Background and basics about CDFIs - their history, what they are, who they serve, and how anyone might be able to use a CDFI
Hello and welcome to CDFI Central, the podcast about building strong communities through unconventional financing. And now your host, Clearinghouse CDFI President and CEO Doug Bystry.Douglas Bystry:
Welcome to a CDFI central with Doug Bystry. This is the first of a series of podcasts that we plan to do, and these podcasts will be all about community development financial institutions or CDFIs. We hope to have interviews, discussions, debates, talk to players, practitioners in the industry, take a look at legislation…whatever is happening, whatever is important in the CDFI world is something that we want to tackle and cover here. By way of introduction, I am the president and CEO of Clearinghouse CFI, but for the purposes of these podcasts, I will be your host and I will be the person that will be conducting the interviews and talking to various guests and hopefully helping everyone out there listening to understand CDFIs and what they can do, and the value that they bring, and how you might be able to use them. The first podcast, the one that we're starting today is really an introductory, I guess I'll call it CDFI 101 covering basic terms, definitions. It is desired that this be for novices or those of you who aren't very familiar with the CDFI industry. If you are a practitioner or someone who is working in the CDFI industry, this would be very much a repeat course for you. But if you're not, and you've always wondered what CDFIs are, what these acronyms mean, how you might be able to use a CDFI, then this podcast is certainly for you. So, what is a community development financial institution or a CDFI? I thought I'd take the four words and divide them up into community development and separately financial institution. So, my definition of community development is people coming together in a common area to take action, to generate solutions for a common problem. Financial Institution is any entity that aggregates money and puts it into assets such as stocks, bonds, or the primary purpose—loans. So, what you have is a financial institution that is focused on solving problems for people that live in a common area. That is really what CDFI means to me. Think of the old movie It's a Wonderful Life, the Jimmy Stewart character and the Bailey's savings and loan who took small deposits from people in the community and lent it to the local tavern owner so that he could own a home. That's what CDFIs are. That's what we do. CDFIs are financial institutions that are dedicated to delivering responsible, affordable lending to help low-income, low wealth and other disadvantaged people in communities joined the economic mainstream. There are roughly 1,200 CDFIs in the country. Collectively right now, the CDFI industry manages more than $150 billion and that is a billion with a B. And what geographies do these CDFIs cover? Well, there are certified CDFIs in 50 states, including the district of Columbia, Guam, and Puerto Rico. In fact, I looked up and I found out that there are like seven CDFIs in Puerto Rico. The largest concentration of CDFIs in the United States is California with 98, followed closely by New York with 83, and of course, as you might expect, many of the smaller, less populated states have less CDFIs located there. But there are a number of CDFIs that have a national footprint. In other words, they may be located in Tennessee, Alabama, or New Mexico, but they can make loans anywhere. Now I'm often asked what it is that CDFIs do specifically, and as I've already mentioned, the primary focus of most CDFIs is loans, but CDFIs also can provide technical assistance and grants. Our CDFI I know gives away about $120,000 a year every year in grants to groups working in the community. So, CDFIs in their types of loans 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, as well as operations. Now, some CDFIs do very small or micro loans, which would be like 50,000 or less, and others particularly like ours, does loans for millions of dollars. I think the largest loan we ever did was $32 million, and I think the smallest we ever did was about a hundred thousand dollars. Now I often get asked, can CDFIs do anything outside of a low-income area or outside of a distressed community? And the answer to that is yes, depending on the CDFI. In order to maintain a CDFI status, CDFIs have to primarily serve economically distressed, rural, and urban markets at at least 60% of their financial activities level. In other words, 60% of what they have to do has to be directed to economically distressed markets or serving low-, moderate-income people in underserved communities. What are the types of projects that CDFI is finance? The types of projects that CDFI finance are, in no particular order: affordable housing projects, community facilities, commercial real estate, small business, nonprofit organizations, childcare, education, green or environmentally sensitive projects, health clinics, healthy food, transit-oriented development, as well as other special needs. The list goes on and on and on. Now, many CDFI specialize in just one type of loan, but others like our CDFI can do lots of different things. So, I'm often asked how CDFIs differ from traditional lenders or traditional