Is a Community Development Financial Institution (“CDFI") an allowable use of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”)for businesses considered impacted or otherwise eligible under CSLFRF?

Last Updated: March 04, 2024

A Community Development Financial Institution (“CDFI”) that is structured as a revolving loan fund, is likely an eligible use of funds as described by the U.S Department of Treasury (“Treasury”):

A recipient may contribute funds to a revolving loan fund if the loaned SLFRF funds are restricted to financing eligible uses under the public health emergency/negative economic impacts, premium pay, and necessary water, sewer, and broadband categories (or under the government services category if the contribution to the revolving fund is made using revenue loss funds). The funds contributed using SLFRF funds must be limited to the projected cost of loans made over the life of the revolving loan fund, following the approach described above for loans with maturities longer than December 31, 2026.[1]

It is important to note the difference between the eligibility of an entity to receive American Rescue Plan Act (“ARPA”) funds such as CSLFRF, and allowable use of funds.  When it comes to businesses, eligible impacted small businesses may receive loans if the funded activity is both eligible and has a reasonable nexus to COVID-19.^[2] Multiple factors can affect whether a small business can be identified as impacted. Factors to consider include, but are not limited to:

1. Decreased revenue or gross receipts; and 

2. financial insecurity;

3. increased costs;

4. capacity to weather financial hardship; and challenges covering payroll, rent or mortgage, and other operating costs.^[3]

The activity of the loan from an eligible revolving loan fund, or a CDFI structured as such, is limited to allowable activities under CSLFRF guidelines. This requires the funded activity to fall within one of the eligible use categories for CLSFRF funds. A CDFI structured as a revolving loan for small business likely falls under the negative economic and health impacts category.[4] This eligible use category requires that the CDFI functioning as a revolving loan to respond to identified negative economic or health impact from the COVID-19 Pandemic in a reasonable and proportional manner.[5]

The U.S. Department of Treasury maintains that CSLFRF uses for general economic development or uses that generally enhance the jurisdiction’s business climate is generally considered an ineligible use.[6] Furthermore, it is critical to ensure due diligence is performed relative to internal controls and city policy to include scrutiny around concepts such as conflicts of interest and general adherence to city policy in conformance with 2 CFR 200.303.

The municipality must ensure that proper documentation is kept for subrecipients, pass-through entities, and beneficiaries in conformance with 2 CFR 200.331-332.

All CSLFRF recipients who have entered into contracts and/or subawards, including entities which have elected to fund revolving loan programs such as the scenario summed above should review the following updated Treasury guidance concerning contracts and subawards.

Immediately effective with Treasury’s publication of the Obligation Interim Final Rule 2023 on Monday, November 20^th, 2023, is the institution of additional flexibility regarding the replacement of a contract or subaward entered into prior to the obligation deadline of December 31, 2024.[7]

While the general provision that that recipients may not re-obligate funds or obligate additional funds after the obligation deadline remains unchanged, Treasury is clarifying that after December 31, 2024, recipients would be permitted to replace a contract or subaward entered into prior to December 31, 2024 under three distinct circumstances:[8]

(1) the recipient terminates the contract or subaward because of the contractor or subawardee’s default, because the contractor or subawardee goes out of business, or because the recipient otherwise determines that the contractor or subawardee will not be able to perform under the contract or carry out the subaward

(2) the recipient and contractor or subrecipient mutually agree to terminate the contract or subaward for convenience

(3) the recipient terminates the contract or subaward for convenience if the contract or subaward was not properly awarded (such as if the contractor was not eligible to receive the contract), there is clear evidence that the contract or subaward was improper, the recipient documents its determination that the contract or subaward was not properly awarded, and the original contract or subaward was entered into by the recipient in good faith.

A contract will be considered made in good faith for purposes of clause (3) above if the parties followed standard procurement or subaward practices, as applicable, and the contract or subaward was not entered into for the purpose of evading the obligation deadline.

A recipient that re-obligates funds to a new contractor or subrecipient after the obligation deadline will be considered to have used its funds to cover an obligation incurred prior to the obligation deadline if any of the three situations above is present and if the original contract or subaward being replaced was entered into by December 31, 2024.

If a recipient enters into a replacement contract or subaward, the recipient still must expend all funds by the expenditure deadline.[9]

Finally, Treasury states:

Recipients should maintain documentation to justify their determinations, which should include an analysis of the factors discussed above. Treasury may ask recipients to provide this information in their periodic reports.[10]

Treasury has updated the CSLFRF Compliance and Reporting Guidance to allow for a means to report any activities which result from the updated contract and subaward guidance cited above.[11]  While the Treasury FAQs document for the 2023 Interim Final Rule (”IFR“) has not yet been released,[12] recipients should review the State and Local Fiscal Recovery Funds: Obligation IFR Quick Reference Guide,[13] in addition to the IFR.[14]