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Community Development Finance

CDFIs are community-based organizations that provide access to credit for a variety of needs in communities. The limited or nonexistent access to credit for many communities resulted from banks not serving these communities, historically a result of federal policy (Squires 2003).[1] CDFI predecessors include the minority banks of the 1880s and the credit unions of the 1930s (Benjamin, Rubin, and Zielenbach 2004). However, many of the earlier modem-era CDFIs emerged from community development corporations established in the 1960s. These organizations began to see the potential in leveraging capital for investment in communities to stimulate small business creation and homeownership. Implicit for these organizations was a strategy of poverty alleviation through building a community's assets, though the language of assets was not articulated at that point. During the 1990s, two events institutionalized and grew these organizations: retooling the Community Reinvestment Act (CRA) in 1991[2] and creation of the CDFI Fund in 1994, with an annual appropriation to provide grants and loans to support CDFIs. The Fund and the idea of a CDFI industry was promoted by President Clinton on the basis of the experiences of large CDFIs such as ShoreBank.[3] Seeing an opportunity, practitioners formed trade organizations such as the CDFI Coalition and Opportunity Finance Network, providing additional industry cohesion and branding (CDFI Coalition 2006). A third factor was unprecedented economic growth, which meant success for businesses that CDFIs financed. Raising capital to fund loans and investments was relatively easy (Benjamin, Rubin, and Zielenbach 2004), further stimulating growth.

Today, CDFIs offer diverse programs that address financial, human, and social capital community needs, including small business and microenterprise loan funds and equity investments; mortgages and other consumer banking services; housing development financing; and technical assistance and educational programs that enable customers to successfully use CDFI credit. There are an estimated 800-1,000 CDFIs operating today (CDFI Data Project 2005). Data collected for 496 CDFIs (about 50 percent of total estimated CDFIs) indicated that CDFIs held $20.78 billion in assets and underwrote $4.3 billion in loans and investments in FY2005. This accounted for the financing of 9,074 businesses, creating or maintaining 39,151 jobs, the construction or renovation of 55,242 units of affordable housing, and support for 613 community facilities in economically disadvantaged areas.

CDFIs provide community development services beyond access to capital. For example, a small business loan officer may have a business development counselor work with the potential borrower to develop a business plan. Some organizations also provide other forms of technical assistance, such as environmental or employment reviews, or suggest links to regional programs in workforce development.[4] Indeed, CDFI Fund data from FY2001 CDFI activities for 348 CDFIs responding to the CDFI survey showed that 50 percent of CDFIs provided consumer financial education, 45 percent provided homebuyer education, 41 percent provided business counseling and training, and 32 percent provided other counseling and training.

Figure 9.1 Litvak and Daniels's Six Kinds of Market Failures

Litvak and Daniels's Six Kinds of Market Failures

Over 85,600 clients received group-based training, and another 95,500 received one-on-one counseling.

Since 2000, CDFIs have entered a tougher funding environment with reduced subsidies available for transformational activities such as small business counseling and community development programs.[5] As federal funding is cut, there is a question of how CDFIs can remain faithful to their mission or the elements of their business that distinguish them from a bank. Further, transformational CDFI credit offers a virtuous cycle whereby the CDFI's transformational services decrease the risk of credit provided by the CDFI–that is, the likelihood of a loan going into default is ideally reduced with transforming services such as business counseling. With loss of these transformational services, CDFI's loan portfolios could be at higher risk.

  • [1] The Federal Housing Authority established racially restrictive lending policies guaranteeing that houses would be occupied by the same class and race (Squires 2003).
  • [2] This provided amore stringent framework for banks to invest in communities. CDFIs offered a useful vehicle for banks' community investments and for creating partnerships in reinvesting.
  • [3] The 1994 Reigle Community Development/Regulatory Improvement Act created the Fund.
  • [4] CEI has established a workforce development agreement called ETAG, which requires businesses to provide work opportunities for low-income and welfare recipients. ShoreBank Enterprise Cascadia provides Brownfield loans whereby loan recipients get assistance in the technicalities of cleaning up their land.
  • [5] From 2001 to 2005, Fund appropriations dropped from $118 million to $54 million per year.
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