In brief

Low-income individuals and the areas they live in have long suffered from a dearth of investment opportunities. Conventional financial institutions have not tended to offer them a healthy supply of capital, credit or financial services. As a means of providing greater investment for underserved communities, the Community Development Financial Institution (CDFI) Fund was created in 1994 to deliver responsible, affordable lending to help these communities join the economic mainstream. The Fund and the CDFIs it supports have gone from strength to strength since then, with bipartisan support from successive administrations and from Congress.

The challenge

While more prosperous areas in the US have been well served by banks and other financial institutions, low-income areas have often been starved of commercial capital, credit and financial services organisations. The onus was on local communities to fill the gap. "Beginning in the 1880s when the first minority-owned banks focused on low-income areas, community organisations have developed to provide needed financial services. For a community to thrive economically it requires access to basic financial services, affordable credit, and investment capital. Yet historically, for low-income communities and individuals, that access has often been limited. From the creation of credit unions in the 1930s and 1940s and community development corporations beginning in the 1960s and 1970s, to the more recent emergence of non-profit loan funds in the 1980s, community organisations sought to better the conditions in these economically underserved markets."[1] That was the situation in the 1990s, one that demanded a more formal, governmental intervention.

The initiative

In 1994, during the Clinton Administration, the Community Development Financial Institution (CDFI) Fund was created by means of the Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325), which was introduced by Donald W. Riegle Jr., Republican Senator for Michigan. The Fund was responsible for funding CDFIs. "CDFIs are private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help disinvested people and communities join the economic mainstream. While being financial institutions, CDFIs are profitable but not 'profit-maximising' in essence. They leverage funding from private and public sources to finance community businesses — including small businesses, microenterprises, non-profit organisations, commercial real estate, and affordable housing — and spark job growth and retention in hard-to-serve US markets."[2]

In the following year, the CDFI Fund was transferred to the US Treasury. “Though the Riegle Act created the Fund as a wholly-owned, independent government corporation, a supplemental appropriations bill moved the Fund into the Department of Treasury (Treasury) in 1995. The Fund was moved within Treasury because of its focus on financial institutions and because other bank regulatory agencies (i.e., the Office of Thrift Supervision and Office of the Comptroller of the Currency) were already located within the agency.”[3]

The CDFI Fund has a broad remit to achieve its objectives.  “The Fund’s official mission is to increase economic opportunity and promote community development investments in low-income and distressed communities in the United States. To carry out this mission, the Fund is composed of several programmes that address multiple needs of distressed communities. These programmes encourage qualified entities to provide financial and technical assistance to meet the needs of local businesses, potential homebuyers, community developers, and potential investors in distressed and LICs. The Fund’s range of incentives include equity investment in programme awardees, tax credits, grants, loans, and deposits and credit union shares in insured CDFIs and state-insured credit unions.”[4]

The public impact

Since its inception in 1994, the CDFI Fund has "awarded more than $2 billion to CDFIs and allocated $43.5 billion in New Markets Tax Credits",[5]  with $3 million in tax credits in 2015 alone, 75 percent of these being made in "severely distressed communities". The Fund has also made awards to finance property acquisition and development: "in fiscal year 2015, CDFI Programme awardees reported that they provided $3.39 billion in financing to homeowners, businesses, and commercial and residential real estate developments".[6]

Financial literacy is another of the Fund's specialisms: "CDFI Programme awardees financed over 12,300 businesses and provided more than 35,000 individuals with financial literacy training".[7] Taken in the round, "this critical financing contributed to nearly 7,000 jobs and an estimated 26,000 construction-related jobs; and resulted in more than 500 affordable housing units, 10.5 million square feet of commercial real estate, and 448 businesses receiving financial counselling services".[8]

There are now 1,000 CDFIs operating nationwide and they "continue to grow in size and impact, and to support community transformation".[9] Their contribution to low-income areas has been significant. "The Opportunity Finance Network, one of the leading national networks of CDFI's states that CDFIs have invested over $3.8 billion in low-income individuals and communities. Of that group, 48% were people of colour, 73% with low incomes, 48% were women, and 25% were from rural communities. Over a period of 30 years from 1985-2014, they have helped to create 934,000 jobs, 1.5 million housing units, 98,000 community facilities and supported 192,000 businesses and microenterprises in the US."[9]

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What did and didn't work

All cases in our Public Impact Observatory have been evaluated for performance against the elements of our Public Impact Fundamentals.