financial institutions. And I think for me, I answer that by saying that CDFIs are mission driven. In other words, you might think of a regulated financial institution as being profit motivated, but a CDFI is mission or impact motivated. They want to do loans that are going to make a difference, bring about change, positive change in the communities they serve. I'm also asked do CDFIs compete with conventional financial institutions, and my answer to that is they shouldn't. If CDFIs are there to help address unmet credit needs, once a borrower becomes eligible to get a loan from a regulated financial institution, why then that borrower should go to a regulated financial institution, and CDFIs should direct their resources to helping those that can't obtain financing through conventional sources. Now the other big difference between CDFIs and regulated financial institutions is FDIC insurance and deposits. Most regulated financial institutions get most of their money from the deposits that people bring in—your checking account, your savings account—and we all know that the interest they pay you is a cost to them, and it's what they use to obtain money. Regulated financial institutions have FDIC insurance on their deposits. Most CDFIs are not depository institutions, nor do they have FDIC insurance. There are some exceptions though, and we'll talk about that in a moment. FDIC insurance is the insurance that the United States government provides to depositors at regulated financial institutions up to $250,000, and in exchange for that, the banks have to operate under regulation or guidelines set forth by the United States government. In other words, you the consumer are protected up to $250,000 in case that bank goes under, but in exchange for that, the bank has to operate within the guidelines of what the federal government tells them. Because most CDFIs don't have FDC insurance, they also don't have that layer of regulation or the government telling them necessarily which loans to make and which loans not to make. That is a primary advantage that CDFIs have over traditional lenders in deciding which loans to make in the community. If you look at all the loans CDFIs 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-wealth or historically disinvested populations. 27% are serving or in rural areas, and 45% to women or women-owned businesses. Now, many people might think that the type of impact lending that CDFIs do is more risky or creates greater risk to the financial system than what regulated financial institutions do. What I'm pleased to report is that CDFIs actually report a lower net charge off than do regulated financial institutions, and I know some of you listening to this may say, well, how can that be? How is this possible? And I think there's a couple of different reasons. Number one, CDFIs have a closer relationship traditionally with their borrowers and if the borrower gets into trouble, they're able to work with them. They're sometimes able to extend the loan, adjust the terms. They're also able to talk to them and understand what's going wrong. I think most of you know that if you got into trouble with your home mortgage and you went to your lender and you said, “Gee, you know, something happened. I had a health issue, I had a problem, can you work with me?” Well, they might, but they also might say, “Sorry, you know, we don't have time to hear your problem.” CDFIs take the time. They have the mission that drives them to try to make positive changes in the community and gives them the ability to work with their borrowers, particularly in times of difficulty. There are four primary different types of CDFIs in existence, and I want to start with the group that most CDFIs fall into, which would be a community development loan fund. These are entities, largely nonprofit, that provide financing and development services to business organizations or individuals in low-income areas. This is where you'll find your microenterprise, small business, housing, community development. They usually have a board of directors with community representatives on it, and they are by far the largest segment within the CDFI industry. Second to that would be the community development venture capital funds. Now these entities provide equity and debt with equity-like features for businesses primarily in distressed communities. They can be nonprofit or for-profit, although most are nonprofit, and once again have community representation on their board, but a community development venture capital fund is looking for—probably a greater return. Many of you know what a venture fund is. It is simply a venture fund that has impact as one of its motivating goals. The other two segments in the CDFI industry are community development banks and community development credit unions, and they differ primarily from the first two in that they typically have FDIC or National Credit Union Administration insurance that gives them the right to take in deposits and provide government insurance up to $250,000 on all of those accounts. But in exchange for that, they have regulations that they have to abide by. Now, community development banks that are CDFIs also, are usually very small, and they're usually serving a more rural or community-based population. You won't find your giant money centers being both