Community Development Financial Institution (CDFI)

What Is a CDFI?

A community development financial institution (CDFI) is a lender whose main purpose is community development rather than maximizing profit. CDFIs serve low-income communities and people who lack access to mainstream financing. Certified CDFIs operate in all 50 states, the District of Columbia, Guam, and Puerto Rico.

CDFI is a federal designation. The CDFI Fund, part of the U.S. Department of the Treasury and created by the Riegle Community Development and Regulatory Improvement Act of 1994, certifies organizations that meet its standards.

How CDFIs Work

CDFIs come in several forms:

• Community development banks and credit unions, which take deposits and are regulated like other banks and credit unions
• Loan funds, which do not take federally insured deposits and were the most common type of certified CDFI as of 2021, according to the Congressional Research Service
• Venture capital funds, which make equity investments rather than loans

To be certified, an organization must be a legal entity and a financing entity with a primary mission of promoting community development. It must primarily serve one or more target markets, provide development services alongside its financing, and stay accountable to the target market it serves. It cannot be a government entity or be controlled by one, though tribal governments are an exception.

Certification makes a CDFI eligible for CDFI Fund awards. One of these, the Capital Magnet Fund, which is paid for by contributions from Fannie Mae and Freddie Mac rather than by appropriations, gives competitive grants to CDFIs and qualified nonprofit housing organizations to finance affordable housing and related economic development. Awardees must produce housing and community development investments worth at least ten times the award.

Example

Suppose a nonprofit wants to buy a small apartment building before a private investor does, but it has not yet lined up tax credits or public funds. A bank may decline such an early, uncertain loan. A CDFI loan fund might lend the purchase money short-term, to be repaid when permanent financing arrives. The Office of the Comptroller of the Currency cites acquisition and predevelopment loans as examples of lending that loan funds provide and conventional lenders are often reluctant to make.

Why It Matters for Workforce Housing

The CDFI Fund lists mortgage lending for first-time homebuyers among the activities its awards support. CDFIs also use flexible underwriting, which can help borrowers and small community builders who do not fit a conventional lender’s standards. CDFI programs are aimed mainly at low-income people and places, so their reach into moderate-income workforce housing varies by lender.

Criticisms and Limitations

CDFIs are a small part of the U.S. financial system. The Congressional Research Service reported that certified CDFIs together held about $151.8 billion in assets in 2020. The same report notes that lending to borrowers with limited or impaired credit histories is more hands-on, and generally more costly, than automated lending to traditional customers. The report also found that CDFIs tend to request more federal funding than they receive, a gap that widens when programs face budget cuts.