[Federal Register Volume 76, Number 127 (Friday, July 1, 2011)]
[Proposed Rules]
[Pages 38577-38580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16682]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 76, No. 127 / Friday, July 1, 2011 / Proposed
Rules
[[Page 38577]]
DEPARTMENT OF THE TREASURY
Community Development Financial Institutions Fund
12 CFR Chapter XVIII
Bond Guarantee Program
AGENCY: Community Development Financial Institutions Fund, U.S.
Department of Treasury.
ACTION: Request for public comment.
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SUMMARY: This notice invites comments from the public on issues
regarding the Community Development Financial Institutions (CDFI) Bond
Guarantee Program created by the Small Business Jobs Act of 2010. All
materials submitted will be available for public inspection and
copying.
DATES: All comments and submissions must be received by August 15,
2011.
ADDRESSES: Comments may be sent by mail to: Jodie Harris, Policy
Specialist, CDFI Fund, U.S. Department of the Treasury, 601 13th
Street, NW., Suite 200 South, Washington, DC 20005; by e-mail to
[email protected]; or by facsimile at (202) 622-7754. Please note
this is not a toll free number.
FOR FURTHER INFORMATION CONTACT: Information regarding the CDFI Fund
and its programs may be downloaded from the CDFI Fund's Web site at
http://www.cdfifund.gov.
SUPPLEMENTARY INFORMATION: The Community Development Financial
Institutions Fund (CDFI Fund) was created for the purpose of promoting
economic revitalization and community development through investment in
and assistance to CDFIs. Its vision is to economically empower
America's underserved and distressed communities through the provision
of low-cost capital to certified CDFIs. The CDFI Fund was established
by the Riegle Community Development Banking and Financial Institutions
Act of 1994.
The CDFI Bond Guarantee Program (the program) was enacted through
the Small Business Jobs Act of 2010 (Pub. L. 111-240) on September 27,
2010. The CDFI Fund will serve as the program administrator and must
administer the program in accordance with sections 1134 and 1703 of the
Small Business Jobs Act, which amended the Community Development
Banking and Financial Institutions Act of 1994, 12 U.S.C. 4701 et seq.
(the Act) by adding a new section 114A.
Section 114A authorizes the Secretary of the Treasury (through the
CDFI Fund) to guarantee the full amount of notes or bonds, including
the principal, interest, and call premiums not to exceed 30 years,
issued by CDFIs to finance loans for eligible community or economic
development purposes. The bonds or notes will support CDFI lending and
investment by providing a source of long-term, patient capital to
CDFIs. In accordance with Federal credit policy, moreover, the Federal
Financing Bank (FFB), a body corporate and instrumentality of the
United States Government under the general supervision and direction of
the Secretary of the Treasury, finances obligations that are 100%
guaranteed by the United States, such as the bonds or notes to be
issued by CDFIs under the program. Because the FFB's cost of funds is
equivalent to the current Treasury rates for comparable maturities, the
FFB can provide CDFIs the least expensive funds to generate loans and
represents the most efficient way for CDFIs to finance 100% Federally
guaranteed obligations.
The CDFI Fund is required by statute to promulgate program
regulations by September 27, 2011 and to implement the program by
September 27, 2012.
The CDFI Fund invites and encourages comments and suggestions
germane to the mission, purpose, and implementation of the CDFI Bond
Guarantee Program. The CDFI Fund is particularly interested in comments
in the following areas:
1. Definitions
(a) Section 114A(a) of the Act provides certain definitions
applicable to the CDFI Bond Guarantee Program. In particular, Section
114A(a)(2) of the Act defines eligible community or economic
development purpose as any purpose described in section 108(b) [12
U.S.C. 4707(b)] and includes the provision of community or economic
development in low-income or underserved rural areas. The CDFI Fund is
interested in comments regarding all definitions found in the Act as
they relate to the program, including the following:
(i) How should the term ``low-income'' be defined as such term is
used in Section 114A(a)(2)?
(ii) How should the term ``rural areas'' be defined as such term is
used in Section 114A(a)(2)? For example, is a rural community any
census tract that is not located in a metropolitan statistical area
(MSA)? Respondents should discuss how a particular definition would
enable the program to target businesses and residents in rural areas,
and discuss whether there are particular measures that should not be
used because they may inadvertently disadvantage certain populations
(i.e., provide examples of particular households or communities that
would not qualify under specific definitions).
(iii) How should the term ``underserved'' be defined and/or
measured?
(iv) Should ``eligible community or economic development purpose''
be defined to allow a CDFI or its designated Qualified Issuer to only
invest inside the CDFI Fund Target Market that it was certified to
serve?
