CDFI 101: An Introduction to Community Development Financial Institutions

Background and basics about CDFIs - their history, what they are, who they serve, and how anyone might be able to use a CDFI 

Episode Transcript

Intro (00:02):
Hello and welcome to CDFI Central, the podcast about
building strong communitiesthrough unconventional
financing.
And now your host, ClearinghouseCDFI President and CEO Doug
Bystry.

Douglas Bystry (00:18):
Welcome to a CDFI central with Doug Bystry.
This is the first of a series ofpodcasts that we plan to do, and
these podcasts will be all aboutcommunity development financial
institutions or CDFIs.
We hope to have interviews,discussions, debates, talk to

(00:40):
players, practitioners in theindustry, take a look at
legislation…whatever ishappening, whatever is important
in the CDFI world is somethingthat we want to tackle and cover
here.
By way of introduction, I am thepresident and CEO of
Clearinghouse CFI, but for thepurposes of these podcasts, I
will be your host and I will bethe person that will be

(01:03):
conducting the interviews andtalking to various guests and
hopefully helping everyone outthere listening to understand
CDFIs and what they can do, andthe value that they bring, and
how you might be able to usethem.
The first podcast, the one thatwe're starting today is really

(01:24):
an introductory, I guess I'llcall it CDFI 101 covering basic
terms, definitions.
It is desired that this be fornovices or those of you who
aren't very familiar with theCDFI industry.
If you are a practitioner orsomeone who is working in the
CDFI industry, this would bevery much a repeat course for

(01:47):
you.
But if you're not, and you'vealways wondered what CDFIs are,
what these acronyms mean, howyou might be able to use a CDFI,
then this podcast is certainlyfor you.
So, what is a communitydevelopment financial
institution or a CDFI?
I thought I'd take the fourwords and divide them up into

(02:10):
community development andseparately financial
institution.
So, my definition of communitydevelopment is people coming
together in a common area totake action, to generate
solutions for a common problem.
Financial Institution is anyentity that aggregates money and

(02:30):
puts it into assets such asstocks, bonds, or the primary
purpose—loans.
So, what you have is a financialinstitution that is focused on
solving problems for people thatlive in a common area.
That is really what CDFI meansto me.
Think of the old movie It's aWonderful Life, the Jimmy

(02:53):
Stewart character and theBailey's savings and loan who
took small deposits from peoplein the community and lent it to
the local tavern owner so thathe could own a home.
That's what CDFIs are.
That's what we do.
CDFIs are financial institutionsthat are dedicated to delivering
responsible, affordable lendingto help low-income, low wealth

(03:14):
and other disadvantaged peoplein communities joined the
economic mainstream.
There are roughly 1,200 CDFIs inthe country.
Collectively right now, the CDFIindustry manages more than$150
billion and that is a billionwith a B.
And what geographies do theseCDFIs cover?

(03:35):
Well, there are certified CDFIsin 50 states, including the
district of Columbia, Guam, andPuerto Rico.
In fact, I looked up and I foundout that there are like seven
CDFIs in Puerto Rico.
The largest concentration ofCDFIs in the United States is
California with 98, followedclosely by New York with 83, and

(03:59):
of course, as you might expect,many of the smaller, less
populated states have less CDFIslocated there.
But there are a number of CDFIsthat have a national footprint.
In other words, they may belocated in Tennessee, Alabama,
or New Mexico, but they can makeloans anywhere.

(04:20):
Now I'm often asked what it isthat CDFIs do specifically, and
as I've already mentioned, theprimary focus of most CDFIs is
loans, but CDFIs also canprovide technical assistance and
grants.
Our CDFI I know gives away about$120,000 a year every year in

(04:43):
grants to groups working in thecommunity.
So, CDFIs in their types ofloans really vary from CDFI to
CDFI and from region to region.
But just to cover a quick list,I know CDFIs provide loans for
acquisition of property,refinance, construction,
renovation, gap financing, aswell as operations.

(05:07):
Now, some CDFIs do very small ormicro loans, which would be like
50,000 or less, and othersparticularly like ours, does
loans for millions of dollars.
I think the largest loan we everdid was$32 million, and I think
the smallest we ever did wasabout a hundred thousand

(05:30):
dollars.
Now I often get asked, can CDFIsdo anything outside of a
low-income area or outside of adistressed community?
And the answer to that is yes,depending on the CDFI.
In order to maintain a CDFIstatus, CDFIs have to primarily

(05:51):
serve economically distressed,rural, and urban markets at at
least 60% of their financialactivities level.
In other words, 60% of what theyhave to do has to be directed to
economically distressed marketsor serving low-, moderate-income
people in underservedcommunities.

