Client Alert: Community Development Financial Institutions Fund's Bond Guarantee Program Funded for 2013

    1 May 2013

    On March 21, 2013, Congress authorized the Community Development Financial Institutions (“CDFI”) Fund to guarantee up to $500 million aggregate principal amount of bonds in fiscal year 2013, marking a new opportunity for investment in traditionally under-served communities.

    CDFI Fund Background

    The Community Development Financial Institutions (“CDFI”) Fund, which is run by the U.S. Treasury Department, was established by the Riegle Community Development and Regulatory Improvement Act of 1994 to promote economic revitalization in low-income communities.

    The CDFI Fund accomplishes its mission through several initiatives, outlined below, including:

    • the Bond Guarantee Program;
    • the CDFI Program;
    • the New Markets Tax Credit Program;
    • the Bank Enterprise Award Program;
    • the Native American CDFI Assistance Program;
    • the Capital Magnet Fund; and
    • the Financial Education and Counseling Program.

    cdfi certification

    To qualify for financial awards under most of the CDFI Fund’s programs, an entity must become a certified CDFI. To be eligible for certification as a CDFI, an entity must:

    • be a legal entity;
    • have a primary mission of promoting community development
    • be a financing entity;
    • provide development services in conjunction with financing activities;
    • primarily serve one or more target markets;
    • maintain accountability to its target market(s);
    • and be a non-governmental entity that is not under the control of any government entity (excluding Tribal governments).

    The most common types of certified CDFIs include community development banks, credit unions, loan funds and venture capital funds.

    Entities wishing to become certified CDFIs must submit a CDFI Certification Application to the CDFI Fund.[1] This is an ongoing process, and applications may be submitted at any time.

    bond guarAntee program

    Program Overview.

    The CDFI Fund may authorize certified CDFIs or their designees (“Qualified Issuers”) to issue bonds worth a minimum of $100 million in the aggregate, up to a maximum of $1 billion per year, on which the CDFI Fund will provide a 100 percent guarantee as to principal, interest and call premiums (“Guaranteed Bonds”). Qualified Issuers will then sell the Guaranteed Bonds to the Federal Financing Bank (“FFB”) and use the proceeds from the sale to extend credit to other CDFIs at the same interest rate as that offered to the Qualified Issuer by the FFB.

    Legal Status of Program

    The CDFI Bond Guarantee Program was enacted through the Small Business Jobs Act of 2010 on September 27, 2010. Treasury issued an interim rule for the Bond Guarantee Program, which became effective on April 8, 2013. The Bond Guarantee Program is authorized through fiscal year 2014. On March 21, 2013, Congress authorized the CDFI Fund to guarantee up to $500 million aggregate principal amount of bonds in fiscal year 2013.

    Guaranteed Bonds

    90 percent or more of the principal amount of Guaranteed Bonds must be used annually to make loans for approved purposes related to community and economic development, including, among others: low income housing; businesses providing jobs to low-income people, or that are owned by low-income people; provision of basic financial services; community facilities; and supporting commercial facilities that provide revitalization, community stability and job creation/retention. Any unpaid principal balances of Guaranteed Bonds must be held in:

    1. community or economic development loans;
    2. a relending account; or
    3. a risk-share pool.

    Guaranteed Bonds have a maximum maturity of 30 years, and are subject to annual compliance tests. Guaranteed Bonds will be non-recourse obligations of the Qualified Issuer. Qualified Issuers must pay an annual fee of 10 basis points of the Guaranteed Bond’s unpaid principal.

    Qualified Issuers

    To be eligible to become a Qualified Issuer, an entity must be a certified CDFI, be able to issue bonds and make loans, and be able to perform special administrative functions, including loan servicing and financial reporting. Qualified Issuer Applications are not yet available, but should be submitted to the CDFI Fund.

    Once approved as a Qualified Issuer, an entity will assemble other certified CDFIs into a Bond Issue Pool and submit a Guarantee Application to the CDFI Fund. If the Guarantee Application is approved, the Qualified Issuer will issue bonds for purchase by the FFB, then lend bond proceeds to members of the Bond Issue Pool and act as a program administrator and servicer with respect to loans of Guaranteed Bond proceeds.

    Other CDFI Fund Programs

    CDFI Program

    Program Overview

    The CDFI Fund offers two types of monetary awards through the CDFI Program: Financial Assistance (“FA”) awards and Technical Assistance (“TA”) awards.

    Financial Assistance Awards

    FA awards of up to $2 million each are made to certified CDFIs to be used for financing capital, loan loss reserves, capital reserves or operations. They may be in the form of equity investments, loans, deposits or grants, and the recipient CDFI is required to match the award amount with non-federal funds of the same type.

    Technical Assistance Awards

    TA awards of up to $100,000 each are made to entities seeking to become certified CDFIs, and may be used to build the recipient’s capacity to provide financial services to low income communities and families. Suggested uses of TA award money include: purchasing equipment, materials or supplies; consulting or contracting services; paying salaries and benefits of certain personnel; and training staff and board members.

    New Markets Tax Credit Program

    Program Overview

    The CDFI Fund permits investors to receive tax credits in exchange for making equity investments in certified Community Development Entities (“CDEs”). Tax credits equal 39 percent of the initial equity investment in the CDE, and are claimed over the course of seven years.

    CDE Certification

    Entities seeking certification as CDEs must apply to the CDFI fund. To be eligible for certification, an entity must: be a domestic corporation or partnership; demonstrate a primary mission of serving or providing investment capital for low income communities and/or persons; and include residents of low income communities on a governing or advisory board to the entity.

    Bank Enterprise Award Program

    Program Overview

    The Bank Enterprise Award (“BEA”) Program offers grants to FDIC-insured depository institutions for increasing qualified activities from a baseline level over the course of an assessment period. Awards are based on increases in three types of activities:

    1. CDFI Related Activities including equity investments, equity-like loans, grants, loans, deposits/shares and technical assistance to qualified CDFI partners;
    2. Distressed Community Financing Activities including affordable home mortgage loans, affordable housing development loans, small business loans, home improvement loans, education loans and commercial real estate loans; and
    3. Service Activities including deposits, community services and financial services. Award amounts correlate to the percentage of increase in funds dedicated to these activities. Once received, BEA awards must be reinvested in distressed communities.

    Other Programs

    The CDFI Fund also provides:

    • a Native American CDFI Assistance Program, which provides FA awards up to $750,000 to certified Native CDFIs and TA awards up to $150,000 to certified Native CDFIs, emerging Native CDFIs and sponsoring entities;
    • a Capital Magnet Fund, which provides competitive grants to CDFIs and qualified nonprofit housing organizations; and
    • a Financial Education and Counseling Program, which provides grants to eligible organizations to enable them to provide financial education and counseling services to prospective homebuyers.