On February 3, 2010, Secretary of the Treasury Timothy Geithner announced a new program to help two specific types of credit unions and banks expand their credit and services “to the country’s hardest hit communities.” The announcement was the culmination of six months of groundwork and collaboration with Treasury by the Federation, on behalf of low-income credit unions, and our counterparts representing community development banks.
The Community Development Capital Initiative (CDCI) is a program of the U.S. Department of the Treasury. Using returned funds from the Troubled Assets Relief Program (TARP) to support the continued viability, growth and expansion of CDFI-certified depository institutions, CDCI will make low-interest secondary capital deposits in CDFI-certified community development credit unions and community develoment banks.
Although the funding and authority for the CDCI are provided by and through the Treasury Department’s Troubled Asset Relief Program (TARP), this is not a “bailout” program and is quite different from other elements of TARP. However, the funding and authority for the CDCI are provided by and through TARP, and so CDFI credit unions and banks must comply with all Treasury guidelines regarding transparency, reporting, and monitoring.
According to the final numbers released by Treasury on September 30, 84 community development financial institutions received a total of $570 million in secondary capital investments. With 48 recipient institutions, credit unions represented 57% of this total, yet received $70 million or 12% of the total funding. Community Development Banks got most of the CDCI money – but the great majority of it was refinanced from the earlier Capital Purchase Program. In all, only $111 million of the CDCI funding was NEW money, and we’re happy to report that credit unions got the better portion of that. The administration had budgeted $800MM for this program, so plenty was left unclaimed.
The fact that credit unions only received 12% of the CDFI money in spite of representing 57% of the recipient institutions highlights the small size of participant credit unions:
4 credit unions had assets over $100 million
11 credit unions had assets over $50 million
19 credit union had assets of less than $10 million
5 had assets of less than $1 million
45 out of these 48 credit unions are Federation members, although we worked closely with 46 of these institutions.
Of the 111 CDCI applications received by NCUA only 85 were sent to Treasury for final approval. We estimate that at least five credit unions were rejected in this second phase and at one point we were working with 72 credit unions, representing $111 million in secondary capital requests.
Most of the 24 credit unions that pulled out after receiving pre-approval from Treasury based their decision on the following issues:
Lack of clarity about executive compensation limitations: The 9/16 memo that Treasury sent out to CDCI participants and the subsequent conference call they hosted on 9/22 were helpful but took place too late in the process for a number of credit unions to reverse their decision to withdraw.
The prohibition of the payment or accrual of any bonus for the CEO and retention award of incentive compensation to up to the 25 most highly compensated employees of the credit union. Many interpreted these restrictions too broadly and some understood that all 457 plans were prohibited. Questions were raised about contributions to other type of pension plans as well. There was also confusion about 457 F payouts as initially people understood them as being prohibited, which was credit unions whose CEOs were approaching retirement age. This issue was later clarified as the prohibition would only apply to “acceleration of payments” and not to those who would be entitled to them as originally stipulated in their retirement plans.
The requirement that the credit union permit its members to hold an annual, separate, non-binding vote to approve executive compensation.
The prohibition of any severance payments to credit union SEOs and the 20 most highly paid employees. Since many of the participant credit unions had less than 20 employees, this limitation forced them to change their personnel policies and benefit structures as most credit unions pay some sort of severance to their employees
The waiver requirement for the 20 most highly paid employees. This created tremendous grief as many credit union managers felt that they couldn’t in good faith ask their employees to sign something that had no enforcement on any of them. In addition, in certain cases, employees refused to sign the waiver and as a result credit unions could not close on their loans.
Across the board, the CDCI program provided a unique opportunity to get community development credit unions on the administration’s agenda and bring additional resources to strengthen their capacity to serve low-income consumers and underserved communities. We regret that Treasury (and in some instances NCUA) didn’t provide the flexibility needed for the CDCI program to achieve maximum impact, but given the complexity of the program, tight deadlines and the regulatory constraints faced, we still feel quite satisfied that so many small credit unions made it to the finish line.
The CDCI was restricted to credit unions that (a) are certified by the Treasury Department’s Community Development Financial Institutions (CDFI) Fund AND (b) have low-income designation from NCUA or state regulators.
What kind of funding was made available?
This is NOT a grant program. Funds provided to credit unions must be in the form of secondary capital loans – deeply subordinated debt that is classified as net worth, subject to certain conditions, on the balance sheet of low-income credit unions. Currently, low-income credit unions are the only credit unions eligible to accept this kind of loan.
Was this part of the $30 Billion Program Treasury Announced for Community Banks?
No, it is separate from that. There is no set amount for CDCI, but it will probably be less than $1 billion.
What were the terms on CDCI Investments?
