Financial opportunity isn’t equally distributed across the United States. Millions of Americans live in places that aren’t well served by traditional financial institutions, from far-flung tribal homelands to isolated farming and ranching towns to urban neighborhoods suffering from decades of disinvestment.
This is a tricky, complicated issue that has persisted for decades. It has no easy solution. But that doesn’t mean nothing is being done to address it.
One group that’s doing more than almost anyone else is the collection of mostly local and regional banks certified as Community Development Financial Institutions (CDFIs). More than 1,300 of them serve low-income communities, covering every state and the vast majority of U.S. counties.
Community Development Financial Institutions are banks and credit unions that serve people and small businesses that mainstream financial institutions tend to overlook.
Many CDFIs focus on historically disadvantaged populations, including people living in rural areas far from major cities, Native American tribes, and urban communities of color. Members of these communities tend to have lower income, lower net worth, and lower credit scores on average than members of communities that have not faced such historical disadvantages.
CDFIs tailor their financial products to these target populations. Although every CDFI is different, they’re generally willing to make loans to people with lower credit scores, and in some cases might not consider loan applicants’ credit at all. Their checking accounts and savings accounts tend to have lower minimum balance requirements and lower fees overall as well.
CDFIs work with their customers and members to build financial capacity and financial literacy over time. They’re less interested in transactional, “one-and-done” interactions and more focused on building lasting relationships.
CDFIs also invest in locally based businesses and businesses that invest in the communities the CDFIs serve. That covers everyone from the hairdresser on a one-stoplight Main Street to the real estate developer building affordable housing in an urban neighborhood with far too little of it.
From minority-owned banks and rural cooperatives around the turn of the 20th century to upstart credit unions during the Great Depression, smaller financial institutions have supported historically disinvested communities for decades.
Modern CDFIs owe their existence to the Riegle Community Development and Regulatory Improvement Act of 1994, a landmark law that authorized the creation of the Community Development Financial Institution Fund.
According to the Opportunity Finance Network, whose membership includes more than 350 CDFIs, these institutions manage more than $220 billion. Its borrowers are diverse:
- 84% low-income
- 60% people of color
- 50% women
- 27% rural
CDFIs work to keep capital in the communities they serve. OFN’s member institutions leverage each dollar of public funding by a factor of eight — meaning they lend out $8 for every $1 they receive in federal, state, and local assistance.
Meanwhile, they maintain a chargeoff rate of about 0.5%. In other words, for every $200 lent out, OFN members lose just $1.
The CDFI Fund and Certification
The CDFI Fund, as it’s known, supports community development and revitalization in low-income, low-resource areas.
Many financial institutions make it their mission to support historically disadvantaged communities and businesses willing to invest in them. Some qualify as CDFIs; others don’t.
The difference comes down to CDFI certification. Financial institutions interested in becoming CDFIs must apply for certification through the U.S. Department of the Treasury. To be eligible, they must meet all the following criteria:
- Be a financing entity — that is, an organization that provides loans or other forms of credit
- Be legally incorporated
- Have a primary mission of promoting community development
- Provide development services alongside financing
- Be accountable to its target markets — that is, the communities it serves
- Not be a government entity or under the control of any government, except for tribal governments
Once certified, CDFIs become eligible to apply for CDFI Fund awards and grants, such as the New Markets Tax Credit and the Small Dollar Loan Program. These programs help CDFIs finance activities that might otherwise be out of reach, such as:
- Flexible loan underwriting to people and businesses with subprime credit or limited credit history
- Affordable mortgage loans for first-time homebuyers
- Commercial loans for businesses in distressed communities that traditional financial institutions consider too risky
These activities vary by CDFI type.
Types of CDFIs
There are four types of certified CDFIs. All share the community development and revitalization mission, but each offers a different mix of products and services to different target audiences.
Community development banks, or CDBs, are for-profit financial institutions whose boards of directors include members of the communities they serve.
CDBs are regulated by some combination of state and federal authorities, including the Federal Reserve and state banking regulators. They lend to individuals, small businesses, and nonprofits in target communities. Their deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable limits set by federal law.
Community Development Credit Unions, or CDCUs, are nonprofit financial institutions whose customers are also members. Each credit union member owns a tiny stake in the institution itself.
CDCUs make low-cost loans to underserved customers, often at interest rates lower than those of for-profit banks. They also provide low-cost deposit accounts like checking, savings, and certificates of deposit.
CDCUs are regulated by the National Credit Union Administration (NCUA) and state credit union regulators. Their deposits are insured by the NCUA up to applicable limits set by federal law.
Community development loan funds (CDLFs) are lenders that specialize in supporting consumers, businesses, and nonprofit organizations in low-income areas. They come in four flavors:
- Microenterprise, which primarily serves solopreneurs, freelancers, and other low-revenue enterprises
- Small business, which serves businesses with anywhere from a handful of employees to a few hundred
- Housing, which supports housing development and rehabilitation in underserved areas
- Community service organizations, which include charities and nonprofits serving the CDLF’s community
Some CDLFs serve more than one target market. For example, a given CDLF might serve both microenterprises and small businesses. Regardless, CDLFs are usually nonprofits governed by members of the communities they serve.
Community development venture capital funds (CDVCFs) offer financing to small and medium-sized private sector companies in overlooked communities. Their investments generally involve an equity component, meaning they take ownership stakes in the companies they support, but some also offer debt financing.
CDVCFs are usually governed by members of the communities they serve. Some are nonprofits, while others are for-profit, but their investments tend to target higher-growth businesses.
CDFIs are invisible to many consumers and entrepreneurs not directly involved with them — even those living and working in communities they serve. So it’s only natural to have questions about what they are and how they work.
Are CDFIs Nonprofits?
Some CDFIs are nonprofits, but not all of them. The most important determinant of for-profit versus nonprofit status is CDFI type:
- Community Development Banks: For-profit
- Community Development Credit Unions: Nonprofit
- Community Development Loan Funds: Can be either
- Community Development Venture Capital Funds: Can be either
How Are CDFIs Regulated?
Every CDFI is regulated by at least one state or federal agency. Again, an important determinant — but not the only one in this case — is CDFI type.
For example, Community Development Banks are generally regulated by the Federal Reserve or Federal Deposit Insurance Corporation and the state banking regulator in the state they’re chartered in. Community Development Credit Unions are regulated by the National Credit Union Administration or state credit union regulators.
How Do CDFIs Get Their Money?
CDFIs get money from a combination of private deposits and public funding. Although most CDFIs get considerable financing from private sources like individuals and business deposit accounts, many rely on public grants and awards to finance higher-risk lending activities.
Use OFN’s CDFI locator to search for certified CDFIs near you. You can search by institution type, states served, and financing or account options.
If you’re looking for a high-yield savings account or free checking account, you have no shortage of choices. Your best bet is probably an online bank with low overhead expenses and even lower fees to users like you.
However, if you’re looking for a deeper relationship with your financial institution, a CDFI might be a better choice. This is particularly true if you’re looking to start or expand a business in a place that banks have historically been reluctant to invest in.
Working with a CDFI isn’t a shortcut to riches. Nothing is. But it’s far more likely to mean working with an organization that truly has your best interests at heart — and your community’s too.