Community Development Financial Institutions: Increase economic development in your community and ease your compliance burden at the same time!

This month, the Consumer Financial Protection Bureau’s (“CFPB’s”) new Ability to Repay (“ATR”) and Qualified Mortgage (“QM”) rules took effect. These rules impose new burdens on financial institutions as they determine whether consumers qualify for credit products.

However, Dodd-Frank and the 2009 Stimulus Act included amendments to a program that can ease the new ATR requirements and give banks tools to spur economic development. These changes came to the program for Community Development Financial Institutions (“CDFIs”). They are part of an effort to spur economic development in underserved areas. CDFIs are entities, often financial institutions, that:

1. Have a primary, but not sole, mission of promoting community development;

2. Serve a CDFI target market;

3. Provide development services in addition to financing; and

4. Maintain accountability to their target market by either including a member of the community (such as a business owner) on the bank’s board, or creating an advisory board.

One of the biggest advantages of becoming a CDFI for community banks is the exemption from the CFPB’s new ATR rules. Under the new ATR rules, consumers can commence a lawsuit against a bank that fails to adhere to the ATR rules. The ATR rules impose strict limits on banks by requiring banks to take into account a variety of factors about a consumer’s financial health before lending money.

However, institutions that qualify as CDFIs are exempt from the ATR rules. This means that an institution is protected from ATR rule enforcement. This is different from the protection afforded by the QM rules that many banks may be familiar with already. Under the QM rules, banks are only afforded a presumption of compliance with the ATR rules. A bank that only complied with QM rules could still find itself liable for violating the ATR rules.

CDFIs also qualify for a variety of grants that provide quick capital infusions to banks engaged in economic development. For example, banks can qualify for the Bank Enterprise Award (“BEA”) program. These awards are available for banks to increase lending and investment in distressed communities. Each year federal appropriations allocate funds for the BEA program, which are then distributed to select applicants. For 2013, this totaled grants per applicant of approximately $300,000.

The bond guarantee program provides guarantees for bonds issued in support of community development. Bond issuers can use this program to raise revenue for community development. A qualified issuer, such as a CDFI, will issue bonds that are then purchased by the Federal Financing Bank (“FFB”) and guaranteed by the Treasury Department.

New market tax credits are available for investors to invest in economic development in low income communities. Investors contribute to qualified Community Development Entities (“CDEs”). The investors are then eligible for seven years of tax credits, which reduce the tax liability of the investor on a dollar for dollar basis. The amount of the tax credit is equal to 5% of the equity investment for the first three years, and up to 6% for next four years. Total, the investor will receive a tax credit of 39% of the investment.

Banks can get involved in the new market tax credit program in several ways. Banks can operate CDEs and allocate investment funds. Banks can also invest their own funds in CDEs and take advantage of the tax credits.

There are a variety of programs available for banks both as CDFIs and as regular institutions. These programs give banks a number of tools they can use to increase economic development in underserved communities. They also help defray the risks of loans to new ventures in underserved communities. To qualify for some of these programs, such as the exemption from the ATR rules and BEA program, banks will need to become a CDFI.

With the help of legal counsel, these are achievable requirements for many banks in Iowa. The federal program wants to see more institutions qualify as CDFIs, so federal regulators are willing to help banks do everything they can to qualify.