The basic terms for the loans are:
Two-percent (2%) for the first eight years, escalating to nine-percent (9%) for an additional five years, should credit unions choose to retain the loans.
Credit unions may choose to apply for CDCI funds for terms 8 or 13 years. If applying for 8 years, funds must be returned to Treasury by the end of the 8th year in order to avoid the rate increase.
Writedown of CDCI secondary capital begins at 5 years before maturity.
Credit unions must write down 20% of CDCI funds in each of the 5 years (Important: writedown funds do not count towards your regulatory net worth).
How much were credit unions allowed to receive?
Credit unions can apply for amounts up to 3.5% of their total assets (e.g., $35,000/million in assets).
What were the conditions and restrictions for CDCI investments?
Credit unions must be approved by NCUA to participate in the program. NCUA must ascertain the applicant credit union is “viable.” Credit unions that fall short of this standard may be able to access CDCI funds if they are able to raise dollar-for-dollar match funds from non-federal sources.
Who administers the CDCI program?
Treasury’s Office of Financial Stabilization, in cooperation with NCUA and the Treasury Department’s CDFI Fund.
The CDFI Fund recently sent out a CDCI Relationship Management letter from Treasury informing CDCI participants that Justin Hall will be the new head of the Relationship Management function for the Office of Financial Stability’s Community Development Capital Initiative. Justin will take primary responsibility for answering general queries regarding CDCI. Please direct any questions you may have to him.
Treasury's CDCI program requires that participating credit unions comply with a number of post-closing obligations listed on the Securities Purchase Agreement (SPA) and other CDCI closing documents.
Treasury's letter, with specific post-closing requirements is available by clicking here.
A summary of these post-closing obligations has been prepared for us by the Lawyers Alliance of New York, and is available below. Please note that this summary focuses only on your document delivery obligations, but all credit unions should be aware that the SPA contains several other ongoing compliance requirements that you must be sure to understand and observe.
Please remember that over the next couple of weeks several reporting requirements in connection with the CDCI program become due. These obligations area specified in your CDCI Security Purchase Agreement and were also contained in a communication Treasury sent to you after the closing of your CDCI loan (refer to attached CDCI Filings Letter).
Based on that letter we developed a summary and a check-list that we sent to you some time ago with the purpose of making it easier to visualize what’s due and when. For your convenience, we’ve updated that checklist, but we must remind you that this list is focused solely on document delivery obligations. The SPA contains several other ongoing compliance requirements that you should read and be sure to understand and observe.
The following deliverables are now due (please refer to revised compliance checklist above):
a. Audited Consolidated Financial Statements. You should notify Treasury that you are NOT required by the regulator to produce audited financial statements. NCUA Rules & Regs Part 715 & 741 allows Supervisory Committee Audits (Agreed-upon Procedures) and other Audit Options. This is due 90 days after end of the fiscal year.
b. Interest Holders Report: This is due as soon as available after each quarter.
c. Internal Control Assessment: This is due as soon as available.
In addition, the following certificates are due on March 17, 24 or 28 of each year (depending on your credit union’s CDCI closing date):
a. Annex F, Officer’s Certificate;
b. Narrative stating that the credit union's CDFI certification status remains unchanged;
c. Narrative stating that the credit union continues to provide development services;
d. List of all new board members, including a narrative of each individual’s relationship to the target market and/or investment area; (See Exhibit B of Annex F, which contains correct format to list new board members and suggests language regarding their relationship to target market)
e. Narrative stating that the credit union is not an agency of the United States of America, or any specific state or political subdivision;
f. CDFI Material Event Form (if applicable);
By now you should have already instituted an Excessive/Luxury Spending Policy and established a formal Compensation Committee. In lieu of a Compensation Committee (which must be composed entirely of independent directors), your Board of Directors is permitted to assume that function, provided it acts as a whole and DOES NOT delegate duties to a subcommittee.
Finally be advised that the following compensation regulation requirement is also due:
As stated on the Securities Purchase Agreement (SPA), Section 8.6 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered personally, or by facsimile, upon confirmation of receipt, or (b) on the second business day following the date of dispatch if delivered by a recognized next day courier service. All notices to the Investor shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the Investor to the Credit Union.
As stated on the Post Closing Obligations Memo, to be in compliance with the requirements under the American Recovery and Reinvestment Act of 2009 –ARRA- (which amends certain sections of the Emergency Economic Stabilization Act of 2008) and the interim final rules published on June 15, 2009 at 31 C.F.R. part 30), recipients of funds under the Community Development Capital Initiative of the Troubled Assets Relief Program must have in place a company-wide policy regarding excessive or luxury expenditures within 90 days of receiving those funds.
This policy should be posted on your credit union’s internet websites.
