What is a CDFI?
In the 1970s, community activists, spurred on by passage of the Fair Housing Act and other anti-discrimination legislation, turned their sights on the severe lack of credit opportunities for low-income people and minorities. Heightened pressure on financial institutions to increase access to financial products reached its apex with the passage of the 1977 Community Reinvestment Act (CRA). The CRA encourages financial institutions to expand the availability of services to low-income neighborhoods and communities, and provided regulatory authorities the ability to enforce compliance by conducting regular examinations and limiting the mergers and acquisitions of noncompliant institutions.
Concurrently, credit unions and non-bank loan funds began to organize, with a similar goal of reaching people who lacked access to financial products. A coalition of these organizations, which espoused a broad mission of community development through financing, formed an industry organization that lobbied for recognition within the government. In 1993, President Bill Clinton spearheaded the creation of a fund specifically for Community Development Financial Institutions (CDFIs) while also proposing an overhaul of the Community Reinvestment Act that allowed banks to fulfill their CRA requirements by investing in CDFIs.
The CDFI Fund and legal recognition of CDFIs was passed in the 1994 Riegle Community Development & Regulatory Improvement Act. CDFIs are defined therein as:
- Private financial institutions (non-governmental entities)
- Dedicated to community development through a specific target market
- Accountable to community input
Thus, CDFIs encompass Community Development Loan Funds (like Working Solutions), Venture Capital Funds (providing equity to businesses in distressed communities), Community Development Credit Unions (which promote asset-building programs and are wholly owned by their members), and Community Development Banks.
The CDFI Fund was established by the Riegle Act to help build the capacity of CDFIs committed to working in distressed communities. Its first round of awards, in 1996, totaled $48 million to 69 organizations. 12 years later, following the economic crash, the American Recovery and Reinvestment Act of 2009 budgeted an additional $100 million annually to the CDFI fund to assist in the recovery at the ground level of the economy. Since its 1994 inception, the CDFI Fund has provided over $1.7 billion in funding to CDFIs. In 2011 alone, those CDFIs reported that they had provided over $1.3 billion in financing to business owners, homeowners, nonprofits, real estate developers and more, and many also provided technical assistance, including business consulting and financial literacy training.
There are currently over 1,000 CDFIs operating in all 50 of the United States, working on programs that range from healthy food financing in urban food deserts to Native CDFIs committed to economic development in tribal communities. A grassroots movement to expand access to economic opportunity has evolved into a thriving industry that works on the ground level to supply low-income communities with necessary financial products and at the top level, lobbying for policies that will level the economic playing field. CDFIs are at the frontlines of developing innovative new financial products, combating predatory lending in distressed communities, and promoting the specific needs of their local communities.