What Are Community Development Financial Institutions (CDFIs)?  

I have just moved from the city into the countryside, in a different neighborhood. I noticed that my local bank is a CDFI. I’ve never seen that before, so I did some research to find out more about the CDFI designation. I want to share with you what I found.

Community Development Financial Institutions (CDFIs) are specialized institutions that are certified by the U.S. Treasury’sTreasury’s CDFI Fund. They can be banks, credit unions, venture capital firms, and loan funds.

These institutions provide products and services to individuals and businesses in underserved communities (which is a broad term – I didn’t realize even my community was underserved!) The mission of CDIF institutions is to help develop their communities through responsible lending. These institutions can apply for grants and other types of support through the fund.

Why are Community Development Financial Institutions Important?

Communities cannot be economically viable unless community members have access to financial services. Access to capital is essential to businesses. Yet, many mainstream financial institutions fail to locate in economically distressed communities because they can’t make the profits they “need” to.

Mainstream financial institutions also consider businesses owned by women and minorities to be riskier than those owned by white men, according to Third Way. It’s also highly likely that white men came to that conclusion all on their own, but hey, not like they have any say or control over any financial institutions that may have failed in the past, right?

Third Way provides an example of Carmen Tapio, a black woman, who is the CEO of North End Teleservices, LLC, a contact center. Although she had a long-term relationship with a mainstream financial institution, she was denied a business loan when applying because the institution focused more on large-business lending. When she applied with a CDFI, she received her loan, however.

CDFIs also strive to provide financial services to individuals who might not otherwise have access to them. More than 5 percent of Americans, however, lack basic financial services such as a checking account, accounting to an FDIC survey. The main reason is that they lack enough money to meet minimum balance requirements, the survey said – and if Rick Scott gets his way, they’ll have even less.

Community development banks generally have no minimum balance requirements for checking accounts. When unbanked individuals need loans, they often have to resort to loans from payday lenders who charge exorbitant rates. CDIFs are designed to offer reasonably priced loans to previously non-banked individuals.

Even for those members of a neighborhood who might be able to have their banking needs met by conventional financial institutions, having CDFIs in the community improves their quality of life too. According to the World Economic Forum, more and more officials and policymakers believe that improving access to financial services throughout the population as a way to promote economic development for the whole society.

More than 60 countries have adopted financial inclusion targets. The World Bank says that universal access to financial services helps lift people out of poverty, learn to save, and become entrepreneurs. In some countries, microfinance establishments make very small business loans to encourage entrepreneurial activities in distressed communities.

In the United States, CDFIs seek to fill the gap. They are generally businesses, but they have different goals.

They want to contribute to the neighborhood’s economic development, and some only break even. These community development banks may offer no interest on savings accounts to offer low-interest loans to individuals. Because low-income individuals have few other options for savings accounts, the lack of interest is a tradeoff they’ll willingly accept in exchange for being able to get low-interest loans.

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How Does a Bank Become a Certified Community Development Financial Institution?

Community development financial institutions have a different mission from mainstream financial institutions. Institutions must apply to receive the designation as certified CDFI. The designation is important for receiving certain types of funding.

To become a certified CDFI, the institution must target at least 60 percent of its financing activities to moderate-income or low-income people. They also must be accountable to their target group. Many community development financial institutions fulfill this requirement by appointing members of the target group to their boards.

To gain certification, financial institutions apply to the CDFI Fund. In addition to meeting the 60 percent threshold, the institutions must meet the following requirements:

• Be a legal entity
• Have community development as its primary mission
• Be a financing entity but also provide development services
• Be accountable to its target group
• Not be a government agency or have any affiliation with a governmental agency. The exception is tribal governments, which are eligible to apply.

Every state, Puerto Rico, and the District of Columbia have at least one CDFI. I found a current list of CDFIs on the web.

The federal government will consider four types of financial institutions for certification as CDIFs.