A template Luxury Expenditures Policy is available below:
Please note that any credit unions that DID NOT produce their original CDFI certification application at the time of their CDCI closing are required to submit that documentation within 60 days of closing.
This is one of the post-closing obligations listed on the Securities Purchase Agreement (“SPA”): "(ii) to the extent a copy of the CDFI Certification Application that the Credit Union submitted to the Fund in connection with its certification as a CDFI is not available, a newly completed CDFI Certification Application true, complete and correct as of the Signing Date (the CDFI Certification Application, delivered to the Investor pursuant to this Section 2.3(l), the "CDFI Application"), ..."
As per Section 8.6 of the Securities Purchase Agreement, the documentation must be mailed to:
United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Attention: Chief Counsel, Office of Financial Stability
Responding to concerns voiced by the Federation, NCUA issued an opinion letter on March 31, recommending that CDCUs requiring a 1-to-1 match for CDCI investments be allowed to apply for terms of either 8 or 13 years.
The opinion letter is in direct response to concerns that CDCUs requiring a match to be considered viable will be challenged to identify outside investors willing to match Treasury's secondary capital investments for terms of 13 years, effectively serving as a barrier for many CDCUs to participate in the program.
NCUA's letter contends that CDCUs should be allowed to apply for funds with terms of 8 or 13 years, with the assertion that any and all Treasury funds could be returned after 2 years.
To read NCUA's Opinion Letter on CDCI Maturity Terms, please click here.
Although the funding and authority for the CDCI is provided by and through the Treasury Department’s Troubled Asset Relief Program (TARP), this is not a “bailout” program and is quite different from other elements of TARP. However, the funding and authority for the CDCI are provided by and through TARP, and so CDFI credit unions and banks must comply with all Treasury guidelines regarding transparency, reporting, and monitoring.
Credit unions participating in the CDCI program will have several compliance issues to deal with. The Federation does not believe that these are terribly burdensome for the great majority of credit unions, or that they should discourage credit unions from participating. In order to provide credit unions with the accurate information, we have assessed these issues and their possible impact on credit unions.
We gratefully acknowledge the guidance that CUNA has given to the Federation. However, this memo is presented for informational purposes only. This is not intended to provide legal advice, and neither the Federation nor CUNA assumes any liability in providing this information. Larger credit unions, in particular, may wish to consult their attorneys if they have further questions. It is our understanding that the Treasury Department may be available to answer specific question addressed to them. On request, the Federation will locate the appropriate Treasury Department staff to which questions may be addressed.
Please note that for the purposes of this memo, certain legal provisions not applicable to credit unions have been omitted. For credit unions that receive over $25 million in CDCI funds, there are additional compensation and corporate governance restrictions. Based on our current information, the Federation believes that few, if any, credit unions will be requesting those amounts; however, please notify us if you are in that group, and we will attempt to provide additional information and support.
To view our memo on executive compensation regulations under CDCI, please click here.
Informal guidance regarding Executive Compensation is available by calling Kurt Slawson at Treasury at (202) 927-9460, or Ms. Pat Geoghegan (pronounced “Gagen”?) at: (202) 927-8729.
NCUA requires that all credit unions applying for CDCI Funds complete Secondary Capital Plans, regardless of whether they require a match or not. For CDCUs completing Secondary Capital Plans in-house, the Federation has several resources available to assist you:
The Federation has developed several templates to assist credit unions to complete their Secondary Capital Plans. If your credit union is interested in using one of our templates, please contact Pablo DeFilippi at (800) 437-8711 x304 or email@example.com, or Brian Gately at (800) 437-8711 x201 or firstname.lastname@example.org.
NCUA & Federation Community Development Capital Information for CDCUs - On March 4, 2010, National Credit Union Administration (NCUA) Board Chairman Debbie Matz and Federation President/CEO Cliff Rosenthal held a joint audio conference. The call was designed to provide low-income credit unions with specifics about the U.S. Treasury Department’s new Community Development Capital Initiative (CDCI) and was open to low-income designated credit unions interested in applying for secondary capital from the Treasury Department’s Community Development Capital Initiative. The session was attended by over 100 participants, and included information from NCUA, the U.S. Treasury Department, and the Federation. Detailed notes from this call are available by clicking here.
Treasury Department Community Development Capital Informational Conference Call Summary - On February 17, 2010 the CDFI Fund and U.S. Treasury Department’s Office of Financial Stability hosted an informational conference call regarding the Community Development Capital Initiative. Donna Gambrell, Director of the CDFI Fund; Michael Tae, Director of Investments at the Treasury Department's the Office of Financial Stability; and Cliff Rosenthal, President/CEO of the Federation led an information session for credit unions. Detailed notes from the call are available by clicking here.