LISC COO Annie Donovan knows her way around Community Development Financial Institutions. In the blog that follows, she offers an indispensable primer on how CDFIs work, the diverse ways and places they operate, and why they are imperative to building equitable and inclusive communities and helping close our country's racial wealth and opportunity gaps.
Top image: INHP
I was recently in Indianapolis, celebrating the accomplishments of a local community organization, the Indianapolis Housing Partnership (INHP), with my colleagues and our partners.
INHP has been an innovator in virtually every aspect of accessible, affordable homeownership. They offer a variety of creative mortgage products in addition to programs for home repair, homebuyer education, and even realtor engagement. As one of my colleagues at the Housing Partnership Network, a national organization, said, “I wish every market in America had an INHP.”
Indeed, every community needs an INHP because the housing market since the onset of the pandemic has only gotten more difficult. The most recent State of the Nation’s Housing Report from Harvard’s Joint Center for Housing states that, “Even as the US economy continues to recover, the inequalities amplified by the pandemic remain front and center. [M]illions of households that lost income are behind on their housing payments and on the brink of eviction or foreclosure. A disproportionately large share of these at-risk households are renters with low incomes and people of color.”
INHP is a CDFI, an acronym – well known in our field – for Community Development Financial Institution. CDFIs are a collaborative force that brings together diverse private and public sector investors to create economic opportunity in communities.
They are mission-driven financial institutions that take a market-based approach to supporting communities that have historically lacked access to capital – places that the financial markets, when left to their own devices – have failed to reach. INHP is among a thousand plus organizations across the country certified as a CDFI by the US Treasury Department’s CDFI Fund. LISC is also a certified CDFI. Since our founding in 1979, LISC has invested $26.7 billion in our communities, leading to $75 billion in total community development investments.
Not just any organization can be a CDFI. You have to start by being a financing entity – so you can’t just talk about the importance of investment – you have to actually invest, with a primary mission to serve low-income markets or people who, the data show, lack adequate access to capital. Sixty percent of your assets must be invested in your target markets – a high bar.
A CDFI has to be accountable to the community it serves through its governing board or advisory board and must offer development services, or technical assistance – alongside financing.
CDFIs exist in all 50 states, DC and the territories. They collectively hold over $150 billion in assets on their balance sheets, and about $250 billion in assets under management.
CDFIs are very diverse in their organizational forms. They can be banks, credit unions, loan funds, microloan funds, or venture capital providers. INHP is the most common form of CDFI – a nonprofit loan fund.
Like INHP, CDFIs help families finance their first homes. They also support residents starting businesses, and invest in local health centers, schools, or community centers.
The healthiest community development ecosystems support multiple CDFIs that can provide a wide range of products, services and strategies to a local market.
According to the Opportunity Finance Network (OFN), a CDFI trade association, 84% of CDFI loans made by their members are in low-income communities, 60% are to people of color, 50% are to women and 28% are in rural areas.
In the community development world, CDFIs are ascendant. They are growing in size and impact, and in their ability to support community transformation.
Their appeal continues to broaden because the CDFI model is viable, resilient and impactful in every kind of setting. As CDFI Fund director, I visited communities far-and-wide, from Kotzebue, Alaska, which is 33 miles above the Arctic Circle, to the Colonias on the border, to Native American reservations, rural areas, and small, medium and large urban centers. CDFIs thrive no matter where they are.
CDFIs perform on par with regulated financial institutions when it comes to managing risk, despite the fact that they serve what many consider “higher risk” markets. Data from OFN show that in 2020, surveyed CDFIs had an average delinquency ratio of only 1.2% and a charge off rate of a mere one half of one percent. And that was through the height of the pandemic.
CDFIs are countercyclical, meaning that when things go bad, CDFIs accelerate their activity. CDFIs are quick to act because our industry has deep experience in times of crisis. In the aftermath of natural disasters, 9/11, the Great Recession, and the COVID -19 pandemic CDFIs were financial first responders helping individuals, businesses, and communities.
During the pandemic, true to form, CDFIs stepped up their game. When the federal Paycheck Protection Program failed in its initial roll out to protect those most vulnerable during the pandemic, especially businesses owned by Black, Indigenous, people of color and women, CDFIs lobbied hard to make changes to the program that would allow better access to PPP resources by the communities we serve.
And we were successful. When the final tally on PPP was taken, Community Financial Institutions (CFIs) — a category of lender that included CDFIs— made more than $34 billion in PPP loans.
Is it any wonder that CDFIs enjoy sustained bipartisan support in Washington? In our increasingly divided nation, anything that can continue to receive bipartisan political support must be a resilient public policy tool!
In the CARES Act passed by Congress in 2020, CDFIs, Minority Depository Institutions and other community banks received a whopping $12 billion in investment, $3 billion of which went to the CDFI Fund to support financial assistance to CDFIs in addition to the normal annual appropriations for the CDFI Fund. This is the most important form of recognition for the CDFI industry.
The future for CDFIs is bright. We will continue to grow. And grow we must. Because these times feel quite precarious on so many fronts.
In times of rapid change and unpredictability, I like to hold on to my core values and stay close to my friends.
CDFIs like INHP are respected trailblazers, with deep ties to their communities and robust partnerships. They express their core values as service to the people and places they work with. Individuals, families, neighborhoods.
Now, more than ever, it’s important for us all to hold fast to what we value, to support each other in this ever more challenging work and to not lose our hope for the future. CDFIs are a critical vehicle to help us reach a future in which all communities are included in broadly shared opportunity and prosperity.
About the Author
Annie Donovan, COO
Annie Donovan joined LISC In May 2019 as COO. Immediately prior, she was a Senior Fellow at the Beeck Center for Social Impact and Innovation at Georgetown University and a Senior Fellow at the Center for Community Investment at the Lincoln Institute of Land Policy. Annie’s distinguished career in community development and impact investing includes serving as Director of the U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund).
@ADonovanLISC