While the term “community development financial institutions” or “CDFI” is relatively new, the concept itself is part of a rich history of self-help credit.
From the immigrant guilds of New York City’s Lower East Side and the Prairie Populists of the late 1800s, to African-American communities forming the first community development credit unions in the 1930s, communities have sought self-help credit solutions because traditional financial institutions have ignored or abandoned them.
The current CDFI industry began taking shape in the late 1960s and early 1970s. Some of the first organizations dedicated to community development were created out of governmental efforts to address poverty alleviation and racial discrimination. The Johnson Administration, under its “War on Poverty” campaign and through the Office of Economic Opportunity, launched community development corporations (CDCs) to work in both urban and rural poor communities. In the successes of many of these early CDCs lay the foundation for today’s CDFI industry.
In the 1970s, CDFIs expanded their funding sources by reaching out to private organizations, particularly religious institutions and individuals. Many business-development loan funds were launched with federal funds from the Department of Housing and Urban Development, the Economic Development Administration and the Department of Agriculture. Community development credit unions and banks were started in the 1970s, such as South Shore Bank in Chicago (1973) and the Santa Cruz Community Credit Union (1977). The Neighborhood Reinvestment Corporation (NRC), a national intermediary that supports local Neighborhood Housing Services offices, was created in 1973 and began financing affordable housing in 1978. In April 2005, Neighborhood Reinvestment Corporation began doing business as Neighborworks® America.
Despite the increased diversity of funding sources, CDFIs grew only incrementally through the 1970s and 1980s. It wasn’t until the 1990s that the CDFI industry expanded dramatically. Factors contributing to this growth include:
- the creation of the CDFI Fund in 1994, a government agency that provides funding to individual CDFIs and their partners through a competitive application process.
- revised Community Reinvestment Act (CRA) regulations in 1995 which explicitly recognize loans and investments in CDFIs as a qualified CRA activity.
- a growing record of success that has inspired confidence in the CDFI industry and attracted new sources of support and funding.
Today the number of CDFIs continues to increase. There are over 1,000 CDFIs certified by the CDFI Fund. CDFIs operate in every state and the District of Columbia, serving both rural and urban communities.
Helping Low Income People
Community Development Financial Institutions (CDFIs) are private-sector, financial intermediaries with community development as their primary mission.
While CDFIs share a common mission, they have a variety of structures and development lending goals. There are six basic types of CDFIs: community development banks, community development loan funds, community development credit unions, microenterprise funds, community development corporation-based lenders and investors, and community development venture funds. All are market-driven, locally-controlled, private-sector organizations.
CDFIs measure success by focusing on the double bottom line:” economic gains and the contributions they make to the local community. CDFIs rebuild businesses, housing, voluntary organizations, and services central to revitalizing our nation’s poor and working class neighborhoods. The positive effect that CDFIs have on their communities should not be underestimated.
Not only do local organizations make the decisions about how to best meet community needs, the ripple effects of CDFI activity bring responsible homeowners, locally-owned businesses, neighborhood facilities, first-time savers, and other positive benefits to communities that reach far beyond the financial bottom line.
CDFI Products and Services
CDFIs supply the tools enabling economically disadvantaged individuals to become self-sufficient stakeholders in their own future.
These tools include providing financial services, loans, and investments; offering training and technical assistance services; and promoting development efforts that enable individuals and communities to effectively use credit and capital. Rebuilding disinvested communities and making loans to people with limited or poor credit histories requires more than simply providing access to conventional loans. It requires the flexibility to adapt lending guidelines to the needs of borrowers; to accept unconventional collateral for loans; and to provide education, training, and assistance to potential borrowers.
CDFIs conduct a wide range of financial activities. Community development credit unions and community development banks supply underserved communities with traditional retail banking services like savings accounts and personal loans. Microenterprise development loan funds provide small amounts of business capital to small scale entrepreneurs.
Community development loan funds lend to build businesses, affordable housing and community facilities. Community development venture capital funds provide equity and management expertise to small, often minority owned businesses that promise rapid growth. CDFIs rebuild local economies by increasing the ability of ambitious entrepreneurial people to act in their own economic self-interest.
Sources of Funding
CDFIs are private-sector organizations that attract capital from private and public sources. Private sector funds come from many sources: corporations, individuals, religious institutions, and private foundations. Depository CDFIs, like community development banks and community development credit unions, get capital from customers and non-member depositors. CDFIs work in partnership with conventional financial institutions to channel private investment into distressed communities, either through direct investment in the CDFI or through coordination of lending, investment, and other services.
One crucial source of support for CDFIs is the federal CDFI Fund, administered by the Department of the Treasury. The CDFI Fund makes capital grants, equity investments, and awards to fund technical assistance and organizational capacity-building. CDFIs apply for limited funds through a competitive process that requires the CDFI, in most cases, to provide at least a 1:1 match of non-federal funds to receive financial assistance. The Fund also rewards banks and thrifts for making investments in CDFIs and distressed communities through its Bank Enterprise Award Program. The New Markets Tax Credits Program, initiated in 2002, encourages private sector investment by offering tax credits for qualified community development investments. CDFIs use the money awarded through CDFI Fund programs to leverage private-sector resources into distressed communities.
CDFIs and Mainstream Financial Institutions
CDFIs differ from mainstream financial institutions in some key aspects. CDFIs cultivate specialized knowledge about the communities in which they do business. They forge deep relationships with their customers and community leaders. This translates into a willingness and commitment to spending time on individualized service, and specialized programs that are often too time-consuming or costly for mainstream financial institutions to implement. For example, many CDFIs offer non-conforming mortgages or loans. Others make accounts available to customers with limited or poor credit history. Mainstream institutions, on the other hand, tend to offer a few generic programs designed to capture the broader market.
Despite these differences, CDFIs do not supplant conventional financial institutions. In fact, they complement each other. Because CDFIs and banks share a market-based approach to serving communities, CDFIs often work in partnership with banks to develop innovative ways to deliver loans, investments, and financial services to distressed communities. Oftentimes, they jointly fund community projects, with the CDFI assuming the more risky subordinated debt.
Mainstream financial institutions also invest their own capital directly in CDFIs, receiving Community Reinvestment Act (CRA) credit and potential cash rewards under the CDFI Fund’s Bank Enterprise Award Program. Furthermore, CDFIs create a future market for mainstream financial institution products and services. They incubate businesses and people, helping them to grow and prosper. Once their customers have achieved some success, established a good credit history and have reached a substantial size, they can “graduate on” to borrowing larger amounts available from more conventional lending institutions. CDFIs are trailblazers in their communities, leading the way in investing in distressed urban and rural neighborhoods and bringing people into the economic mainstream as contributors to the economy.