CDFIs infuse underserved markets with capital, caring, capacity

There’s nothing mysterious about what happens to people and places after decades and generations of being on the business end of discriminatory housing and lending practices. 
Neighbors, small businesses and communities lose opportunities for generational wealth, shared prosperity and social cohesion.

Disinvestment in certain markets, particularly low-income and racial minority ones, establish legacies of exclusion, disparity and erasure. Access to capital is one of the keys to righting wrongs and reversing fortunes in historically underserved markets. That necessarily means doing things differently — to do things the right way, often for the first time — when it comes to community development.

The community development financial institutions (CDFIs) sector is a prime leader in transforming underserved markets. For 30 years, these mission-driven institutions — banks, credit unions, loan funds, venture capital funds, nonprofits — have ensured access to capital to individuals, businesses and developers; provided training and technical assistance; and so much more. 

While we know how and why underserved communities struggle, understanding the diverse work of CDFIs is not something easily compressed into an elevator speech. That’s why earlier this year LISC Phoenix convened a CDFI 101 workshop to demystify this vibrant component of the finance sector and share insights about how to use its tools and leverage assets in community development. Experts also dispensed advice to community development leaders interested in obtaining CDFI certification from the U.S. Department of the Treasury. 

 “We thought it was important to put on this event so that you could hear from our partner CDFIs in the community about how you could use this tool,” Terry Benelli, CEO of LISC Phoenix, said at the workshop. “This is just a tip of the iceberg around what CDFIs are in light of obvious need.”

The workshop that attracted nearly 50 community developers, funders and financial institution representatives from across throughout Arizona featured panel discussions with practitioners and end users about relationship funding, investing for impact and recycling capital. Panelists included Benelli; Robin Romano, CEO of MariSol Federal Credit Union Solutions; Dave Castillo, CEO of Native Community Capital; Annie Donovan, president and CEO of Raza Development Fund, and Diane “Dede” Devine, former CEO of Native American Connections, a nonprofit that grew into a key Arizona affordable housing developer using all tools in the CDFI toolbox. Helen Dunlap, a consultant with a 50-plus-year history in community development and community development finance, was the workshop facilitator.

A CDFI is not a charity or government program. It is a debt-focused institution that expects to be paid. But its philosophy on risks and impact investing are different from conventional lenders. They invest in markets — providing access to capital for community impact — exactly where financial institutions for decades would not do business because of perceived risks, among other things. 

“A CDFI is there to cause change in your community through investment,” Dunlap said. “And invest means recycle. … The capital recycles itself. We’re not giving money away. Essentially, we’re investing in marketplaces.”

For CDFIs, markets are people and places that deserve, at long last, a chance to grow and prosper. There’s a need in Arizona for more of them to do the kind of investing that strengthen households and small businesses through access to capital. 

“Impact is really important,” Romano said to those interested in creating a CDFI. “When you do your certification, you really have to have a vision statement that reflects what you’re going to do out there, and then every year as part of the certification they say, ‘Tell us what you’ve done. How many loans did you make? How many people did you go out and serve? Are you tracking this?’… 

“Not everything works, but we do things because we think it may help our particular market, whatever that may be, and we’re going to try it out,” she said of Marisol’s CDFI investment philosophy. “Many of you know who I am. I’ve always been the one you can come to if you have a weird project or a weird loan program. Or something odd that you need to do. I’m the one.”

CDFIs, depending on the situations, can be an institution of first response or a lender of last resort.

When circumstances arise, a pandemic, for example, CDFIs, having established relationships in communities, know how to deploy resources where they’re needed most. When minority-owned small businesses were left out of the early round of the COVID-response Paycheck Protection Program, CDFIs like LISC Phoenix were among the first to respond to the inequity by helping people in targeted markets get the capital they needed.

On the receiving end of impact investment, Diana “Dede” Devine said the lending mission of CDFIs also can be just what a project needs to get over the finance hump. 

“They’re not always the cheapest lender,” Devine said. “But sometimes you’re at the end of your capital stack and you just need that gap (amount) to push you over the top to make the project work. So, there’s a little bit more risk in that.”

It’s a risk with a moral obligation. 

“We have got to just convince people that still don’t want to do it that we have disinvested in certain populations for so long that we have an obligation to do it, even if there’s more risk,” Devine said.

Castillo said Native Community Capital was born of banks unwillingness to do business on tribal trust lands. 

“In tribal communities, banks are just not present,” Castillo said. “So, who is present? Predatory lenders. 

There’s a tremendous need for small-dollar debt consolidation lending, credit counseling, budgeting and just basic support. It’s not someone sitting across from you demanding that you reach a credit score. It’s someone understanding from the community, what we euphemistically call economic social stress, understands that very intimately and working with the community to get them to a better place.”

Raza Development Fund as a CDFI has been active in affordable housing, charter schools and health centers. It is a national lender doing big deals, but it continues to nurture the Arizona community development finance system in ways that matter to the people it serves. 

“Our strategy moving forward is really to work on building the ecosystem,” Donovan said. “For the Latino community and immigrant communities, small business is really important. It’s a gateway into mainstream economy and to economic mobility to build generational wealth.”