What is a Community Development Financial Institution (CDFI)?

Community Development Financial Institutions (CDFIs) are private-sector, financial intermediaries with community development as their primary mission.

CDFIs supply the tools enabling economically disadvantaged individuals and underserved communities 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 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, which the Genesis Fund does on a no-cost or low-cost basis to the organizations we work with.

While CDFIs share a common mission, there are six basic types of CDFIs: community development loan funds (like the Genesis Fund), community development banks, community development credit unions, microenterprise funds, community development corporation-based lenders and investors, and community development venture funds. Some CDFIs engage in two or more of these functions.

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 revitalize our nation's poor and working class neighborhoods. The emphasis on being a local organization is very important. 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.

In a November 2006 speech at the Opportunity Finance Network Conference in Washington, D.C., Federal Reserve Chairman Ben Bernake commended the role CDFIs play in the economy, “The Federal Reserve and the CDFI community share a common interest in increasing economic opportunity for all Americans. CDFIs work with partners in both the public and private sectors to help unlock the economic potential of lower-income and underserved communities.”

Forty years ago, the precursors to CDFIs were most often governmental efforts dedicated to poverty alleviation and racial discrimination known as Community Development Corporations (CDC). The successes of CDCs laid the foundation for today's CDFIs.

In the 1970s, CDFIs expanded their funding sources by reaching out to private organizations, particularly religious institutions and individuals. 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. The Genesis Fund has been the recipient in three rounds of funding (2001, 2004, and 2006) totally $684,500.

• revised Community Reinvestment Act (CRA) regulations in 1995 which explicitly recognize loans and investments in CDFIs as a qualified CRA activity. (Passed by Congress in 1977, t he Community Reinvestment Act is intended to encourage banks and other depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. The CRA requires that each insured depository institution's record in helping meet the credit needs of its entire community be evaluated periodically.)

• 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 700 CDFIs certified by the CDFI Fund. CDFIs operate in every state and the District of Columbia , serving both rural and urban communities. In Maine there are 12 certified CDFIs, including the Genesis Fund.

Community development loan funds lend to build businesses, affordable housing and community facilities. They 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.

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. CDFIs do not supplant conventional financial institutions. 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. 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.

 

- adapted from materials from the Coalition of Community Development Financial Institutions