• Community Development Banks are profit-making businesses that provide capital in distressed communities. They account for about 13 percent of CDFIs.Community Development Credit Unions are nonprofit, member-owned institutions. They account for about 26 percent of CDFIs.
• Community Development Loan Funds are nonprofit organizations that provide financing to affordable housing developers, small businesses, and community service organizations. They account for about 59 percent of all CDFIs.
• Community Development Venture Capital Funds provide equity financing or debt and equity services to businesses in economically distressed communities. They account for about 2 percent of all CDFIs.

Why are CDIFs important to a community?

Credit and capital are the lifeblood of small businesses and often dictate whether a company can get off the ground, expand, survive, and thrive. Small businesses make up 99.9 percent of U.S. firms, according to the Federal Reserve.

But capital continues to be a significant problem for small businesses, especially those owned by women and people of color. In the U.S. “Traditional” financial institutions consider minority-owned businesses riskier than their white male counterparts and tend to deny loan applications from these minority-owned businesses.

Consider, again, the example of Tapio, the CEP of the contact center in Nebraska. Although her revenue stream was excellent, the bank indicated that its target customers were larger businesses.

The good news is she finally received the loan she needed from a CDIF. No thanks to the “traditional” alternatives.

What are CDFIs, and how do they work?

CDFIs primarily focus on providing capital and financial services to businesses, individuals, and organizations that are often overlooked in urban and rural communities. While traditional banking institutions may see risks or lower returns by focusing on these communities, CDFIs are designed to foster economic opportunity and revitalize neighborhoods.

They provide financial help, technical assistance, and more affordable financial products that meet the needs of these communities. In some cases, they provide access to financial products that community members would be unable to access at all in from conventional financial institutions.

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What is the federal government’s role in CDFIS?

The federal government now awards funding through the CDIF Fund, administered through the U.S. Treasury Department. The federal government’s role actually began as far back as the 1970s, when Congress responded to a practice known as redlining.

Redlining is a discriminatory practice in which loans and services are withheld from people in minority communities or low-income communities. Congress passed the Community Reinvestment Act to respond to this practice and try to put these communities on equal footing with other communities. One aspect of the act was the creation of the first CDFI.

CDFIs really began to expand with the passage of the Riegle Community Development and Regulatory Improvement Act, which created the CDFI Fund. In 2010, Congress passed the Small Business Jobs Act of 2010, which created the State Small Business Credit Initiative. Under that Initiative, CDFIs could distribute funds to small businesses during the devastating economic recession that traditional financial services had helped create.

What Is A Minority Depository Institution?

A Minority Depository Institution is a particular type of CDFI. About half of all CDFIs also have the designation of Minority Depository Institutions (MDIs). They help encourage economic development in minority communities. MDIs are those community development banks where either:

• More than half of the voting shareholders are minorities
• Or more than half of the board members are minorities, and the community the bank serves is comprised primarily of minority residents.

The Federal Depositors Insurance Corp. keeps a list of MDIs, which it updates quarterly.

What is the CDFI Fund?

The federal government operates several programs through the CDFI Fund. The CDFI Fund provides monetary grants to help support the mission of community development financial institutions. Only certified CDFIs can participate in most of the programs.

The CDFI Fund provides several programs and resources to help CDFIs fulfill their mission. The programs include the Bank Enterprise Award Program, the CDFI Program, the Capital Magnet Fund, the Mission-Driven Bank Fund, the CDFI Bond Guarantee Program, the CDFI Equitable Recovery Program, the Economic Mobility Core, the New Markets Tax Credit Program, the Small Dollar Loan Program, Capacity Building Initiative, and Native Initiatives.

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What is the Bank Enterprise Award Program?

The Bank Enterprise Award Program is open to any FDIC-insured bank or credit union, not just to certified community development financial institutions. The program provides monetary incentives to banks and credit unions that increase their investments in CDFIs or expand lending, investment, or other services, such as checking or savings accounts or money orders, in low-income communities.

The incentives come in response to investments the bank has already made into CDFIs. However, these banks or credit unions cannot use the incentive grants to improve their bottom line. They must then put any money they receive through the program back into the low-income community.

