Community Development Financial Institutions

Community Development Financial Institutions (CDFIs) are a suggested strategy to increase business growth, community wealth, economic development, and economic revitalization in distressed communities^{9, 10}. Experts suggest CDFIs can expand economic opportunity for marginalized populations that have been left behind by mainstream lenders and financial service providers³, especially in neighborhoods of color¹¹. However, additional evidence is needed to confirm effects¹².

CDFI loans appear to be successfully reaching the people they intend to help: those living in areas with high poverty or unemployment and members of underserved groups such as individuals with low incomes, minorities, Native organizations, and the unbanked¹³. Most CDFI funding goes to communities that are distressed and underserved; however, lending is unevenly distributed across the country, and substantial needs remain in rural areas². Many small and midsize cities also face challenges in attracting sufficient funding for CDFIs¹⁴.

CDFIs can help reduce the racial wealth divide by providing financial services to people of color to enable them to build wealth and assets through homeownership and small business ventures. CDFIs can also support community wealth building with efforts to develop community properties, infrastructure, services and programs, and to invest in housing and community development opportunities in distressed communities¹⁰.

Black and Hispanic-owned businesses and those located in distressed communities are more likely to apply for funding from CDFIs¹⁵. Black-owned businesses in rural areas, however, were significantly less likely to apply at a CDFI than those in urban areas¹⁵. Studies suggest black-owned businesses may be less likely to be funded, perhaps due to a lack of business assets which could be used as collateral¹⁵.

Available evidence suggests community development credit unions offer an alternative to predatory lending, such as payday loans^{16, 17}. Community development venture capital investments are more likely to be in rural areas than traditional venture capital and are more likely to happen at earlier points in the development of a business and in non-typical industries¹⁸. Community development venture capital may be less likely to result in significant profit but may attract traditional venture capital to underserved areas¹⁸. Experts suggest the effect of CDFIs on neighborhood revitalization, economic development, and business growth may be constrained by the relatively small amounts of funding available¹² and the limitations of available data to detect effects¹³.

A Los Angeles-based study suggests CDFI staff with direct community experience, particularly those that share a language and cultural background with clients, may be able to gather additional valuable information during the lending process, build stronger relationships with clients, and may allow a CDFI to take on greater risks⁵. Surveys of CDFI leaders suggest CDFIs’ roles vary based on what community needs they are addressing. CDFIs can function as alternatives to mainstream financial institutions or work to draw mainstream lenders into the area. Other CDFIs may offer a new product or previously unavailable service to meet community needs; serve as economic development catalysts; or act as a bridge between public and private sectors, community developers, and philanthropic organizations¹⁹.

CDFIs require financial capital and sufficient equity to support their loans, operations, and expansion activities, but CDFIs do not always have adequate funding. For example, for CDFI microlenders (who make loans under $50,000) a lack of assets can prevent service expansion; the small business loans they offer do not always cover the full costs of providing loans, which means they must locate additional grants and financing¹⁵. To increase their available equity, experts suggest strategies such as selling loans, coinvesting with other organizations, and finding new investors, including those who may be interested in social and environmental benefits as well as investment returns. To attract such investors, CDFIs need to effectively communicate what the CDFI is doing, the size and structure of their offerings, and understand the impact measures that investors are interested in²⁰. Analysis indicates that CDFI loan funds, banks, and credit unions with larger assets are much more likely to have high self-sufficiency ratios (i.e. they are more likely to be able to produce sufficient revenue to cover costs without reducing their equity value) than smaller CDFIs²¹.

Experts recommend significantly increasing the budget for CDFI Fund grant programs, to $1 billion annually³. Experts also suggest adding more support and investment for community development capacity and partnership building with state, local, and philanthropic partners².

As of spring 2021, there were more than 1,160 certified Community Development Financial Institutions (CDFIs) across all 50 states, Washington, D.C.²². In 2019, CDFIs provided $168 billion in financing³. In fiscal year 2018, registered CDFIs provided 28,000 loans or investments to almost 15,000 small business, over 200,000 consumer loans, around 19,000 home improvement or purchase loans, financed over 33,000 affordable housing units, and provided financial literacy training to 343,471 individuals⁴. Some cities where CDFIs play a significant role have been the subject of case studies, such as Detroit²³.

The U.S. Department of the Treasury certifies all CDFIs that receive grants from the CDFI Fund¹. To qualify for these equity grants, private legal financing organizations must primarily be working to promote community development in at least one specific market experiencing certain levels of poverty, unemployment, or population loss. Grantees must also offer development services (e.g., trainings in financial literacy, microenterprise management and development, etc.) along with financing activities¹².

Native CDFI loan funds have grown over time²⁴ and have the potential to make more loans within their communities if they had more funding²⁵. The CDFI Fund’s Native Initiatives program provides funding, technical assistance, and training for Native CDFIs²⁶. Native CDFIs can also partner with traditional lenders in addition to receiving CDFI funding²⁷.

The focus of CDFIs can widely vary. For example, the Denver Regional Transit-Oriented Development Fund provides flexible financing to affordable housing and community developers to maintain or create affordable housing near public transit in the seven-county metro area²⁸. CDFIs may partner with community land trusts to increase affordable housing in communities²⁹ and have a history of partnering with community health centers³⁰. CDFIs can partner with health practitioners and other community groups on community health improvement efforts, such as violence prevention and financial education, as well as traditional financing. Examples include a Coatesville, PA-based center that features health services, senior housing, and a children’s library; adding additional affordable housing, health services, a vegetable garden, and social connectedness programs to a St. Paul, MN rental housing complex; and in New York City, supporting development of a public school with a rooftop garden as well as an adjoining community center³¹.

As of 2021, loan funds accounted for over half of CDFIs registered with the CDFI Fund, credit unions were another 25%, banks 12%, holding companies 8%, and venture capital funds only 1%³².