Treasury Proposes to Eliminate Race- and Ethnicity-Based Target Markets from CDFI Certification

Over the past year, senior administration officials have repeatedly criticized certain CDFI activities as advancing diversity, equity, and inclusion (DEI) objectives that they argue fall outside the program's intended purpose. Treasury Secretary Scott Bessent has publicly stated that the administration wants to ensure the CDFI Fund is focused on its statutory mission and not "loaded with a partisan wish list," while Office of Management and Budget Director Russell Vought has questioned whether federal resources should support institutions that target minority communities as a core component of their business model.

Against that backdrop, the proposed changes appear as part of a broader effort to align federal community development programs with the administration's emerging post-DEI policy framework.

Together, these proposals would reshape both who can qualify as a CDFI and how Treasury evaluates certification over time. Institutions that rely on the affected OTPs should begin contingency planning now and consider submitting comments before the November 30 deadline.

What Would Change

Elimination of race- and ethnicity-based OTPs. The notice proposes to eliminate the following OTP categories:

• Other Targeted Population – African American
• Other Targeted Population – Hispanic
• Other Targeted Population – Other Pacific Islander
• Other Targeted Population – Filipino
• Other Targeted Population – Vietnamese

CDFIs would instead need to demonstrate service through Investment Areas (qualifying distressed geographies)¹, Low-Income Targeted Populations (generally households at or below 80 percent of area median income)², or remaining OTP categories that do not rely on race or ethnicity, such as Native American, Native Alaskan, Native Hawaiian, Persons with Disability, and other CDFIs.

One-year transition period. Currently certified CDFIs that rely on an eliminated OTP to reach their required Target Market service would have one year to transition. The notice frames this as largely administrative, but in practice, affected institutions may need to redesign their certification strategy, establish new Investment Area methodologies, identify alternative OTP qualifications, rebuild Target Market analyses, and potentially recharacterize their mission and impact reporting. For some organizations, this new pathway will be exceedingly challenging.

Accountability measured by activity, not board representation. The notice proposes replacing portions of the traditional Accountability analysis, which was historically demonstrated through governing or advisory board representation, with a framework that looks directly at Target Market activity and loans/investments made. The CDFI Fund specifically requests comment on this point (Question 10): "In revising the Accountability requirement to be measured through Target Market activity rather than board representation, the CDFI Fund is evaluating whether minimum thresholds of Target Market activity should be set for entities that are approved to serve more than one Target Market type. What should be the minimum threshold per approved Target Market type for an institution to comply?" This change may provide some relief from board-composition requirements, but it also introduces new threshold-compliance complexity for multimarket CDFIs.

A more performance-driven certification regime. Taken together, the proposed changes signal a return to annual Target Market compliance testing (rather than multi-year testing) and a new emphasis on certification demonstrated mainly through transaction-level financing activity, rather than through mission and governance structures. Annual testing means certified CDFIs would be evaluated more frequently, so a single weak year could jeopardize certification rather than being averaged out over a longer period. At the same time, shifting the focus to loans and investments actually made converts certification into a more quantitative examination; the implication is that an institution’s stated mission will carry less weight than the financing activity. Combined with the move to measure Accountability through Target Market activity rather than board representation, these changes would make certification less a one-time review of organizational purpose and structure and more an ongoing test of performance. Governance structures and mission statements remain important and will still be collected., however. These changes may draw fewer headlines, but over time they could significantly change how certification is monitored and enforced, giving the CDFI Fund more frequent, data-driven opportunities to identify compliance shortfalls and, where warranted, take action, including decertification.

The December 2023 Application versus the Proposed 2026 Application

The CDFI Fund published a redline comparing the current CDFI Certification Application (released December 2023) with the proposed 2026 version. The redline shows the following specific changes.

Summary of Potential Industry-Wide Effects

Greater emphasis on place-based lending.
Expect increased focus on census tracts, qualifying ZIP codes, and geographic eligibility analysis, including for institutions whose historic mission has been race and ethnicity-focused rather than place-focused.

Product and outreach redesign.

Outreach, intake, data collection, and underwriting practices may need to be realigned to income- and geography-based standards.

Transaction and investment diligence.

Banks, investors, and strategic partners evaluating certified CDFIs should account for certification transition risk, which could affect valuations, deal terms, and capital commitments.