The program defines low-income communities (also known as economically disadvantaged communities) as those where two conditions occur. The first is that at least 30 percent of the residents have incomes below the national poverty level.

The second is that the community is experiencing 1.5 times the national unemployment rate. There are tons of neighborhoods like this across America. There’s a good chance you’re reading this in one such neighborhood.

The CDFI fund says that the BEA program has awarded grants totaling more than $546 million since the fund began in 1994. Participating banks and credit unions in the year of 2020 alone:

• Increased loans and deposits for community development financial institutions by more than $40 million.
• Increased loans and investment capital in distressed communities by more than $360 million.
• Provided more than $15 million in additional financial services in low-income communities.
• Increased equity and equity loans and grants to community development financial institutions by more than $30 million.

What is the CDFI Program?

The CDFI Program provides Financial Assistance (FA) and Technical Assistance (TA) awards for certified or emerging community development financial institutions. The awards help CDFIs grow and be sustainable.

Financial Assistance Awards are grants, loans, deposits, equity investments, or credit union shares. They are available for up to $2 million. Only certified CDFIs are eligible for FAs. The CDFIs must match the federal grant funds dollar-for-dollar with non-federal funds.

The CDFIs use the awards to provide affordable financial products in their communities, such as loans or development services. The federal government also awards FAs to help CDFIs finance healthy food activities in low-income communities.

Technical Assistance grants are a capacity-building initiative. Both certified and emerging CDFIs are eligible for these TAs.

Emerging CDFIs must demonstrate that they could qualify to be certified within three years after receiving the reward. Since the CDFI Program began in 1994, it has awarded more than $2 billion in FAs and TAs to CDFIs.

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What is the Capital Magnet Fund?

The Capital Magnet Fund provides grants to certified CDFIs and nonprofit organizations to support financing tools aimed at providing access to housing. Some of these tools include financing for building affordable housing or community service activities that will attract investment in building affordable housing or providing loan guarantees.

Low-income families typically spend a much higher proportion of their incomes on housing, and the burden of having to pay so much affects for housing their ability to buy food, find transportation, or purchase health insurance. Government-sponsored housing enterprises provide funding for the Capital Magnet Fund, which varies annually.

Federal government rules require that at least 70 percent of Capital Magnet Fund dollars be used to finance affordable housing. The remaining 30 percent is available to finance economic development activities related to affordable housing. If CDFIs use the grants to leverage housing or economic development activities, the fund requires that the investments equal at least ten times the grant amount.

The Capital Magnet Fund program is relatively new, beginning in FY 2010. In that year, the fund provided $80 million in grants to 23 CDFIs and nonprofit organizations in 38 states. The investment helped create more than 13,300 affordable housing units and generated $20 of investment for every dollar in grant money.

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What is the Mission-Driven Bank Fund?

The FDIC launched the Mission-Driven Bank Fund in 2021. The fund allows the private sector to support mission-driven banks.

Private sector investors might include corporations, mainstream financial institutions, and charitable organizations. A private sector fund manager manages the fund.

Mission-driven banks can pitch potential investments to the fund. The types of investments will include anything that allows them to build or scale their institutions or increase their capacity to provide financial products that will stimulate economic development. According to the FDIC, the fund will

• Be a vehicle for mission-driven financial institutions to raise capital.
• Allow the banks to be sustainable despite economic downturns.
• Be a means by which the banks can attract the technical expertise necessary to grow their operations and acquire and maintain technology solutions.
• Allow the banks to build capacity and scale.

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What is the CDFI Bond Guarantee Program?

The CDFI Bond Guarantee Program provides an additional source of community development loan funds for CDFIs. Under the program, CDFIs or their designees issue bonds to gain capital.

The fund guarantees the bonds up to a value of $1 billion per year. Because of the federal guarantee, the bonds are more attractive to investors than they would otherwise be.