Legitimacy

Stakeholder Engagement Good

The CDFI Fund has internal and external stakeholder support, which helps it to develop the right mix of products for the CDFI markets. Internally, the main stakeholders are the Treasury and the members of its statutory Community Development Advisory Board, which "include the Secretaries of Agriculture, Commerce, Housing and Urban Development (HUD), Interior, Treasury, the Administrator of the Small Business Administration (SBA), and nine private citizens appointed by the President”.[10]

The most important external stakeholders involved with the Fund are the CDFIs themselves, which include regulated institutions, such as community development banks and credit unions, and non-regulated institutions, such as loan and venture capital funds. These stakeholders engage effectively with each other to work towards achieving the end objective of the CDFI Fund.

The CDFIs forge crucial relationships with the local community and with "other industry players to provide stability and bridge the gap in the market for financial investments".[11] Banks have consistently provided capital to CDFIs, as well as being critical partners with CDFIs in enhancing their ability to serve emerging domestic markets. "Banks view CDFIs as key partners to increase their market penetration in low-income communities, to allow them to finance a greater number of deals, and to help fulfil their CRA requirements."[12]

Political Commitment Good

The fund has received strong support from all governments since its inception, although with less enthusiasm during the presidency of George W. Bush. Presidents’ budget proposals have always included a significant amount of money for the CDFI Fund, and they have generally had widespread support:

  • “Ideas for geographically targeted community development policies were a feature of federal policy debates throughout the 1980s and early 1990s [and had] bipartisan support.”[13]
  • “In 1984, as banks were closing branches throughout low-income neighbourhoods, Cliff Rosenthal (from the Consumer Financial Protection Bureau), crafted model legislation for the creation of a New York State 'Corporation for Community Banking' to help Credit Unions and other community-based lenders fill the gaps... The efforts lined up with then-presidential candidate Bill Clinton, and two years after his election, the CCDFI Fund... was signed into law.”[14]
  • “The CDFI Fund has weathered changes in administration to enjoy great growth and has invested more than $1.5 billion in CDFIs. And the CDFI designation has become a badge of credibility and honour, a gateway not only to the CDFI Fund but also to other programmes.”[15]
  • “Based on its success to date, the Administration’s fiscal year 2015 budget proposal requested $225 million to enable strong support for the CDFI Fund’s key programmes. Additionally, the Administration’s proposal called for a permanent extension of the CDFI Fund’s New Markets Tax Credit Programme and proposed a one-year extension of the CDFI Bond Guarantee Programme.”[16]

It remains to be seen, though, whether the new administration will continue this scale of investment in the Fund.

Public Confidence Good

The CDFI Fund's programmes are primarily targeted at aiding the CDFIs in developing their community development strategies. In 2015, the Fund organised a national listening tour to solicit public opinion regarding a new strategic framework.

The CDFIs appreciate the flexibility and usefulness of the Fund's programmes, and use their awards "to support a wide diversity of community development strategies, from consumer services and credit, to micro and small businesses, to community facilities and affordable housing”.[17] However, they would like more transparency and to be able to shorten the award cycle.

This in turn would give the low-income communities that benefit from the awards greater confidence in the work of the CDFI Fund.

Policy

Clear Objectives Strong

The objective of setting up the CDFI Fund was to deliver responsible, affordable lending to help disinvested people and communities join the economic mainstream. The Fund has aimed to achieve this through the CDFIs themselves. “Since its inception in 1994, the CDFI Fund has built a nationwide network of CDFIs committed to ensuring that underserved communities have access to quality, affordable, and credible financial services. Over time, the CDFI Fund has leveraged more sophisticated financial mechanisms, such as tax credits, to further support community development.”[18]

With the CDFI Fund’s help, the CDFI Industry has grown into a thriving sector of the financial services industry that is meeting the needs of communities across the country. “The institutions the CDFI Fund serves have enhanced their capacity, sustainability, and impact. The CDFI Fund, in turn, has evolved to meet their needs, offering new programmes to further community transformation.” [19]

