How Credit Unions Can Strategically Approach Target Market Lending for CDFI Certification

How Credit Unions Can Strategically Approach Target Market Lending for CDFI Certification

Jeff Bailey
Manager, CDFI Advisory Services

For credit unions currently CDFI-Certified or considering certification, understanding how to meet Target Market (TM) lending requirements is crucial. Did you know that loan purchases count toward CDFI TM lending just as much as loans originated in-house? With the end of the fiscal year fast approaching, credit unions have one last opportunity to adjust their TM lending figures, and loan purchases can be a powerful tool in that effort.

Certified CDFIs must ensure that at least 60% of their eligible financial products are directed toward TM borrowers. While many CDFIs focus on originating loans internally, loan purchases—especially when targeted carefully—can also count toward these requirements. Understanding the potential impact of loan purchases on your TM percentage is essential for maintaining compliance and fulfilling the mission of CDFI Certification.

In this post, we’ll explore the opportunities and risks associated with loan purchases, with a focus on how credit unions can maximize their TM lending through strategic buying.

Opportunities: Using Loan Purchases to Meet TMRequirements

Loan purchases offer a significant opportunity for credit unions to boost their TM lending percentage. Take, for example, a hypothetical credit union—Airport Federal Credit Union (AFCU)—that is CDFI-Certified. By the end of Q3, AFCU’s TM lending rate is below the 60% requirement, with only 40%of loans by transaction count (40 of 100 total) and 58% by dollar amount ($29,000,000 of $50,000,000 total) going to TM borrowers.

However, AFCU has the option to purchase 200 TM-qualified loans totaling $4 million. After this purchase, AFCU’s TM rate jumps to 80% by loan count and 61% by dollar amount—surpassing the certification requirement.This example illustrates how strategic loan purchases can help credit unions fill gaps in their TM lending and ensure they remain in compliance with CDFI requirements. 

Loan Purchases From Non-CDFIs

Credit unions can likewise strategically use loan purchases from non-CDFI entities to enhance their TM lending. For example, CUCollaborate’s trusted lending partners — like the National Auto Loan Network (NALN) — provide a viable solution, if purchased loans meet TM criteria.

Say, for instance, that by the end of Q3, AFCU’s TM lending rate falls short of the required 60%, with only 40% of loans by transaction count and 58% by dollar amount going to TM borrowers. AFCU can purchase 200 TM-qualified loans totaling $4 million, after which, its TM rate increases to 80% by loan count and 61% by dollar amount, surpassing the certification requirement. This again demonstrates how targeted loan purchases can help credit unions close gaps in their TM lending and maintain compliance. 

While loan purchases offer opportunities, they also require careful evaluation. For instance, if AFCU were to purchase a large pool of auto loans where only 50% meet TM criteria, the credit union’s overall TM percentage could drop to 50.7%—below the 60% threshold—jeopardizing its CDFI Certification.Therefore, assessing TM eligibility is crucial when purchasing from non-CDFIs.

With strategic partnerships like NALN, credit unions can confidently pursue loan purchases, ensuring these acquisitions align with CDFI goals and safeguard compliance.

Purchasing Loans From Certified CDFIs or Through LendingPartners

Purchasing loans from other CDFI-Certified institutions offers additional opportunities. These loans can contribute to your TM lending in one of three ways:

1. Direct TM Qualification: If the borrowers of the purchased loans meet the TM criteria, these loans will directly count toward your TM lending rate. However, it’s important to clarify that purchased TM loans count as TM-lending regardless of the CDFI status of the seller.
2. TM-Qualified     Loans From Non-CDFIs: Practically speaking, this means filtering purchased loans to only include loans to Investment Area-qualified census tracts. CUCollaborate’s lending partners, like NALN, use CUCollaborate’s CDFI API to screen any potential loan so that the credit union only receives TM-qualified loans. This also has the advantage of avoiding the need for Board Accountability to Other Targeted Populations (OTP)-Certified CDFIs.
3. OTP: CDFIs can designate loans purchased from other certified CDFIs under a specific category within their TM, creating another avenue to meet the 60%     requirement and facilitating collaboration between CDFIs.

Additionally, credit unions may wish to establish an advisory board if they aim to count non-TM loans purchased from Certified CDFIs toward their TM percentage. This can assist in ensuring accountability to theOTP requirements.

Best Practices for Loan Purchases and CDFI Certification

Loan purchases can be a valuable tool for credit unions looking to meet or maintain their CDFI Certification, but they come with both opportunities and risks. To navigate this landscape effectively, a strategic, data-driven approach is essential.

CUCollaborate offers tailored solutions to help credit unions identify TM-eligible loans, ensuring compliance with certification requirements while expanding impact. Whether you're looking to purchase loans or optimize your lending portfolio, our tools and partnerships can help you make informed decisions.

By taking a proactive and thoughtful approach to loan purchases, credit unions can not only meet their CDFI Certification requirements but also amplify their mission to serve underserved communities effectively.

To learn more about how CUCollaborate can support your credit union’s TM lending strategies, contact Ben Hering, our Director of Partnerships, for a consultation.