The bond issuer must use the money to extend credit to other CDFIs. While some CDFIs will act as bond issuers, most CDFIs will benefit by being borrowers, the CDFI Fund says. A certified CDFI must undergo a specific eligibility process to qualify as a bond issuer.

In general, to be a bond insurer the CDFI will need to:

• Have the ability to issue bonds and make loans
• Have the capacity to service the loan and report appropriately on it.
• Understand the FFD’sFFD’s Lending Policy
• Understand standard loan servicing procedures.

What is the CDFI Equitable Recovery Program (ERP)?

Natural disasters, such as hurricanes and tornadoes, and the COVID-19 pandemic have disproportionately affected economically distressed communities. The CDFI ERP is designed to help CDFIs provide loans and grants and expand investment activities in their communities to recover from these adverse circumstances. CDFIs can also apply for money from the ERP to enable them to build the capacity to offer these loans and grants.

What is the Economic Mobility Corps?

The Economic Mobility Corps (EMC) is a joint initiative of the CDFI Fund and AmeriCorps. It places full-time national service members in CDFIs. The volunteers will enhance the CDFIs’ capacity to provide financial counseling activities, such as financial literacy, budgeting, saving, and financial planning.

In addition to CDFIs, Indian tribes, state and local governments, colleges, and nonprofit organizations may apply for the awards. However, the recipients must use the awards to place Americorps members in certified CDFIs. The EMC has enough funds for up to 61 full-time Americorps members per year for two years.

What types of Native Initiatives Do CDFI Programs Fund?

The Native Initiatives program supports CDFIs in Native communities. The program began in 1994 when Congress studied lending and investment practices in Native Communities. The study discovered unique challenges to economic growth that exist in Native communities.

The Native Initiatives program seeks to build the capacity of Native CDFIs so that they can increase access to credit, capital, and financial services. Awards to the Native CDFIs are competitive and can take the form of grants, loans, credit union shares, equity investments, and deposits.

What is the New Markets Tax Credit Program?

Low-income communities often have few businesses that can provide jobs and lack access to services and health care. Because of this lack of jobs and services, property values often decline as well, creating a vicious cycle of economic decline.

The New Markets Tax Credit Program seeks to end this cycle by spurring development in underserved communities by offering tax credits to attract investment. The program does this by allocating tax credit authority through Community Development Entities (CDEs).

CDEs are intermediaries between investors and qualified businesses in a low-income community. Through CDEs, private capital flows to the qualified business.

CDEs use the tax credit authority to offer credits to investors in exchange for CDE equity. The CDE then uses the capital from these investments to provide loans to businesses operating in low-income communities. The loans will have favorable interest rates and terms.

The program helps communities because it creates a wide range of jobs. It also increases the community’s access to certain services. From the time the program began in 2003 until 2020, the program has created or maintained more than 830,000 jobs.

It also has supported the construction of 56.7 million square feet of manufacturing space, 94.5 million square feet of office space, and 67.2 million square feet of retail space. The development has made the community more attractive to public sector investors, further increasing its impact, the CDFI Fund says.

The program also helps businesses by providing them with more flexible loan terms than they could find elsewhere. Terms might include lower interest rates, lower origination fees, longer maturities, and higher loan-to-value ratios.

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What is the Small Dollar Loan Program?

The small dollar loan program helps CDFIs provide their individual customers with alternatives to high-interest small loans, also known as payday loans. Under the program, grants are made to certified CDFIs to allow them to establish and maintain these small-dollar loan programs. The loans help those in low-income communities gain access to emergency cash when they need it, while also giving them the opportunity to build a good credit history.

CDFIs can only use the grants to support small dollar loan programs that offer consumer loans that:

• Are less than $2,500
• Must be paid in installments
• Have no prepayment penalty
• And report to at least one national consumer reporting agency.

Not all certified CDFIs are eligible to apply for grants through the Small Dollar Loan Program. To be eligible, the CDFIs must partner with another institution. The institution must be either

• An FDIC institution that has a primary mission of serving targeted investment areas or
• Another certified CDFI

What are CDFI Capacity Building Initiatives?