Evidence Good

CDFIs emerged out of a gap in the financial services sector. They were mostly an experimental approach to community building and anti-poverty efforts organised primarily around two questions: could communities without access to conventional finance organise their own financial resources? And, if they did, what difference would it make? As stated above, in Political commitment, the CDFI Fund built on experiences at state level. "Cliff Rosenthal crafted model legislation for the creation of a New York State 'Corporation for Community Banking' to help credit unions and other community-based lenders fill the gaps. Eventually, the Federation expanded this vision nationally, proposing the creation of a federal entity that was tentatively called 'National Neighbourhood Banking Corporation'."[20]

This provided a template for the 1994 Act, and the Fund has been gradually extended over time in response to its success (see also Public impact above). "A recent sampling of CDFI performance found that 81 CDFIs managing $1.8 billion in assets had provided more than $2.9 billion in financing. They did this with a 1.8 percent cumulative loss rate, consistently low delinquencies, and no losses of investor principle. That financing created or retained more than 137,000 jobs and 121,000 affordable housing units. The success of the US CDFI industry is impressive, and it is encouraging similar efforts in the UK, India, Eastern Europe, and elsewhere - efforts that will benefit from the lessons we have learned."[21]

Feasibility Fair

There is no specific information on the human resources, fiscal and legal constraints being addressed via feasibility studies. However, the evidence from the New York State's  Corporation for Community Banking and the National Neighbourhood Banking Corporation indicated that similar ventures could succeed on a smaller scale, and there was a strong likelihood that such funding could be scaled up to the extent that the Riegle Act envisaged.

Action

Management Strong

The role of the director of the CDFI Fun has changed over time. “The Fund is headed by a director, who is appointed by the Secretary of the Treasury and not subject to Senate confirmation. Initially, the director served a three-year term; however, the Fund was led by approximately 10 directors in its first 15 years. To bring greater stability to the Fund’s leadership, the Secretary of the Treasury made the director’s position into a career appointment in 2010, meaning that there are no limits on the length of the director’s term.”[22]

The Fund has a 15-member Community Development Advisory Board (see also Stakeholder engagement above). “The board members include the Secretaries of Agriculture, Commerce, Housing and Urban Development (HUD), Interior, Treasury, the Administrator of the Small Business Administration (SBA), and nine private citizens appointed by the President. The Advisory Board’s function is to advise the director of the Fund on the policies regarding the Fund’s activities. The Advisory Board is not allowed, by law, to advise the Fund on the granting or denial of any particular application for monetary or non-monetary awards.”[23]

The Fund's management structure of the fund "is very clearly defined, with responsibility for each programme of the Fund delegated to separate teams, with each team reporting to a Deputy Director and a Director of the Fund, along with Legislative and External Affairs Managers, a Resource Manager, a CFO and Legal Counsel".[24]

The CDFI Fund’s model is competitive and each of its programmes provides CDFIs with the flexibility to determine the best use of limited federal resources in their community. The Fund ensures that the recipients use the award, or an amount equivalent to the award amount, for BEA-qualified activities in a distressed community. “The CDFI Fund supports the mission-driven financial institutions working on a local level that know their communities best. Financial institutions that become certified by the CDFI Fund are eligible to apply for the comprehensive services it offers including monetary support and training to build organization capacity. The CDFI Fund’s model is competitive and each of its programmes provides CDFIs with the flexibility to determine the best use of limited federal resources in their community.”[25]

The Fund has slightly increased its oversight of the CDFI's over the years. “According to a GAO report, the Fund’s authorising statute places no restrictions on how BEA recipients may use their award. In this same report, the Fund agreed with GAO’s interpretation of its authorising statute. However, the Fund changed the terms of the programme’s award agreements in 2009. Recipients must now use the award, or an amount equivalent to the award amount, for BEA-qualified activities in a distressed community.”[26]

