘access to credit’ and ‘financial inclusion’ – which in reality exacerbate exclusion. Most CDFIs stay away from these harmful products and are true to their mission. But others do not, and at least one CDFI is charging rates as high as 190% APR in the name of financial inclusion. Moreover, in the mortgage space, we are concerned that some CDFI mortgage lenders are using the certification not to promote community development but to promote their ability to avoid the sensible underwriting requirements that apply to most non-CDFI lenders.”

One of the standard talking points about CDFIs is growth in the number of certified organizations, now at 1,372 as of July 2022. But in FY ‘21, 248 CDFIs received Financial Assistance (Base-FA) awards out of 420 applications submitted. Only a third of certified CDFIs applied for funding? I admit that’s a crude proxy for assessing performance and activity.

Maybe a better one is found in the data released in July by the CDFI Fund that examines the FY 2020 activity of CDFI Financial Assistance (FA) award recipients who are required to report their data under their Assistance Agreements. In this case, the number of CDFIs with a FA award was 400; a higher number than the 248 above because the recipients could have received their award between FY 2018-FY 2020. In other words, of the 1,173 CDFIS certified as 12/31/20, only 34% percent were operating with a CDFI Fund award.

Now compare that to the $1.25 billion in COVID-19 relief funds awarded in June 2021 by the CDFI Fund to 863 CDFIs out of a total of 1,264 certified at the time. RRP was not a competitive award. All that was required was a pulse, no compliance issues, and an outstanding portfolio. What happened to the other 400? Curiouser and curiouser…

“It's been a long, long time coming, but I know a change gonna come. Oh, yes it will.” - Sam Cooke.

The pending revisions to the certification application are nothing less than a badly needed and long overdue effort to protect the CDFI ‘brand’ and ensure that the program continues to support the provision of accessible and affordable access to capital for underserved populations . So, in light of this, I offer some advice to those seeking to ‘get in under the wire’ by September 30th. Here my five reasons for why you should take a pass until April 2023, if at all.

1. The current application backlog shows no signs of lifting. Organizations that try to ‘wing it’ by submitting applications that don’t follow the requirements only end up making the queue longer, and hurting organizations that live and breathe financing economic justice and ‘opportunity for all.’
2. Applications submitted by October 1 are not guaranteed to be eligible for FY 2023 CDFI Financial Assistance funding. The CDFI Fund has made no public guarantees that certification applications submitted by September 30th will be reviewed in time for the next FY 2023 CDFI Fund Program funding round, now announced for the fall of 2023. Emerging and existing CDFIs with assets under $5 million can apply for the TA program.
3. Inexperienced consultants. Some of the organizations that come to our doorstep have been working with consultants claiming to understand the application requirements and process. I was approached by the Executive Director of what appears to be a ‘certifiable’ nonprofit, that under the tutelage of a consultant, managed to be declined - twice. When I explained to another executive that the entity would not meet the tests, he asked me if I could refer him to another consultant. If you need a third party to help you with the application, then perform the same due diligence you would for hiring an audit firm - or a dentist - or a wedding planner, for that matter.
4. New applicants may not qualify under the new policies. At some point in 2023, all certified CDFIs will have 18 months to attest that they meet the tests of certification. Perhaps the most significant changes relate to the “Mission” test. Currently, this test lacks the ‘teeth’ required for the CDFi Fund to properly assess how the applicant demonstrates a mission related to community development. The proposed changes require not only more documentation to assess whether the entity has a reasonable community development strategy, but also whether it engages in responsible financing practices (yes!). Finally, If the applicant is an affiliate of another entity, both entities must now have (and demonstrate) a mission related to ‘community development.’
5. In advance of the freeze, the CDFI Fund has been scrutinizing applications more aggressively to protect the brand. In the past, the staff would reach out to applicants to request additional information before making a determination. That practice seemed to be built upon the assumption that - all things equal - applicants embody the philosophy and practices of a CDFI, so let’s give them a final opportunity to make their case. No more; that practice ended more than a year ago, with thanks, in part, to the flood of applications that wouldn’t make it past the first review.

In Reaffirming our Commitment to Impact in 2022, CDFI Fund Director Jodi Harris stated that:

“CDFI Certification is not for every organization. It was never intended to be…. The CDFI Fund does not want growth for growth’s sake if it comes at the expense of a strong community development mission.”

Amen!