community development banks and CDFIs. Community development credit unions that are also CDFIs are regulated by the National Credit Union Administration or NCUA, an independent federal agency. But for both community development banks and community development credit unions that are CDFIs, they both have regulations that they have to adhere to. Community development loan funds, community development venture funds—whether they're for profit or nonprofit—are usually on their own when it comes to deciding which loans to make, and they have much less of a regulatory burden than do community development banks or community development credit unions. So how long have CDFI has been around and how did they get started? Some people might point to 1977—the year that the community reinvestment act was passed, and that legislation required that banks to reinvest in communities where they were taking deposits. Before then, banks could make loans wherever they wanted to, but the reality is that CDFIs got going around the early nineties. In 1992, the National Association of Community Development Loan Funds was created. This was a loose association of organizations that were doing impactful lending and community development work at the time that would later become the CDFI Coalition. In 1993, President Clinton proposed the community development banking bill, and that was signed into law as the Regal Community Development and Regulatory Improvement Act in 1994, and that established the CDFI Fund. Now, the CDFI Fund is an agency within the U.S. Department of Treasury that provides resources and guidance to CDFIs throughout the country. It also certifies all of the CDFIs that I earlier talked about. In 1995, CRA Act was completely overhauled, and it made it easier for regulated financial institutions to invest in and lend to CDFIs. As I mentioned, most CDFIs are nonprofit organizations. However, Clearinghouse CDFI is a for-profit, and there are a handful of for-profits CDFIs throughout the country. I'm often asked by people why we are for-profit. What inspired us back in the mid-nineties to be a for-profit over a nonprofit, and the reasons are many, but primary for me was one that was personal. I felt that doing economic and community development lending could be done profitably and I think at a personal level, I wanted to prove that we had a model that we could make loans that would have tremendous impact in the low-income communities we serve and do it in a responsible and profitable manner. Clearinghouse CDFI has enjoyed success. We have been profitable for 19 consecutive years, and I think that experiment that we started so many years ago has paid off. Now, if you're listening and you're thinking to yourself, “Wow, this sounds great and I would like a loan,” or “I have an organization or a business that could benefit from financing from a CDFI,” and you want to know what you need to do, I would say this—is that most CDFIs, and we are certainly no exception to that, require the same type of documentation that a regular financial institution would in determining whether or not we make a loan on an individual project. One of the big differences between a CDFI and a conventional financial institution is we can take a look at things like someone's character, someone's dreams, someone's vision. If it's impactful in the community and we buy into your dream and your vision, we might be able to help achieve your goal. But it is a paper chase. We do require a lot. We are asking for a lot of documents up front, and I think any good lender will ask you of these things. But in exchange for that, if you can provide that information, if you can get through the rigors of underwriting, you can receive a loan from a CDFI. Clearinghouse CDFI, like any good CDFI, tracks our outputs and our impacts in the communities that we serve. And I recently saw a report on the cumulative impacts that CDFIs have caused as a result of the lending that they've done. And listen to these numbers. I mean, they're really staggering, if you think about this, in the aggregate: 11,000 community facilities created by CDFIs, over 325,000 businesses and microenterprises created or supported, 1.32 million jobs created (that's a lot), and over 2 million housing units created and maintained. And when I say housing units, I am talking about affordable housing, which is so important and so desperately needed in so many communities. CDFIs track impact because it's critical to their mission. It's critical to what they do. It's why they exist. I hope that all of you have found this discussion today to be informative, educational, and I hope all of you know a little bit more about CDFIs and the great work that they're doing throughout this country. I want to ask all of you to stay tuned for future exciting episodes where we'll be interviewing people, talking about other important topics and things that are relevant to this fantastic industry. Thank you so much for tuning in. On behalf of CDFI Central, I bid you adieu.Outro:
tThe CDFI Central podcast is brought to you by Clearinghouse CDFI. At Clearinghouse CDFI, we finance projects that create jobs and services to help people thrive in healthy communities. Enjoying the podcast? Visit www.ccdfi.com to rate, subscribe, and check out additional episodes. Thanks again for joining us today. Until next time.