As the country continues to rebound from the recession, a small group of lenders is working to meet the needs of communities that slipped through the cracks during this turbulent period or that had few safety nets even before the recession. These lenders—called community development financial institutions (or CDFIs)—were established in 1994 as part of the formation of the CDFI Fund, a government agency within the U.S. Department of Treasury that provides funding to CDFIs through a competitive application process.
Broadly speaking, CDFIs are defined as financial institutions that have a primary mission of community development, serve targeted markets, are financing entities, remain accountable to their communities, and are nongovernmental entities. They are for-profits and nonprofits, banks, credit unions, loan funds, and venture capital funds. Their primary customers are low-wealth residents in both metropolitan and rural areas. CDFIs provide financing for affordable housing, small businesses, schools, health centers, and manufacturing facilities. They also offer development services, such as mortgage credit counseling and financial education.
CDFI are small in number: there are about 875 nationwide, with at least one CDFI in every state, the District of Columbia, Puerto Rico, and the Virgin Islands. The U.S. Treasury hosts a national database of CDFIs, including the type, location, and contact information. Of the 875 CDFIs, approximately 500 are loan funds, 200 are credit unions, and 175 are banks. This compares to about 14,000 banks and credit unions in the United States. Here in the Sixth District, there are 129 CDFIs; 43 banks, 45 loan funds, 40 credit unions, and one venture capital fund.
In spite of their small numbers, CDFIs perform. On February 24, 2015, the CDFI Fund issued two independent reports that provide the first-ever comparative analysis and evaluation of the effectiveness of CDFIs compared to mainstream lenders. The findings confirm that CDFIs are resilient and a reliable resource for capital in areas that need it the most.
The reports found that CDFIs have no more risk than conventional lenders and that they perform nearly as well as mainstream institutions. The first report , CDFIs Stepping into the Breach: An Impact Evaluation—Summary Report, undertaken by Michael Swack, Eric Hangen, and Jack Northrup from the Carsey School of Public Policy at the University of New Hampshire, is an analysis of the impact of financial assistance awards from the CDFI program on CDFI loan fund recipients.
The second report , Risk and Efficiency among CDFIs: A Statistical Evaluation Using Multiple Methods, conducted by Gregory B. Fairchild from the Darden School of Business at the University of Virginia and Ruo Jia from the Stanford Graduate School of Business, is an analysis of CDFI banks and credit unions to assess their risk of failure and their operational efficiency relative to mainstream financial institutions.
Key highlights from the Carsey School report include:
- CDFI loan fund lending fills market gaps for key underserved low-income populations
- CDFI loan funds deliver between roughly 66 percent to some 90 percent of all loan volume to borrowers living in a CDFI Fund–designated investment area
- From 2005 through 2012, Community Reinvestment Act reported lending decreased while CDFI loan fund reported lending more than tripled
- CDFI loan funds provide borrowers who may not qualify for loans from mainstream financial institutions with loan terms and interest rates comparable to mainstream products.
Key highlights from the Darden School report include:
- CDFI banks and credit unions were found to have no more risk of financial failure than mainstream financial institutions, even after controlling for the CDFIs' degree of involvement in the mortgage market during the financial crisis
- Despite serving predominately low-income markets, CDFI banks and credit unions had virtually the same level of performance as mainstream financial institutions.
The critical role of CDFIs is evident by their work in the Atlanta Fed's Sixth District, which includes Alabama, Florida, and Georgia and parts of Louisiana, Mississippi, and Tennessee. Some examples include:
LiftFund of the delta region has led efforts to make $1.3 million in small business loans and provide training to small business owners in Alabama. The delta region office is part of a larger LiftFund organization (formerly Accion Texas) that consists of 19 offices across the South. In its 20-year history, LiftFund has made more than 15,000 loans totaling over $180 million. It has about 3,000 active borrowers.
Pathway Lending This Nashville-based loan fund has made 750 loans totaling $111.7 million, served 420 businesses, financed 219 affordable housing units, and provided 26,500 hours in technical assistance. Last December, the U.S. Small Business Administration chose Nashville as one of six locations to open a Women's Business Center in 2015. Pathway Lending, which specializes in providing resources for women- and minority-owned businesses, received a grant to operate and create programs for the center.
Hope Enterprise Corporation Since its inception in 1994, Hope, comprised of a loan fund and credit union, has generated over $2 billion in financing for entrepreneurs, homebuyers, and community development projects. It has assisted more than 500,000 individuals in low-income communities throughout the mid-South. In 2014, the U.S. Department of Education awarded an $8 million grant to Hope to establish the HOPE Charter School Facilities Fund, which will support financing for the renovation and construction of high-quality charter schools in Arkansas, Louisiana, Mississippi, and western Tennessee.
As of June 30, 2014, Florida Community Loan Fund , headquartered in Orlando, had made 188 loans through its community development and preservation lending, and 14 transactions through the CDFI Fund's New Markets Tax Credit Program. The total financing has exceeded $195 million. It has also financed 454 affordable housing units and 1,028 supportive housing units; financed or provided New Markets Tax Credits for 101 community facilities, totaling 1.3 million square feet; and created or retained 1,435 permanent jobs and 4,989 temporary construction jobs.
Liberty Bank and Trust A minority-owned CDFI bank created in 1972, Liberty has grown to over $550 million in assets. The bank played an important role in helping rebuild New Orleans in the aftermath of Hurricane Katrina in 2005. It has provided more than 1,000 first-time homebuyers with affordable mortgages, low interest rates, flexible underwriting requirements, low down payments, and ongoing personal financial counseling.
Access to Capital for Entrepreneurs (ACE) specializes in small business loans coupled with business advisory services. ACE makes loans with generous repayment terms and affordable interest rates. Since 1999, the organization has made more than $22 million in loans, creating or saving more than 3,500 jobs in Georgia.
In spite of faring fairly well during the recession, CDFIs in the Southeast still face challenges: lack of long-term patient capital, difficulty covering all distressed areas because of limited capacity and resources, and a need for additional collaborations with new partners, including banks, corporations, foundations, and state and local governments.
The Atlanta Fed's community and economic development team is working closely with CDFIs in the Southeast to identify strategies to address these and other challenges. Do you have recommendations on how we can further support Southeast CDFIs in meeting their mission? We welcome your input.
By visiting scholar to the Atlanta Fed's community and economic development program Donna J. Gambrell