At a recent meeting of CDFIs in New England, three young entrepreneurs spoke about how CDFIs were enabling them to pursue their dreams. A young couple spoke about obtaining a mortgage to purchase farm land to expand their small organic farming business. The executive director of a nonprofit afterschool program for low-income youth talked of receiving financing to purchase a building to house her rapidly growing business. In both cases, the entrepreneurs had lacked the collateral and formal business plans needed to obtain financing from traditional sources. The CDFIs listened to their dreams, helped them develop business plans and financial projections, took the time to work through other barriers, and provided financing to get them on their way. Pride, gratitude, and mutual respect emanated from the business owners as well as the CDFI staff who worked with them.
WHAT EXACTLY IS A CDFI?
CDFIs are private financial institutions dedicated to delivering responsible, affordable financing and financial services to disinvested people and communities. These mission-focused financial institutions can be banks, credit unions, loan funds, or venture funds. CDFIs provide a complete range of financial services, financial products, and technical support to people and communities that aren’t adequately served by mainstream financial institutions. A $200 loan might help an individual start to build a credit history. A $5,000 loan might help a family start a homebased microenterprise. A $50,000 loan might help a family buy its first home. A $100,000 loan might help a business expand and create new jobs. And a million-dollar loan might help bring a grocery store to an inner city neighborhood. But CDFIs do much more. They bank the unbanked. They provide financial literacy counseling, training in how to start a business, and technical assistance to help nonprofits manage growth. Through their actions, CDFIs give low-income and low-wealth communities the types of opportunities that are a given in higher income communities.
WHEN DID CDFIs COME INTO BEING?
While the term “community development financial institution” has only been around since the mid- 1980s, mission-focused financial institutions have been in existence since at least the early 1900s when some of today’s CDFI credit unions were chartered. The first CDFI bank, South Shore Bank, was chartered in the early 1970s but it wasn’t until the mid-1980s that a group of fewer than 50 community development loan funds holding less than $30 million in assets gathered for the first time as a budding movement. This small group seeded what would become known as the CDFI industry, which today comprises almost 1,000 organizations managing more than $90 billion in assets.
Many of the early loan fund leaders had been involved in the civil rights, worker rights, and social justice movements. Through that work, they had come to realize that access to capital and wealth-building opportunities were a critical missing piece in marginalized communities. They set out to make capitalism and financial institutions work for these communities by creating community development loan funds.
WHAT HAVE CDFIs ACCOMPLISHED?
CDFIs have had a significant impact in the communities they serve. Opportunity Finance Network members alone, comprising 240 CDFIs or slightly more than 25 percent of all CDFIs, are responsible for over $40 billion in cumulative financing since their inception. This investment has led to the development and/or rehabilitation of 1.5 million housing units, the financing of 143,000 businesses and microenterprises, the creation of 934,000 jobs, and the financing of 9,800 community services organizations that have expanded or maintained childcare, education, and healthcare services for thousands of individuals.
On average, 73 percent of a CDFI’s clients are low-income, 48 percent are persons of color, and 48 percent are female. While comparable figures are not available for all conventional bank clients, they are available for conventional and nonconventional lenders’ home mortgage borrowers: in 2013, 28 percent of home purchase loans went to low-income borrowers, and 28 percent went to minorities.
Remarkably, CDFIs’ loan losses nearly match those of mainstream financial institutions: in 2014, OFN Members’ net charge offs were 0.7 percent while FDIC-insured institutions’ net charge offs were 0.5 percent. OFN Members’ cumulative net loan loss rate is just 1.5 percent. Even more remarkable, CDFI performance has been comparable to banks even during economic downturns including the Great Recession.
Throughout their history, CDFIs have been flexible, innovative institutions that have stayed on the leading edge of providing financial products and services to low-income and low-wealth communities. CDFIs helped create the healthy foods and charter school financing markets. They are doing the same now with financing for federally qualified health centers. They have helped increase the supply of supportive housing services, financed the purchase of assistive technologies for persons with disabilities, financed energy efficiency improvements in affordable housing, and are increasingly involved in natural disaster response and rebuilding efforts in low income areas.
CDFIs are vital players in the country’s financial system and in the ecosystem of organizations working tirelessly to increase opportunities in America’s disinvested urban and rural communities.