In 1994, the US Treasury Department established the Community Development Financial Institutions (CDFI) Fund, a major source of short- and long-term funding for certified CDFIs. Its programs fund community revitalization efforts among more than 1,300 mission-driven lending institutions, support low-to-moderate income communities through assistance and investment of federal dollars, and leverage private sector capital and incentivize bank and institutional investment.
CDFIs have often been lenders of first resort to small and minority-owned businesses in underserved, vulnerable, and low-to-moderate income (LMI) communities. They can be community development banks or credit unions, loan funds or venture capital funds and often serve minority-, women-, or veteran-owned businesses in communities across the US. Larger financial institutions can develop strong working relationships with CDFIs, whose mission-driven purpose gives them a unique opportunity to have an impact on market segments that – owing to regulatory and risk thresholds – may not be feasible for large banks, according to the White Paper. Beyond access to credit, CDFIs also offer mentoring, training, and technical assistance to businesses.
The value of CDFIs was evident during the pandemic, as they were able to effectively channel much-needed government pandemic funding to small businesses. Their localized decision making, deep community knowledge and flexible financing to prioritize needs of communities, gives CDFIs a comparative advantage. As such, heightened attention is now being directed to these lenders with the establishment of a bipartisan Community Development Finance Caucus and the Economic Opportunity Coalition (EOC).
As the financial services industry addresses long-standing gaps in access to credit and strives for economic inclusion, traditional banks continue to deepen their existing CDFI partnerships. These partnerships are important given the uneven economic effects of the COVID-19 pandemic and the associated shutdowns that continue to disrupt many parts of the economy and communities.
The Bank of America White Paper underscores why CDFIs need continued support through advocacy among industry leaders, government agencies and the private sector in order to serve as a critical source of capital, and offers actionable suggestions for support.