2. Use of Funds
(a) The Act defines a loan as any credit instrument that is
extended under the CDFI Bond Guarantee Program for any eligible
community or economic development purpose. Section 114A(b) of the Act
states that the Secretary of the Treasury (the Secretary) shall
guarantee payments on bonds or notes issued by a qualified issuer if
the proceeds of the bonds or notes are used in accordance with this
section to make loans to eligible community development financial
institutions (CDFIs)
(1) For eligible community or economic development purposes; or
(2) To refinance loans or notes issued for such purposes.
The CDFI Fund invites and encourages comments and suggestions
germane to the criteria and use of funds. The CDFI Fund is particularly
interested in comments including the following:
(i) Should there be any limitations on the types of loans that can
be financed or refinanced with the bond proceeds? Are there any uses of
bond or note proceeds that should be excluded or deemed ineligible
regardless of the fact
[[Page 38578]]
that the use was in a low-income or underserved rural area?
(ii) Should the capitalization of: (1) Revolving loan funds; (2)
credit enhancement of investments made by CDFIs and/or others; or (3)
loan loss reserves, debt service reserves, and/or sinking funds in
support of a Federally guaranteed bond, be included as eligible
purposes?
(iii) Should there be any limits on the percentage of loans or
notes refinanced with the bond proceeds? If so, what should they be?
(iv) Should CDFIs be allowed to use bond proceeds to purchase loans
from other CDFIs? If so, should the CDFI that sells the loans be
required to invest a certain portion of the proceeds from the sale to
support additional community development activities?
(v) Should the CDFI Fund place additional restrictions on the
awardees' loan products, such as a cap on the interest rate, fees and/
or late payment penalties or on the marketing and disclosure standards
for the products? If so, what are the appropriate restrictions?
(b) Section 114A(c)(1) states that a capital distribution plan
meets the requirements of the subsection if not less than 90 percent of
the principal amount of guaranteed bonds or notes (other than the cost
of issuance fee) are used to make loans for any eligible community or
economic development purpose, measured annually, beginning at the end
of the one-year period beginning on the issuance date of such
guaranteed bonds or notes. The CDFI Fund welcomes comments regarding
this provision, specifically regarding what penalties the CDFI Fund
should impose if an issuer is out of compliance.
(c) Section 114A(c)(2) states that not more than 10 percent of the
principal amount of guaranteed bonds or notes -, multiplied by an
amount equal to the outstanding principal balance of issued notes or
bonds, minus the risk-share pool amount--may be held in a relending
account and may be available for new eligible community or economic
development purposes.
(i) How should the CDFI Fund define ``relending'' account as stated
in Section 114A(c)(2)? How should it differ from the loans made under
Section 114(c)(1)?
(ii) If the capitalization of revolving loan funds is deemed an
allowable use of funds under Section 114A(a)(4), what activities would
be eligible under the relending account?
(iii) If additional reserves are held, should they be permitted to
be funded from the relending account?
(iv) Should a sinking fund, or any other reserve to allow for the
payment of debt service, be permitted to be funded from the relending
account?
(d) Section 114A(d) states that each qualified issuer shall, during
the term of a guarantee provided under the CDFI Bond Guarantee Program,
establish a risk-share pool, capitalized by contributions from eligible
community development financial institution participants, of an amount
equal to three percent of the guaranteed amount outstanding on the
subject notes and bonds.
(i) In the event that the CDFI Fund determines that there is a risk
of loss to the government for which Congress has not provided an
appropriation, what steps should the CDFI Fund take to compensate for
this risk?
a. Should the interest rate on the bonds be increased?
b. Should a larger risk-share pool be required?
c. Should the CDFI Fund require restrictions, covenants and
conditions (e.g., net asset ratio requirement, first loss requirements,
first lien position; over-collateralization, replacement of troubled
loans)?
(ii) How should the CDFI Fund assess and compensate for different
levels of risk among diverse proposals without unduly restricting the
flexible use of funds for a range of community development purposes?
For example:
a. Should the CDFI Fund take into account the participation of a
risk-sharing partner? What should be the parameters of any such risk-
sharing?
b. Should the Fund take into account an independent, third-party
credit rating from a major rating agency?
(iii) Are there restrictions, covenants, conditions or other
measures the CDFI Fund should not impose? Please provide specific
examples, if possible.
(iv) Should the qualified issuer be allowed to set aside the three
percent from the bond proceeds or should these funds be separate from
the proceeds?
