Community Development Financial Institutions (CDFIs) are community-based financial service providers that focus their resources on the most distressed and underserved communities in the nation. Individuals and families in these communities are often unable to access personal and business financial services – savings and checking accounts, home loans, business loans, etc.—from traditional, mainstream banks. As the large banks consolidate, many communities have lost local bank branches. At the same time, banks have both tightened their lending standards and pulled back from small business lending. Thus, the barriers to accessing financial services and capital have become much more formidable, particularly in the past four years, as the state and the nation have struggled to recover from the Great Recession.
For the past 18 years, CDFIs have been stepping in to fill this gap, and their services are more important now than ever before. Established in 1994 under the Community Development and Regulatory Improvement Act, CDFIs provide loans, make investments, and offer financial resources to individuals and communities that are not served by the mainstream financial sector. CDFIs are a vital link to financial services, capital, and financial literacy that help lift families and communities out of distress and onto the road to economic health. This paper examines the important role of CDFIs in North Carolina. The work of CDFIs enhances the efforts of government and private sector stakeholders in generating economic growth. Working together, supported by sound policies and strategic investments, CDFIs, banks, and the State of North Carolina can spur much-needed economic development in underserved communities, and ultimately the state as a whole.
History of the CDFI Movement
From their earliest roots, Community Development Financial Institutions (CDFIs) have been a part of a movement to generate economic growth and revitalization for people and places that have historically been left out of the financial mainstream. These roots can be traced back to the formation of the community development movement in 1960s and the establishment of Community Development Corporations (CDCs). While other agencies, such as Community Action Agencies focused on social services, CDCs engaged in economic development projects and investments aimed at revitalizing communities. As Alan Okagaki states in a publication by the Federal Reserve Bank of Boston and The Aspen Institute:
…community development emerged as a place-based complement to the original people-based programs of the Economic Opportunity Act. The practice of community development, as embodied in the CDCs, assumes that poverty is a function of place and environment rather than just the “shortcomings” of particular individuals…. Unlike social service interventions, community development deploys market-related tools such as real estate development and business development to address the economic roots of poverty.
It is through this market- and investment-oriented approach that the notion of community-based financial service providers—and ultimately, CDFIs—began to take shape. Community development credit unions serving low-income and minority populations had already emerged in the 1950s, which extended financial services and credit to people outside the financial mainstream.2 During the 1960s and 1970s, CDCs took on economic development, and non-profit loan funds grew during the 1980s. These loan funds raised capital from philanthropic resources and federal agencies, such as the Department of Housing and Urban Development, the Department of Agriculture, and the Economic Development Administration, to provide business and development loans in underserved communities.
The CDFI industry was formally established and funded under the U.S. Department of Treasury through the Community Development and Regulatory Improvement Act of 1994, which created the CDFI Fund. The purpose of the CDFI Fund is to advance “economic revitalization and community development through investment in and assistance to community development financial institutions,” with the mission of increasing economic opportunity in underserved and distressed communities. The establishment of the Fund, along with revisions to the Community Reinvestment Act (CRA) regulations in 1995 specifying CDFIs as qualified CRA investments for banks, catalyzed the nascent CDFI industry.
What Does The CDFI Fund Do?
It is important to distinguish between the CDFI Fund, which is a part of the U.S. Department of Treasury, and CDFIs, which are the local organizations that receive certification and funding through the CDFI Fund. Over the past 23 years, CDFI Fund has awarded $1.4 billion to community development organizations and financial institutions.6 Through financial and technical assistance awards, CDFIs are the primary vehicle of the CDFI Fund for implementing the Fund’s programs and achieving its mission of economic revitalization of low-income communities. In addition to the CDFI Program, the CDFI Fund allocates monetary awards and tax credits through a variety of programs centered on economic development, commercial real estate development, affordable housing and homeownership, and community development financial services:7
• Bank Enterprise Award Program: aimed at complementing community development activities of FDIC-insured entities by providing incentives to increase investments in CDFIs and increase lending, investment, and other activities in economically distressed communities.
• Capital Magnet Fund Program: provides financial awards to CDFIs and other qualified non-profit housing organizations for the purpose of developing affordable housing and community service facilities, as well as financing other economic development activities.
• Financial Education and Counseling Program: provides grants to organizations to provide financial education and counseling to homebuyers to increase their financial skills and knowledge, as well as to identify successful methods to influence behavior leading to financial empowerment.
• New Markets Tax Credits Program: aimed at spurring economic investments in low-income communities by providing tax credits to individual and corporate investors making equity investments in certified Community Development Entities.
• Native Initiatives: aimed at overcoming barriers to accessing capital, credit, and financial services in Native communities by encouraging the development of Native CDFIs, as well as increasing the capacity of existing Native CDFIs.
• CDFI Bond Guarantee Program: guarantees bonds or notes to CDFIs making investments for community or economic development purposes, including commercial facilities that promote revitalization, community stability, and job creation; community facilities; financial services; affordable housing; and businesses providing jobs to or owned by low-income people. This program was enacted by the Small Business Jobs Act of 2010, but has not yet been implemented.