Long-Term Mission Tension

For decades, many CDFIs have viewed racial wealth gaps and historic underinvestment in minority communities as central components of their mission. Treasury's proposal reflects a different policy view: that federal support should be directed based on economic need and community distress rather than demographic identity. That debate is likely to become one of the defining policy discussions in the CDFI sector over the next several years.

Important Process Note: This Is a Paperwork Reduction Act Collection, Not a Notice-and-Comment Rulemaking

The CDFI Fund has advanced these changes through an information collection notice under the Paperwork Reduction Act (PRA),³ and its implementing regulations at 5 C.F.R. Part 1320, rather than through a proposed rule under the Administrative Procedure Act, 5 U.S.C. § 553. That distinction matters for anyone planning to comment, because comments and review are subject to a different standard.

1. Two comment windows. The PRA process begins with a 60-day agency notice requesting comment followed by a 30-day notice when the agency submits the collection to the Office of Management and Budget (OMB) for clearance. Comments may be directed to the CDFI Fund in the first window and to OMB's Office of Information and Regulatory Affairs (OIRA) in the second.
    
2. A slightly different review standard. Under the PRA, the agency must certify, and OMB must determine, that the collection is necessary for the proper performance of the agency's functions, has practical utility, does not unnecessarily duplicate other collections, and reduces burden on respondents to the extent practicable and appropriate.⁴ These clearance criteria focus on the paperwork itself and differ from the notice-and-comment framework that applies to a proposed rule. That said, OMB's paperwork clearance is not the last word: once the CDFI Fund puts the revised application into use, that decision hypothetically will still be reviewable under the Administrative Procedure Act.
    
3. Approval and renewal. The final step is OMB's issuance of a control number with an expiration date (usually three years), after which the agency puts the revised application into use. To extend an approval, the agency must repeat the PRA public notice and comment process, so collections are typically renewed on a three-year cycle.

Effective comments may speak to the PRA criteria directly (for example, the accuracy of the CDFI Fund's burden estimates and the practical utility of new data elements) while also documenting substantive concerns, including whether particular changes go beyond the existing statute and regulations. A well-developed record in both comment windows preserves the full range of options for affected institutions.

Recommended Next Steps

• Inventory current Target Market approvals and identify any reliance on the affected OTP categories.
• Model alternative pathways through Investment Areas and Low-Income Targeted Populations and assess portfolio activity against potential minimum thresholds per Target Market type.
• Evaluate data systems for transaction-level reporting and annual compliance demonstrations.
• Prepare comments by November 30 that address the PRA criteria and the CDFI Fund's specific questions, and plan to submit follow-on comments to OIRA during the 30-day window.

Bottom Line

The proposal represents one of the most consequential changes to CDFI certification in recent memory. For lenders, investors, banks, and community development organizations, this is a development worth watching closely. It has the potential to reshape not only who qualifies as a CDFI, but also where community development capital flows in the future.

Baker Donelson's CDFI team is monitoring this proposal closely and is available to help institutions evaluate their certification exposure, model alternative Target Market strategies, and prepare comments.

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¹ Investment Areas are defined on census tract level and include tracts with a poverty rate greater than 20 percent; Median Family Income (MFI) at or below 80 percent of specific benchmarks (12 CFR 1805.201(b)(3)(ii)(D)(2)(i-ii); unemployment rate 1.5 times the national average; county population loss of greater than or equal to 10 percent between the two most recent census periods (for metro areas) or greater than or equal to 5 percent over the last five years (for non-metro areas); or entirely located within an Empowerment Zone or Enterprise Community, as designated under section 1391 of the Internal Revenue Code of 1986. A tract only needs to satisfy one of those criteria to be a qualified CDFI Investment Area. The CDFI Fund maintains the official tract list here: https://www.cdfifund.gov/system/files/2023-02/CDFI_Investment_Areas_ACS_2016_2020.xlsb

² The calculator and its rubric are available here https://www.cdfifund.gov/system/files/2024-10/LIC_10-18-24_final.xlsx

³ See 44 U.S.C. § 3501 et seq.

⁴ See 44 U.S.C. §§ 3506(c)(3), 3508 and the implementing regulations at 5 C.F.R. § 1320.5, 1320.9.