3. Guarantee Provisions
(a) Section 114A(a)(3) defines a guarantee as a written agreement
between the Secretary and a qualified issuer (or trustee) pursuant to
which the Secretary ensures repayment of the verifiable losses of
principal, interest, and call premium, if any, on notes or bonds issued
by a qualified issuer to finance or refinance loans to eligible CDFI.
The CDFI Fund invites and encourages comments and suggestions relating
to the guarantee provisions, especially:
(i) How should the CDFI Fund define and determine ``verifiable
losses of principal, interest, and call premium''?
(ii) Should the CDFI Fund permit a call upon the guarantee at any
point prior to the issuer liquidating the available assets? If so,
under what condition should a call on the guarantee be permitted?
(b) Section 114A(e)(1) indicates that the Treasury guarantee shall
be for the full amount of a bond or note, including the amount of
principal, interest, and call premiums not to exceed 30 years. The
Treasury may not guarantee any amount less than $100 million per
issuance.
(i) Should the CDFI Fund set specific guidelines or prohibitions
for the structure of the bond (e.g., callable, convertible, zero-
coupon)?
(ii) Should bonds that are used to fund certain asset classes be
required to have specific terms or conditions? Should riskier asset
classes or borrowers require additional enhancements?
(c) Section 114A(e)(2) states limitations on the guarantees.
(1) The Secretary shall issue not more than 10 guarantees in any
calendar year under the program.
(2) The Secretary may not guarantee any amount under the program
equal to less than $100 million but the total of all such guarantees in
any fiscal year may not exceed $1 billion.
(i) Can qualified issuers apply for multiple issuances? Should
there be a limit per qualified issuer? If so, what should that limit
be?
4. Eligible Entities
(a) Section 114A(a)(1) defines an eligible entity as a CDFI (as
described in section 1805.201 of title 12, Code of Federal Regulations,
or any successor thereto) certified by the Secretary that has applied
to a qualified issuer for, or that has been granted by a qualified
issuer, a loan under the program. The CDFI Fund welcomes comments on
issues relating to eligible entities, particularly with respect to the
following questions:
(i) Should the CDFI Fund require one qualified issuer (or appointed
trustee) for all bonds and notes issued under the program?
(ii) Should the CDFI Fund permit an entity not yet certified as a
CDFI to apply for CDFI certification simultaneous with submission of a
capital distribution plan?
(iii) Should the CDFI Fund allow all existing CDFIs to apply, or
should there be minimum eligibility criteria?
(iv) The Act states that a qualified issuer should have
``appropriate expertise, capacity, and experience, or otherwise be
qualified to make loans for eligible community or economic development
purposes.'' How should
[[Page 38579]]
the CDFI Fund determine that a qualified issuer meets these
requirements?
(v) What penalties should be imposed in the event that a CDFI
participating in the program ceases to be a certified CDFI? What
remedies and cure periods should the CDFI Fund allow in the event of a
lapse in CDFI certification?
(b) Section 114A(a)(5) defines a master servicer as an entity
approved by the Secretary in accordance with subparagraph (B) to
oversee the activities of servicers, as provided in subsection (f)(4).
(i) Should the CDFI Fund require one servicer for all bonds and
notes issued under the program?
(ii) Should the CDFI Fund require the master servicer and servicers
to have a track record of providing similar services? How should the
CDFI Fund evaluate the capabilities of prospective servicers and master
servicers?
(iii) Should the CDFI Fund pre-qualify servicers and make those
groups known to CDFIs wishing to submit a capital distribution plan for
consideration?
(iv) Should a CDFI issuer be allowed to serve as its own servicer?
(v) Should the master servicer be eligible to serve as a program
administrator or servicer for a qualified issuer? If so, how should
potential conflicts of interest be managed?
(c) Section 114(a)(8) defines qualified issuers as a CDFI (or any
entity designated to issue notes or bonds on behalf of such CDFI) that
meets certain qualifications: (1) Have appropriate expertise, (2) have
an acceptable capital distribution plan, and (3) be able to certify
that the bond proceeds will be used for community development.
(i) How should a CDFI demonstrate its expertise?
(ii) Are there any institutions that should be prohibited from
serving as qualified issuers?
(iii) Should the CDFI Fund establish minimum criteria for serving
as a qualified issuer?
(iv) Should the CDFI Fund set a minimum asset size for CDFI
participation as a qualified issuer?
(v) Should the CDFI Fund require the issuer to have a minimum net
capital (real equity capital) and require a set amount of net capital
be held for the term of the bond? If so, what is a reasonable level to
require?
(vi) Should qualified issuers be required to obtain an independent,
third-party credit rating from a major rating agency?
