Challenge: The Bond Guarantee Program (BG Program) was created under the Small Business Jobs Act of 2010 and is administered by the Community Development Financial Institution (CDFI) Fund within the U.S. Department of the Treasury. The BG Program provides guarantees on 100 percent of bonds issued by CDFIs for community and economic development purposes, establishing a source of long-term, low-cost capital previously unavailable to the CDFI industry. Implementation of this program requires adherence to regulations outlined in the Small Business Jobs Act of 2010, as well as the Federal Credit Reform Act of 1990. A major hurdle under the program is a lack of appropriated funds to offset defaults. As a zero subsidy program, the BG Program must carefully balance CDFI Fund objectives while maintaining high credit quality among participants.
Solution: In order to accomplish the goals of this new program, the CDFI Fund has engaged the Summit Team to assist with programmatic design, provision of financial modeling and subsidy calculation services, as well as Federal Credit training. Program design requires the development of programmatic materials, with which Summit is currently assisting the CDFI Fund. The CDFI BG Program also requires the establishment of an appropriate internal organization structure, as well as the determination of the financial structure of the bond issuances. Leveraging the Federal Credit expertise and CDFI industry experience of its team, Summit determined appropriate financial structures and identified various roles of entities under each financing.
Summit created application materials and developed underwriting criteria and loan parameters that will determine creditworthiness of CDFI applicants. Our team has designed an internal risk rating methodology for the CDFI Fund that will assess the viability of CDFI applicants by identifying key risk metrics needed to quantify the risk associated with each bond issue. Summit Team members are also developing a recovery rate methodology that will accurately assess potential recoveries in the event of default.
After bond issuance, comprehensive loan and compliance monitoring practices must be instituted to ensure CDFI BG Program success. Summit Team members are supporting the development of a multi-tiered monitoring policy to ensure program participants adhere to the requirements set forth by the CDFI BG Program.