Measurement Strong

The CDFI Fund has been able to measure its success, and that of CDFIs, in quantitative terms, as indicated in Public impact and Strength of evidence above. It has also attempted qualitative measurements of its performance. “The Fund announced a national listening tour [in 2015] to solicit public opinion regarding a new strategic framework for the CDFI Fund. Intended to foster discussion and engagement among local community development leaders and practitioners, the listening tour will be co-hosted by CDFI Fund Director Annie Donovan alongside the Federal Reserve Bank of San Francisco, Federal Reserve Bank of Kansas City-Denver Branch, Federal Reserve Bank of Chicago, Federal Reserve Bank of New York, and Federal Reserve Bank of Atlanta."[27]

The Fund has also defined questions for feedback from various CDFIs, for identifying difficulty in utilising new tools and growing to scale while still maintaining their CDFI certification. The results of such feedback are used to re-examine the certification policies so that the certification reflects the flexibility needed to reach effectively into every community, adhering to the primary mission of community development. "The CDFI Fund is seeking feedback on questions such as 'How should a CDFI demonstrate accountability to a national Target Market, in particular an Investment Area national in scope? Should there be a requirement to have local accountability to supplement a national governing or advisory board?' The CDFI Fund will tackle these and other questions – such as how the primary mission test should be met or what the criteria should be for serving Investment Areas and Targeted Populations - when reviewing the certification criteria.”[28]

An important issue to consider was the Fund's role in community development. "The CDFI Fund re-examined its certification policies so that the certification reflects the flexibility needed to reach effectively into every community to more nimbly respond to changes in the financial services sector while still adhering to the primary mission of community development. The Fund also released a five year strategic plan for this in January 2017."[29]

Alignment Good

The CDFI Fund's role is to ensure that its programmes and the CDFI's activities enable its objectives to be met, that is to provide capital, credit and financial services to underserved low-income communities. It is well aligned with other government departments to monitor the progress of this community development initiative (see Stakeholder engagement and Management above). It is also well aligned with CDFIs themselves.

Most CDFIs have good relations with their clients and other stakeholders. “Most CDFIs have strong market knowledge and long-term relationships with clients and other stakeholders, which help them develop the right mix of products for their markets. CDFI's do not just bank on the community as their prime stakeholder, they also forge crucial relationships with other industry players to provide stability and bridge the gap in the market for financial investments.”[30]

Moreover, CDFIs are successful in reaching customer groups that others overlook, i.e. low-income families, minorities, and women, in particular. "CDFIs with a focus on community service lending serve the largest percentage of female and low-income borrowers (66% and 81%, respectively), while CDFIs that focus on personal development lending serve the highest minority percentage (76%).”[31]

This alignment cuts two ways, to borrowers and lenders alike. “CDFIs are value-added partners to both their investors and borrowers. They build the capacity of borrowers and sometimes of whole communities. Their targeted development strategies help foster markets-some sources of capital now see CDFIs as market builders, developing a customer pipeline. In addition, CDFI financing often closes structural financing gaps in deals, allowing mainstream financial institutions to participate in transactions that otherwise would not have happened.”[32]

Bibliography

The CDFI Fund: Empowering Underserved Communities, January 2016, CDFI Fund, US Treasury
(https://www.cdfifund.gov/Documents/CDFI_Brochure%20Updated%20Jan2016.pdf)

CDFI Fund to Hold National Listening Tour on a Community Development Finance “Framework for the Future”, 22 June, 2015, CDFI Fund, US Treasury
(https://www.mycdfi.cdfifund.gov/news_events/CDFI-2015-26-CDFI_Fund_to_Hold_National_Listening_Tour.asp)

Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues, Lowry, S., 3 October 2012, Congressional Research Service
(https://fas.org/sgp/crs/misc/R42770.pdf)

Providing Capital, Building Communities, Creating Impact, 2005, The CDFI Data Project
(http://fieldus.org/publications/cdpfy05main.pdf)

Taking Stock: CDFIs Look Ahead After 25 Years of Community Development Finance, Pinsky, M., 1 December 2001, Brookings
(https://www.brookings.edu/articles/taking-stock-cdfis-look-ahead-after-25-years-of-community-development-finance/)

What are CDIs?, CDI Fund, US Treasury
(https://www.cdfifund.gov/Documents/CDFI_infographic_v08A.pdf)