Community Development Financial Institutions Fund; CDFI Target Market Assessment Methodologies

ACTION:

Notice and Request for Comment.

SUMMARY:

The Community Development Financial Institutions Fund (CDFI Fund), Department of the Treasury, requests comments from the public regarding the pre-approved Target Market assessment methodologies that entities applying for Certification as a Community Development Financial Institution (CDFI) may use to assess whether the recipients of an entity's Financial Products or Financial Services are members of a pre-approved Target Market. Capitalized terms found in this notice are defined in the regulations that govern the CDFI Program.

DATES:

Written comments must be received on or before December 19, 2022 to be assured of consideration.

ADDRESSES:

You may submit comments via the Federal eRulemaking Portal: www.regulations.gov. Follow the instructions on the website for submitting comments. In general, all comments will be available for inspection at www.regulations.gov. Comments, including attachments and other supporting materials, are part of the public record. Do not submit any information in your comments or supporting materials that you consider confidential or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT:

Michelle Dickens, Program Manager, Office of Certification Policy and Evaluation, CDFI Fund, U.S. Department of the Treasury, 1500 Pennsylvania Avenue NW, Washington, DC 20220 or by phone at (202) 653-0300. Other information regarding the CDFI Fund and its programs may be obtained through the CDFI Fund's website at http://www.cdfifund.gov.

SUPPLEMENTARY INFORMATION:

To be a Certified CDFI, an entity must demonstrate that it serves at least one eligible Target Market (either an Investment Area or a Targeted Population). In addition, it must direct at least 60% of both the number and dollar volume of arm's-length, on- balance sheet Financial Products to one or more eligible Target Market components. Under the current policies and CDFI Certification Application, Applicants must describe and seek approval for each assessment methodology they have used and intend to use to confirm financing activity to their identified Target Market(s). Only those Target Market assessment methodologies that have been approved by the CDFI Fund may be used when compiling Target Market data.

In an effort to increase transparency and reduce burden through a revised CDFI Certification Application, https://www.cdfifund.gov/sites/cdfi/files/2022-10/CDFI_Certification_Application_Preview_Final_10322.pdf, the CDFI Fund intends to publish a list of pre-approved Target Market assessment methodologies that Applicants and Certified CDFIs may use and rely upon to demonstrate that they are serving their identified Target Market(s). Through the revised application and Annual Certification and Data Collection Report (ACR), Applicants and Certified CDFIs will select from a drop-down menu the options in the methodology list that they used for each of their Target Market components ( i.e., Investment Area (IA), Low Income Targeted Population (LITP), or Other Targeted Population (OTP).

The proposed list of pre-approved Target Market assessment methodologies, which may be found on the CDFI Fund website ( www.cdfifund.gov ), reflects the primary assessment methods that have been approved by the CDFI Fund and are most commonly used by a majority of currently Certified CDFIs, but may not be a comprehensive list of all the assessment methodologies previously approved by the CDFI Fund. Because the CDFI Fund, to this point, has not specifically tracked approved Target Market assessment methodologies (and in part as a result of documentation system changes), the CDFI Fund may previously have considered and even approved a Target Market assessment method unique to a specific Applicant or Certified CDFI that does not appear on the proposed list.

Applicants that use one of the pre-approved options will no longer be required to describe the assessment process used to confirm financing activity to their Target Market(s) as part of the Certification Application or a Target Market modification. If an Applicant or Certified CDFI seeks to use an alternative or modified Target Market assessment method, it will be permitted to submit a service request through AMIS for consideration of that process to the CDFI Fund. If new assessment methodologies are approved, the CDFI Fund intends to update the list of pre-approved methodologies as appropriate, so that any newly approved methodologies may be available to other Applicants and Certified CDFIs as well.

Approved CDFI Fund Target Market assessment methodologies must be used exactly as approved unless and until modification of the method is authorized by the CDFI Fund. To use an alternative or modified Target Market assessment method when compiling Target Market data for the CDFI Certification Application, the new method must be approved by the CDFI Fund prior to submission of the application. Failure to use an approved assessment methodology (or maintain required documentation, as noted in the list) may result in the termination of a Certified CDFI's certification.

