How CDFI’s Benefit America
An economically disadvantaged business community or neighborhood doesn’t get that way overnight. Often, it occurs with a seemingly inconsequential event. A local business shuts down or moves to another area, putting a few more people on the unemployment line. That event then leaves fewer people in the area which can then affect other businesses in the area. Economic activity over time slows to a crawl as businesses try to attract more customers. Adjacent neighborhoods can then see residents moving away where there are more jobs. In time, a once thriving area is blighted. At this stage, capital for business operation and expansion dries up as banks cannot justify making loans with no clear path of repayment.
This track is the opposite of how communities begin to grow in the first place. A business gets started, employs people and grows. Economic activity then attracts more capital and businesses move where the money is. Employees follow and buy homes near their jobs. Banks notice the activity along with other entrepreneurs and money flows.
But there is a perceived gap between bank lending and so-called “subprime” loans. Subprime loans are primarily asset-based requiring a sizable down payment from the buyer with less attention to the creditworthiness of the buyer. Communities who are in dire need of capital to revitalize the area are stuck between a bank’s reluctance to lend and high down payment, high interest rate financing.
The CDFI Answer
The Community Development Financial Institution’s, or CDFIs, were introduced approximately 25 years ago and are the bridge neglected communities are looking for. A CDFI is a private organization awarded certification by the Department of the Treasury designed to help low to moderate income areas receive the necessary capital to get an area’s economic engine running once again.
As communities grow stronger they attract still more investment and in turn employ more people, pay more taxes and create a stronger economic impact in the area. And CDFIs are working all across the United States yet are still somewhat unnoticed in the work they do. In 2016 for example, CDFIs financed $2.1 billion in loans while creating some 28,000 new jobs. CDFIs provided loans to more than 5,400 business and 178 million square feet of manufacturing.*
Let’s take a closer look at some of the benefits of CDFIs and the positive impact on the American economy.
CDFI Benefits to America
CDFIs devote funds to local developers to design and build affordable housing projects for low to middle income borrowers. Such projects help local communities revitalize economies and provide an economic stimulus to the area. Employees benefit when they can live near where they work and employers have a steady stream of new workers.
CDFIs also lend to individuals buying their first home in designated areas and work with local banks and credit unions fulfill their Community Reinvestment Act, or CRA, requirements. The Community Reinvestment Act was signed into law in 1977 with its primary mission to “…encourage depository institutions to help meet the credit needs of the communities in which they operate.”**
Steven Kirsch, Managing Director of the DRI Fund says, “The goal of the CRA is a worthwhile one yet banks can sometimes find themselves between a rock and a hard place. They know the Act requires them to make loans in designated areas yet they’re reluctant to do so in an area in dire need of revitalization. CDFIs help banks meet that threshold by providing the necessary capital to serve an area in need.”
Once an area begins to see new capital in the housing and business sectors it just grows from there. Seed capital is so important to these areas.
CDFIs fund business startups as well as provide financing for growing companies that would otherwise find difficulty in obtaining financing. CDFI interest rates and terms are much more competitive compared to subprime lending which keeps many would-be entrepreneurs at bay.
“CDFIs have a significant social impact on America helping those in need of funds to buy a home or start a business while at the same time helping lending institutions meet their federally mandated lending requirements,” Kirsch noted. “It’s heartening to return to a once-blighted community and see the progress that has been made that otherwise wouldn’t without the presence of CDFI funds along with the commitment of the local bank or credit union.”
A Community Development Financial Institution is an official designation given by the CDFI Fund and is located in all 50 states. In order to receive such a certification, the awarded entity must:
- Is a legal entity at the time of Certification application;
- Has a primary mission of promoting community development;
- Is a financing entity;
- Primarily serves one or more target markets;
- Provides development services in conjunction with its financing activities;
- Maintains accountability to its defined target market; and
- Is a non-government entity and not under the control of any government entity (Tribal governments excluded).
As the community matures and begins to prosper once again, the ripple effect means not only more businesses to the area but more jobs. More people move to these areas assisted by newly affordable housing projects. Property and income taxes begin to flow into government coffers. Public schools are built, roads repaired and important public services supported. As communities begin to flourish they have an impact on communities and neighborhoods in surrounding areas which in turn benefit from the economic impact revitalized areas provide. Without the creation and success of CDFIs over the past 25 years it’s difficult to imagine how distressed neighborhoods and business districts could recover on their own.
Local banks and credit unions have a feel for the pulse of an area and see first-hand the needs of local citizens and surrounding businesses and working with a CDFI allows these lending institutions to meet these needs and get to witness the positive impact of a successful CDFI campaign.
*New York Business Journal, April 27, 2017
**Community Reinvestment Act, Board of Governess of the Federal Reserve System