CDFI Capacity Building Initiatives include TA monies, which are part of the CDFI Program, and also training opportunities for CDFIs. The initiatives are designed to improve the capacity of CDFIs to better serve their communities. Training initiatives change over time depending upon CDFI needs Examples of these training initiatives are Building Native CDFIs, CDFIs Sustainability and Impact II, and Access for All: Expanding CDFI Impact in the Disability Community.

Building Native CDFIs’CDFIs’ Sustainability and Impact II

Building Native CDFIs’CDFIs’ Sustainability and Impact II (BNCSI II) is designed to increase the capacity of CDFIs to provide financial services to Native Communities. The program includes webinars, workshops, cadres, and one-on-one technical assistance. CDFIs must apply for the program, and certified Native CDFIs have priority.

Access for All: Expanding CDFI Impact in the Disability Community

Access for All: Expanding CDFI Impact in the Disability Community expands the capacity of CDFIs who want to expand their services to reach persons with disabilities better. It also includes workshops, webinars, and individual technical assistance. It was open to certified CDFIs and any non-certified organizations previously receiving an award from either the Community Development Financial Institutions Program or the Native American CDFI Assistance Program Technical Assistance award.

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Do CDFIs Have Advocates?

Apart from me now? Yes. One advocate for the CDFI industry is the Community Development Bankers Association, a national trade association.

CDBA tries to educate policy members on the value of CDFIs and helps lead the growth of the sector. Many CDFIs belong to the association.

What Five Things Do I Consider the Most Important about CDFIs?

After doing all this research, I began to think about what I’d found and how a CDFI might benefit me. I also thought about the challenges in banking with CDFIs.

CDFIs Benefit Minorities and Other Unbanked Individuals

I am an African-American woman who now lives in a rural area. Even when I lived in the city, experienced subtle clues that traditional financial institutions are not particularly enthusiastic to have me as a banking customer.

Of course, they’ll tolerate me, but if I want to borrow money, they will typically not offer me very good terms. I expect my access to banking services will be even more limited now that I have moved into a more remote area.

However, the presence of a CDFI in my neighborhood is a real asset. My research told me that 60 percent of the customers of CDFIs are people of color, and 28 percent of them are located in rural communities. This research encourages me that CDFIs will be a fairer banking option for me.

CDFIs Provide Technical Support to Small Businesses

Now that I have moved into a more rural area, I have given up my high-powered job in the city and would like to undertake another, less hectic venture. I am planning to start a small quilting business. I have never run a business before.

CDFIs can help me. They have provided business development services to more than 1 million people in 2018.

I am eager for the support CDFIs provide. My local CDFI provides mentoring and capital to help me establish my business.

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CDFIs Were Vital In Distributing Pandemic Relief to Minority-Owned Businesses

I hope we never again have a pandemic as challenging as COVID-19. But, it’s good to know that in a crisis, CDFIs step up to quickly and efficiently provide support.

The CDFI Rapid Relief Program received $1.25 billion to support underserved communities, which meant that CDFIs were able to provide more loans to businesses that struggled in the pandemic. If another disaster, such as a hurricane or tornado strikes, I feel confident my CDFI will be able to help my business.

CDFIs Sometimes Lack Funding

Two issues about CDFIs concern me, however. The first is that my research tells me that CDFIs cannot keep up with the demand. They depend on the federal government and investors for funding, which sometimes means funds are lacking.

For example, 32 percent of CDFIs received qualified loan requests that could not be fulfilled, according to Third Way. I will need to get applications in early to increase my chances of receiving the funding I want.

Most CDFIs Lack Staff

The second issue is related to the first. Eighty percent of CDFIs say they lack the necessary staffing to provide the types of services they’d like. Almost half of the staffers they have lacked the necessary skills.

My local CDFI seems to have only two employees, although I have read that some only have one employee. I hope that my local CDFI will receive money from the CDFI Fund to increase its capacity so that it can fulfill its mission to my community and to me.

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