(06:13):
What are the types of projectsthat CDFI is finance?
The types of projects that CDFIfinance are, in no particular

order (06:22):
affordable housing projects, community facilities,
commercial real estate, smallbusiness, nonprofit
organizations, childcare,education, green or
environmentally sensitiveprojects, health clinics,
healthy food, transit-orienteddevelopment, as well as other

(06:43):
special needs.
The list goes on and on and on.
Now, many CDFI specialize injust one type of loan, but
others like our CDFI can do lotsof different things.
So, I'm often asked how CDFIsdiffer from traditional lenders

(07:03):
or traditional financialinstitutions.
And I think for me, I answerthat by saying that CDFIs are
mission driven.
In other words, you might thinkof a regulated financial
institution as being profitmotivated, but a CDFI is mission
or impact motivated.
They want to do loans that aregoing to make a difference,

(07:28):
bring about change, positivechange in the communities they
serve.
I'm also asked do CDFIs competewith conventional financial
institutions, and my answer tothat is they shouldn't.
If CDFIs are there to helpaddress unmet credit needs, once
a borrower becomes eligible toget a loan from a regulated

(07:52):
financial institution, why thenthat borrower should go to a
regulated financial institution,and CDFIs should direct their
resources to helping those thatcan't obtain financing through
conventional sources.
Now the other big differencebetween CDFIs and regulated
financial institutions is FDICinsurance and deposits.

(08:13):
Most regulated financialinstitutions get most of their
money from the deposits thatpeople bring in—your checking
account, your savingsaccount—and we all know that the
interest they pay you is a costto them, and it's what they use
to obtain money.
Regulated financial institutionshave FDIC insurance on their

(08:34):
deposits.
Most CDFIs are not depositoryinstitutions, nor do they have
FDIC insurance.
There are some exceptionsthough, and we'll talk about
that in a moment.
FDIC insurance is the insurancethat the United States
government provides todepositors at regulated

(08:56):
financial institutions up to$250,000, and in exchange for
that, the banks have to operateunder regulation or guidelines
set forth by the United Statesgovernment.
In other words, you the consumerare protected up to$250,000 in
case that bank goes under, butin exchange for that, the bank

(09:20):
has to operate within theguidelines of what the federal
government tells them.
Because most CDFIs don't haveFDC insurance, they also don't
have that layer of regulation orthe government telling them
necessarily which loans to makeand which loans not to make.
That is a primary advantage thatCDFIs have over traditional

(09:43):
lenders in deciding which loansto make in the community.
If you look at all the loansCDFIs make, and you look at who
gets served by those loans,you'll find that 55% of the
loans go to people of color.
82% go to low-income, low-wealthor historically disinvested
populations.
27% are serving or in ruralareas, and 45% to women or

(10:11):
women-owned businesses.
Now, many people might thinkthat the type of impact lending
that CDFIs do is more risky orcreates greater risk to the
financial system than whatregulated financial institutions
do.
What I'm pleased to report isthat CDFIs actually report a
lower net charge off than doregulated financial

(10:33):
institutions, and I know some ofyou listening to this may say,
well, how can that be?
How is this possible?
And I think there's a couple ofdifferent reasons.
Number one, CDFIs have a closerrelationship traditionally with
their borrowers and if theborrower gets into trouble,
they're able to work with them.
They're sometimes able to extendthe loan, adjust the terms.

(10:54):
They're also able to talk tothem and understand what's going
wrong.
I think most of you know that ifyou got into trouble with your
home mortgage and you went toyour lender and you said,“Gee,
you know, something happened.
I had a health issue, I had aproblem, can you work with me?”

(11:15):
Well, they might, but they alsomight say,“Sorry, you know, we
don't have time to hear yourproblem.” CDFIs take the time.
They have the mission thatdrives them to try to make
positive changes in thecommunity and gives them the
ability to work with theirborrowers, particularly in times
of difficulty.

(11:37):
There are four primary differenttypes of CDFIs in existence, and
I want to start with the groupthat most CDFIs fall into, which
would be a community developmentloan fund.
These are entities, largelynonprofit, that provide
financing and developmentservices to business
organizations or individuals inlow-income areas.

(12:01):
This is where you'll find yourmicroenterprise, small business,
housing, community development.
They usually have a board ofdirectors with community
representatives on it, and theyare by far the largest segment
within the CDFI industry.
Second to that would be thecommunity development venture

(12:21):
capital funds.
Now these entities provideequity and debt with equity-like
features for businessesprimarily in distressed
communities.
They can be nonprofit orfor-profit, although most are
nonprofit, and once again havecommunity representation on
their board, but a communitydevelopment venture capital fund

(12:43):
is looking for—probably agreater return.
Many of you know what a venturefund is.
It is simply a venture fund thathas impact as one of its
motivating goals.
The other two segments in theCDFI industry are community
development banks and communitydevelopment credit unions, and
they differ primarily from thefirst two in that they typically

(13:07):
have FDIC or National CreditUnion Administration insurance
that gives them the right totake in deposits and provide
government insurance up to$250,000 on all of those
accounts.
But in exchange for that, theyhave regulations that they have

(13:27):
to abide by.
Now, community development banksthat are CDFIs also, are usually
very small, and they're usuallyserving a more rural or
community-based population.
You won't find your giant moneycenters being both community
development banks and CDFIs.
Community development creditunions that are also CDFIs are

(13:51):
regulated by the National CreditUnion Administration or NCUA, an
independent federal agency.
But for both communitydevelopment banks and community
development credit unions thatare CDFIs, they both have
regulations that they have toadhere to.
Community development loanfunds, community development

(14:12):
venture funds—whether they'refor profit or nonprofit—are
usually on their own when itcomes to deciding which loans to
make, and they have much less ofa regulatory burden than do
community development banks orcommunity development credit
unions.
So how long have CDFI has beenaround and how did they get
started?

