CDFI refresher and helpful resources

The Federal Reserve Board published the first 2022 issue of its Consumer Compliance Outlook, which includes a feature article on Community Development Financial Institutions (CDFIs) and their impacts on the financial system. The article starts by explaining that CDFIs are mission-focused financial institutions, specifically providing services to “underserved communities, including LMI [low to moderate income] consumers, communities of color, women, or minority groups who can experience challenges accessing credit” while also helping to “grow local economies, provide affordable housing, and support small minority-owned businesses.” The Department of Treasury regularly reviews the activities of CDFIs to ensure they are still working toward the mission of helping their designated communities. According to the Treasury, CDFIs can be found in every state.

The article goes on to describe how CDFIs operate and the importance of access to funding. Generally, CDFI’s attempt to offer services and products at low or no costs to the target community. For example, a CDFI mortgage lender may be more willing to make smaller mortgage loans that do not generate enough interest and fee income to support the cost of making the loans. In this case, the CDFI would make the loan in order to expand lending and financial opportunities in the community, and rely on donation, grants, and other funds to cover the costs of offering these loans. CDFI credit unions also rely on member (and to a limited extent, nonmember) deposits to support their operations. Due to the mission and requirements of certification for CDFIs, these organization play a key role in expanding financial inclusion to markets that are in need, especially during times of crisis, such as during the pandemic. CDFIs must be creative and strategic in leveraging funds from a variety of sources in order to provide for communities in need.

At first glance, the description of CDFI seems similar to how we discuss the credit union industry. Credit unions are cooperative financial institutions that are also mission-driven and aim to better the lives and financial position of members. For this reason, it should not be a surprise that credit unions make up a sizable portion (over one third) of current certified CDFIs. The figure below shows a breakdown of CDFIs by the type of institution, and shows that credit unions hold the second largest share of the pie, behind not-for-profit loan funds.

 

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