Through this Request for Comment (RFC), the CDFI Fund seeks feedback from the public on the proposed list of pre-approved Target Market assessment methodologies. The CDFI Fund also seeks any additional information beyond the questions below that members of the public believe would assist in establishing policies and procedures related to the Target Market assessment methodology. The CDFI Fund intends to consider the feedback received through this RFC prior to establishing a final list of pre-approved Target Market assessment methodologies.

I. Pre-Approved Target Market Assessment Methodologies

a. Do each of the listed Target Market assessment methodologies, if used, provide sufficient confidence as to the level at which an Applicant or Certified CDFI is serving an Investment Area, LITP, or OTP? If no, please identify the methodology, the reason it may inaccurately capture the level of service to an Applicant's or CDFI's Target Market, and how the methodology could be strengthened.

b. Are there assessment methodologies the CDFI Fund previously allowed but that do not appear in the proposed list of pre-approved Target Market assessment methodologies? If yes, please describe any such methodology and indicate the date on which the methodology was approved by the CDFI Fund.

c. Are there additional assessment methodologies the CDFI Fund should consider that it may not have previously approved, but that would serve to provide sufficient confidence as to the level at which an Applicant or Certified CDFI is serving a Target Market? If yes, please provide the following information for each proposed methodology:

• The applicable Target Market type (IA/LITP/OTP)

• Data Collected ( e.g. data fields, time period, reporting level)

• Model/Method design ( e.g. mathematical equations, relationship between data fields, etc.)

• Documents reviewed ( e.g. contracts, agreements, white paper, etc.)

• The step by step process used to collect the data and review any documents or run the model and process its results

• If proposing a programmatic proxy, the step by step process used to compare programmatic data to CDFI Fund definitions ( e.g. income sources, income thresholds, etc.)

• Any record keeping process
• The process for updating any methodology dependent on underlying data changes.

d. What standards should the CDFI Fund use in its decision making to approve or disapprove a proposed assessment methodology?

e. The CDFI Fund also will continue to allow, in the absence of documentation of an individual's actual income, an organization's use of assessment methodologies that treat a Financial Product recipient's participation in an income-based program as a proxy to determine that individual's status as a member of a Low-Income Targeted Population. For a program to be an eligible proxy, the income limits of the program must align with the CDFI Fund's definition of Low-Income.

In addition, the use of any programmatic proxy as an assessment methodology that is not previously pre-approved by the CDFI Fund must be submitted to and approved by the CDFI Fund prior to submission of an application for CDFI Certification.

Because the CDFI Fund has not historically tracked all approved programmatic proxy assessment methodologies, the CDFI Fund requests organizations that currently use, or seek to use, a programmatic proxy not listed among the proposed assessment methodologies, submit as part of this Request for Comment information on the programmatic proxy. Doing so will enable the CDFI Fund to make a determination on the eligibility of that programmatic proxy prior to the finalization of the pre-approved methodologies. In addition to the information requested above, please also provide the step by step process the organization used to compare programmatic data to CDFI Fund definitions ( e.g. income sources, income thresholds, etc.).

f. The CDFI Fund also is considering whether to include as a pre-approved assessment methodology the use of a geography-based proxy to identify members of a Low-Income Targeted Population in the absence of documentation of an individual's actual income. One such approach would be to identify eligible areas based on the share of households in the area that earn less than 80 percent of the Area Median Income (AMI), such that for a Financial Product or Financial Service delivered to a resident of the area there would be a reasonably high likelihood that the resident would be determined to be low-income.