5. Capital Distribution Plan
(a) Section 114A(a)(8)(B)(ii)(II) states that a qualified issuer
shall provide to the Secretary: (aa) an acceptable statement of the
proposed sources and uses of the funds and (bb) a capital distribution
plan that meets the requirements of subsection (c)(1). The CDFI Fund
seeks comments relating to the capital distribution plan requirement,
specifically:
(i) What elements should be required in an acceptable statement of
proposed sources and uses of the funds? How should the CDFI Fund
measure acceptability?
(ii) What elements should be required in a capital distribution
plan? Are there examples of such plans, Federal or otherwise, upon
which the CDFI Fund should model the CDFI Bond Guarantee Program's
capital distribution plan requirements and application materials?
(iii) Should the CDFI Fund require specific intended uses of all
the bond proceeds in the capital distribution plan or should the
qualified issuers just be required to demonstrate an intended pipeline
of underlying assets?
(iv) Should the CDFI Fund set minimum underwriting criteria for
borrowers? Should applicants be required to demonstrate satisfaction of
those criteria in the capital distribution plan?
6. Accountability of Qualified Issuers
(a) The CDFI Fund welcomes comments on how to monitor the use of
proceeds and financial performance of qualified issuers, particularly
with respect to the following questions:
(a) What tests should the CDFI Fund use to evaluate if 90 percent
of bond proceeds have been invested in qualified loans? Should reports
be required from the qualified issuer more frequently than on an annual
basis?
(c) What types of tests should the CDFI Fund use to evaluate
satisfaction of the low-income or rural requirement set forth in
Section 114A(a)(2)?
(d) What support, if any, would applicants and awardees like to
receive from the CDFI Fund after having issued a bond?
(e) What specific industry standards for impact measures
(businesses financed, units of affordable housing developed, etc.)
should the CDFI Fund adopt for evaluating and monitoring loans financed
or refinanced with proceeds of the guaranteed notes or bonds?
(f) Should achievement of some standards or outcome measures be
mandatory?
(g) Are the approval criteria for qualified issuers as listed in
Section 114A(a)(8)(B) adequate? If not, what else should be included?
7. Prohibited Uses
(a) Section 114A(b)(5) provides certain prohibitions on use of
funds including, ``political activities, lobbying, outreach, counseling
services, or travel expenses.'' The CDFI Fund encourages comments and
suggestions germane to prohibited uses established in the Act,
specifically as to whether there are other prohibited uses that the
CDFI Fund should include.
8. Servicing of Transactions
(a) Section 114A(f) states that, in general, to maximize
efficiencies and minimize cost and interest rates, loans made under
this section may be serviced by qualified program administrators, bond
servicers, and a master servicer. This section further outlines the
duties of the program administrator, servicers, and the master
servicer. Comments regarding the servicing of transactions are welcome,
specifically:
(i) The Act lists certain duties of a program administrator. Should
there be other requirements?
(ii) The duties of a program administrator suggest that the CDFI
Fund will serve as the program administrator for all issuances. Should
the CDFI Fund require that each qualified issuer have a designated
program administrator as suggested in section 114A(a)(7)?
(iii) If so, should the servicer be eligible to serve as a program
administrator for a qualified issuer?
(iv) Who should be responsible for resolving troubled loans?
(v) On what basis should servicers be compensated?
(vi) Are there any duties not listed that should be included in
sections 114A(f)(2) through 114A(f)(4)? Are there any prohibitions or
limitations that should be applied?
9. General Compliance
The CDFI Fund welcomes comments on general compliance issues
related to monitoring the guarantee portfolio, particularly with
respect to the following questions:
(i) What types of compliance measures should be required by the
CDFI Fund? Should the CDFI Fund mandate specific reports to be
collected and reviewed by the servicer and ultimately the master
servicer? If so, please provide examples.
(ii) The Act states that ``repayment shall be made on that portion
of bonds or notes necessary to bring the bonds or notes that remain
outstanding after such repayment into compliance with the 90 percent
requirement of paragraph (1).''
[[Page 38580]]
How should the CDFI Fund enforce this requirement?
(iii) What penalties should the CDFI Fund impose if a qualified
issuer is deemed noncompliant?
(iv) The Act provides that the qualified issuer pay a fee of 10
basis points annually. What penalties should be imposed for failure to
comply?
10. General Comments
The CDFI Fund is also interested in receiving any general comments
and suggestions regarding the structure of the CDFI Bond Guarantee
Program that are not addressed above.
Authority: Pub. L. 111-240.
Dated: June 23, 2011.
Donna J. Gambrell,
Director, Community Development Financial Institutions Fund.
[FR Doc. 2011-16682 Filed 6-30-11; 8:45 am]
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