Community Development Financial Institutions (CDFIs)

Description and History

Community Development Financial Institutions, or CDFIs, provide financial services and access to capital to low-income individuals and communities—who have often been deliberately excluded from traditional financial institutions through practices like redlining—with the goal of promoting community development. CDFIs provide business and consumer loans, financial services like low-cost checking and savings accounts, financial literacy education, and investment capital. CDFIs can be banks, credit unions, nonprofit or for-profit loan funds, community development corporation lenders, or venture capital funds.

There are roughly 1,300 treasury-certified CDFIs in the US, managing more than $222 billion in assets. According to a 2022 survey, 85 percent of CDFI loan recipients were low-income, 66 percent were people of color, 48 percent were women, and 27 percent were residents of rural areas (OFN 2024). 

The institutional precursors to federally-certified CDFIs have deep roots in American history—dating back to the days of Benjamin Franklin—often providing critical anti-poverty services for low-income households, small businesses, and communities of color (Rosenthal 2018). Some of these include minority-owned banks from the late 19th century, credit unions from the 1930s and 1940s, Community Development Corporations from the 1960s and 1970s, and nonprofit loan funds from the 1980s (CDFI Fund n.d.). 

In 1994, the Riegle Community Development Banking and Financial Institutions Act of 1994 created the Community Development Financial Institutions Fund (part of the U.S. Treasury Department), which certifies and provides funding for CDFIs. Subsequent legislation increased funding for CDFIs through amendments to the Community Reinvestment Act, the establishment of New Market Tax Credits, and the CDFI Bond Guarantee program (CDFI Fund n.d.). 

CDFIs, Locally Rooted Finance, and the Community Wealth Building Wedge 

To meet certification criteria, CDFIs must provide at least 60 percent of their services within economically distressed areas (e.g., where the poverty rate is above 20 percent) to individuals whose family incomes are 80 percent of area median income (AMI) or below, or to Black, indigenous, or other communities of color (CDFI Fund 2018). In this way, CDFIs specialize in economic inclusion, often making loans that other lenders will not, based on closer relationships with and a better understanding of those they serve. 

CDFIs can serve as the financial undercurrent of CWB activity in a particular place. CDFI activities include providing financial services to individuals and families, supporting home ownership and affordable housing development (including housing cooperatives), and providing funding for small businesses (including worker cooperatives). For example, community development credit unions and community development banks provide low-cost or free checking and savings accounts, help members improve their credit ratings, and offer consumer loans for things like buying a car, paying medical bills, or going to college. In terms of homeownership, CDFIs provide first mortgages, “soft” second mortgages, down payment loans, closing cost loans, loans for maintenance or renovations, and homeownership training classes. Community development loan funds like LISC and the Enterprise Community Partners work with Community Development Corporations and other nonprofit affordable housing providers to improve their organizational capacities and help them access conventional financing sources, often by taking on “pre-development” loans (e.g. to acquire land) that help projects get off the ground. CDFIs are also important sources of funding for nonprofits seeking to build important community facilities like childcare centers and health clinics. CDFIs play a unique role in supporting small businesses. They provide technical assistance (such as helping write business and marketing plans), patient capital (in the form of equity), and loans (often short-term, with below market rates, and for relatively small amounts) to small businesses that face challenges raising capital. 

Examples

Oweesta Corporation

Native CDFIs are critical to addressing Native poverty and moving Indigenous communities toward self-determination and tribal sovereignty (Native CDFI Network 2024). Headquartered in Longmont, CO, the Oweesta Corporation is the oldest Native CDFI intermediary offering services exclusively to Native CDFIs and communities (Oweesta Corporation 2020). Since its inception 25 years ago, Oweesta has provided nearly $900 million in loans—supporting business, housing, and agriculture—to Native communities in Indian Country (Oweesta Corporation 2020). 

Most recently, Oweesta received $156,120,000 from the EPA’s Greenhouse Gas Reduction Fund Solar for All program to provide solar panels to low-income communities in Tribal lands across the country. By leveraging its unique relationship with Native communities, Oweesta will be able to advance equitable development across Tribal lands in the United States, reducing greenhouse gas emissions as well as saving Tribal communities significant dollars on their energy bills (Longmont Leader 2024).

New Hampshire Community Loan Fund

Founded in the late 70s by the Institute for Community Economics (ICE) in Western Massachusetts, the New Hampshire Community Loan Fund was founded to support land and business ownership in New England (New Hampshire Community Loan Fund 2023).  Today, the Fund provides lending and technical assistance services for manufactured-home buyers, multi-family housing, resident-owned communities (ROCs), small businesses, nonprofits, small towns, and municipalities (New Hampshire Community Loan Fund 2024). Maintaining a 100% investor repayment rate across its 40-year history, the Fund generates $2.19 in economic impact for every dollar spent—and to date, they’ve spent over $14 million in local farm and food businesses alone (New Hampshire Community Loan Fund 2024)!

Since its founding, for example, the New Hampshire Community Loan Fund has helped thousands of mobile park residents buy the land under their homes, converting 139 mobile parks (about a third of those in the state) into resident-owned communities (Stringer 2021).

Challenges & Limitations

While CDFIs exist in all 50 states, DC, Puerto Rico, and Guam, their scale remains limited. Federal appropriations to the Treasury’s CDFI Fund are dwarfed by applicant demand. In terms of the roughly $23.3 trillion in assets held by U.S. commercial banks, CDFIs represent a small fraction of the U.S. banking system (Board of Governors of the Federal Reserve System 2024).

Additionally, since the 1990s, much of the policymaking prowess of CDFIs has been relegated to the federal government. This can prove difficult for CDFIs who operate at the level of state and local policy and require an enabling policy environment to provide financial resources for themselves and their borrowers, set the terms of business for their borrowers, and, more broadly, impact the communities they serve (Theodos et al 2017). 

Taking It Forward

Policy scholars have argued that it is time for CDFIs to get innovative about their capitalization, including debt and equity financing as well as impact investing and leaning on policy changes—like CRA reform (Case-Ruchala 2018)—to do so (Seidman et al 2017). The trick, however, is to expand financing options while remaining tethered to their place-based values (CapShift n.d.). 

Shifting focus and energy from federal to state and local policymaking may also prove useful to CDFIs. Opportunities include: pursuing funding programs modeled on the federal government’s CDFI Fund, which provides equity grants; raising long-term debt capital through bond insurance; sharing the credit risk with state and local entities; advocating for banking laws and regulations that create exceptions for CDFIs to better serve their target consumers; and more (Theodos et al 2017). 

Additional Resources