For example, setting a 70 percent threshold for Low-Income households in a census tract block group (as determined by Low to Moderate Income Population by Block Group https://hudgis-hud.opendata.arcgis.com/datasets/HUD::low-to-moderate-income-population-by-block-group/about data from the Department of Housing and Urban Development) as the proxy would capture approximately 34 million of the 134 million Low-Income persons residing in the United States. In addition, approximately 8 million higher-income individuals also live in such block groups and effectively would be treated as Low-Income by such a proxy. There is, however, a significant overlap of block groups with high levels of Low-Income households and block groups located within an Investment Area (where an investment delivered to a higher-income resident is already an eligible Target Market Financial Product). Approximately 32 million Low-Income individuals captured by a 70-percent threshold proxy are also located within an Investment Area, along with 7.5 million higher-income individuals. By contrast, approximately 1.6 million Low-Income individuals captured by such a proxy as well as 478 thousand higher-income individuals are located outside of an Investment Area.

Setting a lower threshold for the proxy would capture a higher share of the nation's Low-Income population, but similarly would effectively treat as members of an LITP a larger number of individuals who would not otherwise be considered Low-Income. Setting a higher threshold, on the other hand, would increase the likelihood that a resident of the geographic proxy is actually Low-Income, but would further limit the utility of the proxy by capturing an even smaller share of the total U.S. Low-Income population.

Based on a 70 percent threshold, a list of all qualifying block groups can be found on the CDFI Fund website, here https://www.cdfifund.gov/programs-training/certification/cdfi/certification-pra. Note that the income status of these block groups is based on data from the 2011-2015 American Community Survey (ACS). If the CDFI Fund determines that residence in an eligible geography is an acceptable proxy for assessing an individual's Low-Income status, the data upon which the CDFI Fund will rely for this purpose will be updated periodically based upon the most recent data available from the U.S. Department of Housing and Urban Development.

i. Should the CDFI Fund establish a geographic proxy for Low-Income status as an approved Target Market assessment methodology, such that a Financial Product or Financial Service delivered to a resident of a qualifying block group would be deemed delivered to an LITP, even if the proxy might overestimate the share of LITP borrowers served by an Applicant or Certified CDFI?

ii. Alternatively, should the CDFI Fund accept the use of such a proxy only when other methodologies are unavailable ( e.g., documentation of actual income or borrower participation in another program with income-based eligibility restrictions)?

iii. If the share of Low-Income households in a census tract block group is an acceptable proxy for LITP status, is 70 percent an appropriate qualifying threshold to maintain the integrity of the CDFI Certification? If no, what is an appropriate threshold?

iv. Are there guardrails the CDFI Fund could place on such a proxy to limit opportunities for abuse of the proxy, e.g., an entity that chooses to use the proxy because it will allow it to represent more activity as directed to an LITP than would otherwise qualify? If yes, describe those guardrails? If the CDFI Fund allows the use of a geographic LITP proxy, should it also require users of the proxy to obtain an attestation from a Financial Product or Financial Services recipient that their income is below 80 percent of the area median family income?

g. Should a Financial Product delivered to a business, not owned by a member of a Targeted Population or located in an Investment Area, that is providing jobs, products, or services to a Targeted Population or Investment Area, be deemed delivered to a Target Market? If yes, are there assessment methodologies for end users, other than those already included in the list that the CDFI Fund should consider? What are those assessment methodologies? Should approval of any such methodology associated with jobs to a Targeted Population or located in an Investment Area be dependent on standards for a livable wage or other quality job metrics?

h. Current standards for identifying members of a Native American and Native Alaskan OTP include an assessment that an individual has “maintained Tribal affiliation or community attachment.” The CDFI Fund's proposed assessment methodologies state that a financing entity may assess a recipient's Tribal affiliation or community attachment via the collection of a government-issued or tribal government-issued photo identification. Are there other methods the CDFI Fund should deem entities can use to assess such status, and in particular an individual's “community attachment” to a Native population? What are those methods and describe them?

II. General Target Market Verification Questions for Public Comment

a. Is there additional information that the CDFI Fund should consider related to Target Market assessment methodologies? If so, please describe.

Authority: 12 U.S.C. 4701 et seq.; 12 CFR 1805; Public Law 116-260.