(14:33):
Some people might point to1977—the year that the community
reinvestment act was passed, andthat legislation required that
banks to reinvest in communitieswhere they were taking deposits.
Before then, banks could makeloans wherever they wanted to,
but the reality is that CDFIsgot going around the early

(14:54):
nineties.
In 1992, the NationalAssociation of Community
Development Loan Funds wascreated.
This was a loose association oforganizations that were doing
impactful lending and communitydevelopment work at the time
that would later become the CDFICoalition.
In 1993, President Clintonproposed the community

(15:18):
development banking bill, andthat was signed into law as the
Regal Community Development andRegulatory Improvement Act in
1994, and that established theCDFI Fund.
Now, the CDFI Fund is an agencywithin the U.S.
Department of Treasury thatprovides resources and guidance
to CDFIs throughout the country.

(15:40):
It also certifies all of theCDFIs that I earlier talked
about.
In 1995, CRA Act was completelyoverhauled, and it made it
easier for regulated financialinstitutions to invest in and
lend to CDFIs.
As I mentioned, most CDFIs arenonprofit organizations.

(16:03):
However, Clearinghouse CDFI is afor-profit, and there are a
handful of for-profits CDFIsthroughout the country.
I'm often asked by people why weare for-profit.
What inspired us back in themid-nineties to be a for-profit
over a nonprofit, and thereasons are many, but primary

(16:23):
for me was one that waspersonal.
I felt that doing economic andcommunity development lending
could be done profitably and Ithink at a personal level, I
wanted to prove that we had amodel that we could make loans
that would have tremendousimpact in the low-income
communities we serve and do itin a responsible and profitable

(16:46):
manner.
Clearinghouse CDFI has enjoyedsuccess.
We have been profitable for 19consecutive years, and I think
that experiment that we startedso many years ago has paid off.
Now, if you're listening andyou're thinking to yourself,
“Wow, this sounds great and Iwould like a loan,” or“I have an

(17:08):
organization or a business thatcould benefit from financing
from a CDFI,” and you want toknow what you need to do, I
would say this—is that mostCDFIs, and we are certainly no
exception to that, require thesame type of documentation that
a regular financial institutionwould in determining whether or

(17:28):
not we make a loan on anindividual project.
One of the big differencesbetween a CDFI and a
conventional financialinstitution is we can take a
look at things like someone'scharacter, someone's dreams,
someone's vision.
If it's impactful in thecommunity and we buy into your
dream and your vision, we mightbe able to help achieve your

(17:50):
goal.
But it is a paper chase.
We do require a lot.
We are asking for a lot ofdocuments up front, and I think
any good lender will ask you ofthese things.
But in exchange for that, if youcan provide that information, if
you can get through the rigorsof underwriting, you can receive
a loan from a CDFI.

(18:12):
Clearinghouse CDFI, like anygood CDFI, tracks our outputs
and our impacts in thecommunities that we serve.
And I recently saw a report onthe cumulative impacts that
CDFIs have caused as a result ofthe lending that they've done.

(18:33):
And listen to these numbers.
I mean, they're reallystaggering, if you think about

this, in the aggregate (18:36):
11,000 community facilities created by
CDFIs, over 325,000 businessesand microenterprises created or
supported, 1.32 million jobscreated(that's a lot), and over
2 million housing units createdand maintained.

(18:58):
And when I say housing units, Iam talking about affordable
housing, which is so importantand so desperately needed in so
many communities.
CDFIs track impact because it'scritical to their mission.
It's critical to what they do.
It's why they exist.
I hope that all of you havefound this discussion today to

(19:19):
be informative, educational, andI hope all of you know a little
bit more about CDFIs and thegreat work that they're doing
throughout this country.
I want to ask all of you to staytuned for future exciting
episodes where we'll beinterviewing people, talking
about other important topics andthings that are relevant to this

(19:40):
fantastic industry.
Thank you so much for tuning in.
On behalf of CDFI Central, I bidyou adieu.

Outro (19:56):
tThe CDFI Central podcast is brought to you by
Clearinghouse CDFI.
At Clearinghouse CDFI, wefinance projects that create
jobs and services to help peoplethrive in healthy communities.
Enjoying the podcast?
Visit www.ccdfi.com to rate,subscribe, and check out
additional episodes.
Thanks again for joining ustoday.

(20:18):
Until next time.