I was a commercial banker for a year before I first heard the “CDFI” acronym, and yet more than 1,000 of these Community Development Financial Institutions currently exist. This lack of visibility is disheartening because the CDFI industry is quietly, efficiently, and profoundly transforming disadvantaged communities across the country.
CDFIs are organizations that are certified by the U.S. Treasury that serve and empower economically distressed areas and finance important, and often less creditworthy, community development projects. More simply, CDFIs do difficult deals that banks won’t do.
The Community Reinvestment Act encourages banks to meet the credit needs of the areas in which they operate, but underserved communities remain ubiquitous. These communities are where CDFIs thrive.
Take Chicago’s troubled West Side neighborhood, where there was an old Sears catalog printing plant that had been abandoned for 40 years. Mercy Loan Fund, a CDFI and subsidiary Mercy Housing, provided a gap loan to help renovate the building and turn it into affordable housing. Traditional banks would not do such risky financing, but it was necessary to complete the rehab. Today, the 181-unit apartment complex known as the Lofts at Arthington has stabilized the lives of hundreds of low-income people, has reduced neighborhood violence, and has brought prosperity to the community.
Since the industry was formally established in 1994, CDFIs have provided catalytic capital to people and communities underrepresented by mainstream lenders. CDFIs encompass a range of nonprofit and for-profit entities, including community development banks, credit unions, loan funds, and venture funds. According to the most recent report from Opportunity Finance Network, the main industry trade association, their member CDFIs have financed $53.9 billion in community projects since inception, developed or rehabbed 1.9 million housing units, financed 256,000 businesses or microenterprises, and created or maintained 1.2 million jobs. It is a nascent industry—relative to traditional banks—with a herculean impact that has a multiplicative effect on our economy.
But these numbers don’t tell the entire story.
Defying the laws of finance, CDFIs take significantly more credit risk than banks but have similar loss ratios. Based on a 20-year longitudinal study, CDFIs’ annual loss ratios are on par with FDIC-insured institutions. CDFIs accomplish this counterintuitive feat by providing technical assistance to their clients and by having “patient capital” —i.e., while a bank might foreclose at the first sign of trouble, CDFIs will dive in and work with the borrower over time to structure a mutually palatable solution, typically minimizing the net loss.
According to the same study, “CDFIs maintained their ability to provide capital in underserved communities, even during recessionary periods when conventional banks retrenched.” During the Great Recession, CDFIs’ average loans outstanding increased while conventional banks experienced one of the largest lending contractions in half a century with outstanding loans declining as much as 16% between 2008 and early 2012. This nimbleness, despite macroeconomic volatility, is uncharacteristic for a growth industry and a testament to the resiliency of CDFIs.
CDFIs’ double-bottom line approach emphasizes both financial and mission results. Central to the mission is a broad definition for diversity, which includes class, race, and gender. To illustrate, 75% of CDFI clients are low-income, 52% are minority, and 48% are female. Inclusivity is not just a data point for the CDFI industry; it’s a core competency.
This industry works at the micro level to create opportunity and improve the lives of disadvantaged people, ultimately reducing income inequality and marginalization. During a time when “the big, bad bank” and “too big to fail” are common in our vernacular, CDFIs hope to be recognized as small but mighty financial institutions that have the benevolence, and now the sophistication and track record of success, to revitalize our most vulnerable communities.
Jason Battista is the president of Mercy Loan Fund, a CDFI and subsidiary of Mercy Housing, the nation’s largest nonprofit affordable housing owner based in Denver. He was awarded Denver’s “40 under 40” award in 2015. He has an undergraduate degree in finance from the University of Northern Colorado and a MBA with an emphasis in finance from the University of Colorado.
