Reforms to CDFI Certification Are Welcome and Necessary
Long-anticipated updates will strengthen the key credential for community development financial institutions.
Last week the CDFI Fund at Treasury announced it will extend the timeline for implementing proposed changes to the certification application. According to the announcement, the CDFI Fund needs additional time to review all the submissions from the latest public comment period (See OFN’s comment letter here). In the meantime, the pause on CDFI certification applications will continue.
Certification Reform is Overdue
The financial services landscape has changed dramatically since the 1990s when certification was first implemented. Updates and revisions to CDFI certification that keep up with changes in the banking sector are the right move.
A rise in predatory lenders operating in low-wealth communities (often in direct competition with CDFIs) led to the creation of the Consumer Financial Protection Bureau and greater scrutiny of financial products. Reforming the CDFI certification process to include an evaluation of products, terms, rates, and fees is critical for an industry focused on offering affordable, responsible financial products and ensuring a borrower’s ability to repay. Transparency builds trust and helps customers make more informed choices.
Over the past several years, the CDFI industry has attracted unprecedented visibility and funding. Private and public sector investors rely on CDFI certification to ensure their investments in CDFIs align with ESG (environment, social, governance), Community Reinvestment Act, or other impact goals.
Inevitably, the influx of capital and public attention has attracted some bad actors. The CDFI Fund has a responsibility to ensure that unsavory financial services providers targeting low-wealth communities do not qualify for CDFI certification. While it is not a regulator, the CDFI Fund serves as an important gatekeeper to keep unscrupulous lenders out of the industry.
Unfortunately, the few bad actors are the ones speaking the loudest about the proposed reforms, some making unfounded claims that the updated application process will restrict lending — or worse, are intended to restrict lending — to “minority borrowers.”
CDFIs have a responsibility to serve their customers with appropriate products, not take advantage of them to reap bigger profits. Accountability to borrowers and responsible lending are core to the CDFI industry’s mission. Timely implementation of the CDFI Fund’s long anticipated certification update will strengthen this key industry credential.
An Industry with Integrity
Lenders seeking certification need to be held to high standards to protect customers and the strong reputation of the CDFI industry. This reputation is built on trust and deep community relationships. Certification by the CDFI Fund is a privilege.
CDFIs are now, and always have been committed to offering responsible financial products that advance a community development mission, bringing vital capital where it is needed most: to low-wealth communities that mainstream finance does not reach.
The CDFI Fund should take the time it needs to carefully review and assess all public comments about certification reforms. At the same time, modernization of this key industry credential has been under review by the CDFI Fund since 2017. It is time to implement reforms.