Under President Trump, the United States Department of the Treasury sought to change fundamental rules relating to CDFI’s through the improper introduction of a proposal under the Paperwork Reduction Act. These new rules sought to eliminate the exemption CDFI’s enjoy from the Consumer Financial Protection Bureau’s ability to repay (ATR) rules relating to mortgage loans. This would eliminate the underwriting flexibility CDFIs need to meet the needs of minority and unbanked borrowers.
CDFI Fund Director Jodie Harris’ proposal appeared to have significant support until it faced public comment and scrutiny for the first time this past Winter. On December 5, 2022, America’s largest non-bank CDFI, The Change Company, posted a public comment highlighting the enormous damage the proposal would do to millions of Americans and all CDFIs engaged in consumer lending. In an interview with Barron’s, Steven Sugarman, the Founder of Change, commented “I can’t imagine a scenario where the proposed rule change carries the day. Someone is going to look at this, and they’re going to say, ‘Let’s take a little bit more of a nuanced view here.’”
Over the 90 day period since Change’s public comment letter, a broad coalitions of Banks, Credit Unions, Independent Mortgage Companies, Mortgage Brokers, and CDFIs have joined forced in united opposition to the new CDFI rules and highlighting the significant damage such rules would do to minority and Low Income lending in America. These organizations now represent the consensus view relating to the critical role of CDFIs in the financial system and the appropriateness and necessity of exempting CDFIs from Regulation Z’s ability to repay rules. With respect to the proposal that CDFIs meet the requirements of the CFPB’s ATR rules, there was broad consensus that if implemented, the proposal would “significantly undermine the efforts of CDFIs to meet the needs of borrowers in low-income and distressed communities.”
The list of organizations who have weighed in against the proposal includes:
- American Bankers Association
- Community Development Bankers Association
- Credit Union Nation Association
- Independent Community Bankers of America
- National Association of Federally Insured Credit Unions
- National Bankers Association
- CDFI Coalition
- National Association of Mortgage Brokers
Even Opportunity Finance Network (OFN), the private organization that the CDFI Fund pays to allocate government fund to CDFIs, found the proposal untenable and called for revisions to key aspects of the rule stating that there are “circumstances where more flexibility is appropriate and responsible.”
When the largest most credible associations representing banks, credit unions, community development lenders, mortgage brokers, and mortgage companies all come to the same conclusion, it is time to listen.
Secretary Yellin and her Treasury Department should put an end to this rulemaking and clearly state that the Treasury Department will support the statutory mission of the CDFI Fund – to expand economic opportunity for underserved people and communities – and not seek to undermine it. Secretary Yellin must speak clearly about the critical role the CDFI’s ability to make ATR exempt loans plays in our financial system. She must underscore that CDFI exemptions are not loopholes, but important aspects of the existing regulatory framework that strengthen our markets and ensure fair and responsible lending.
Secretary Yellin should also re-assure CDFIs who had the courage to speak up against Director Harris’ dangerous new rules for the protection of America’s underbanked that they will not be retaliated against by the CDFI Fund through targeted exams, punitive grant decisions, or otherwise.
There is increasing word that Director Harris’ CDFI Fund has engaged (and continues to engage) in targeted reprisals in order to attempt to pass new rules without public objections. For instance, whistleblowers are requesting the Treasury’s Office of Inspector General investigate new, inappropriate policies the CDFI Fund and its office of Financial Strategies & Reporting has imposed on CDFIs that have raised objections to the CDFI Fund’s proposed rules. For instance, in one situation, the CDFI Fund has refused to credit a CDFI for lending to Black borrowers, when the borrower is in fact Black but does not also live in a community that is at least 70% Black. The CDFI Fund is basically claiming that only lending that promotes segregation will qualify, and if a Black borrower moves to an integrated community they are no longer considered Black by the CDFI Fund.
Such punitive policies are not only antithetical to the purpose of the CDFI Fund and statutory requirements but appear to be being applied in a retaliatory manner – that is, the CDFI Fund is only applying these rules to CDFIs who exercised their first amendment rights to object to CDFI Fund’s disastrous proposed rulemaking. It is not legal to punish the makers of public comments with punitive regulatory actions. The Treasury Department must ensure that CDFIs and other financial institutions are willing to participate in the statutory process as outlined by the Administrative Procedures Act without pressure, intimidation, or retaliation.
Fortunately, Director Jodie Harris recently submitted her resignation from the CDFI Fund and will be leaving office soon. The Treasury Department now has the ability to replace Director Harris with a professional Director who understands consumer lending, the responsibility of the CDFI Fund versus those of regulators such as the Consumer Financial Protections Bureau and banking regulators, and who will usher in a new spirit of community lending – not to build obstacles intended to fortify the structural inequities that already infect consumer lending.
It is critical that a new, permanent replacement is appointed as the Director of the CDFI Fund. New leadership has the potential to move past the ill-conceived rulemaking and retaliation that has defined Director Harris’ tenure.