Introduction to CDFIs:
Bridges Between Capital
and Communities
Rehabilitation Engineering and Assistive
Technology Association of North America
February 17, 2004

Agenda
What is a CDFI?
Why do we need CDFIs?
What are the different types of CDFIs?
What products and services to CDFIs
offer?
Who are CDFIs' customers?
What is the federal CDFI Fund?
2

What is a CDFI?
Community
Development
Financial
Institution
3

"C" and "D"
Community Development
Mission must be Community
Development
Serving distressed and economically
disadvantaged people and communities
Combines development services with
financing
Types of financing include: Housing,
Business, Community Facilities, and
Individuals
4

"F" -- Financial
Primary activity of a CDFI is lending,
investing, or providing other financial
services.
CDFIs develop financial products to
meet the needs of their markets
Make loans that are riskier, often to
unconventional borrowers
CDFIs also provide Technical Assistance
5

"I" -- Institution
CDFIs strive to become a permanent
capital resource in their communities
CDFIs are private-sector institutions
Capital access is part of a long term
solution to poverty alleviation
This means CDFIs expect to be repaid!
Can't avoid risk, but learn to manage risk
6

Why Do We Need CDFIs?
Changes in the
Financial Services
Industry caused
disinvestment:
Mergers
Automation
Growth of "parallel
banking system"
7

Differences from Traditional
Financial Institutions
CDFIs take more risk
May be more lenient on collateral
Different way of evaluating credit problems than a bank
because of mission and the type of capital they utilize
CDFIs are more likely to provide personal
attention to borrower and in analyzing the
loan
CDFIs create new borrowers and new markets
TA to strengthen their applications and capacity
8

Differences from Traditional
CD or Non-Profit Organizations
Disciplined lenders
Manage capital of mostly private investors
Expect to be repaid
Learn to manage risk
Market-Driven
Respond to market demand as well as market
need
9

CDFIs as Niche Players
Work at the intersection of community
development and finance
Strong market knowledge
Long-term relationships with customers
More patient than conventional financial
institutions
Technical assistance a critical component
of relationship
10

What is the Scope of the CDFI
Industry?
There are approximately 800-1000 CDFIs in the US
under the non-technical definition.
Approximate breakdown:
100
Community Development Banks
250
Community Development Credit Unions
50
Community Development Venture Capital Funds
400-600 Community Development Loan Funds
11

CDFI Institution Types
Depositories/ Regulated
1.Community Development Banks
2. Community Development Credit Unions

Non-Depositories/ Unregulated
3.Community Development Loan Funds
4.Community Development Venture Capital Funds
12

Community Development Credit
Unions
Regulated and insured by National Credit Union
Administration (NCUA)
Non-profit cooperatives owned by their members
Promote ownership of assets and savings to low-income
individuals with special outreach to low-income
communities
Provide affordable credit and retail financial services to
low-income people, with special outreach to minorities.
13

Community Development
Banks
Regulated and insured by FDIC, OCC, Federal Reserve
and state banking agencies
For-profit, with community representation on Board
Provide capital to rebuild economically distressed
communities through targeted lending to non-profits,
entrepreneurs, housing developers, etc.
Provide depository services, such as checking and
savings accounts.
14

Community Development
Loan Funds
4 primary types:
Microenterprise Fund
Very small businesses & substantial TA
Business Loan Funds
Small and mid-sized businesses
Community Services Loan Funds
Social Service agencies, charter schools, childcare centers,
etc.
Housing Loans Fund
Affordable housing developers
Unregulated; primarily non-profits
Primary products are loans and Technical Assistance
15

Community Development Venture
Capital Funds
Typically not regulated; can be for-profit or
nonprofit
Provide equity and debt with equity features for
medium-sized businesses in distressed communities
Most recent type of CDFI to develop
Venture capital funds are interested in businesses
with high growth potential as well as a social
mission (i.e. job creation potential).
16

Types of CDFIs

AllBankCredit UnionLoan Fund Venture Capital
Number of CDFIs in Sample 442 17 239 165 21
For Profit 31 17 0 2 12
Nonprofit 166 0 0 159 7
Cooperative 241 0 239 2 0
Government 2 0 0 0 2
Quasi-Government 2 0 0 2 0
Average year began financing 1978 1964 1971 1990 1995
Total Capital $9,221,790,765 $3,214,230,247 $3,062,881,807 $2,682,281,742 $262,396,969
n= 436 17 239 159 21
17

What do CDFIs do?
1) Financing (loans, equity,
guarantees, and other)
2) Retail financial services
3) Technical assistance & training
4) Advocacy
18

Who are CDFI Customers?
Who?
Affordable Housing Developers
Business Owners
Community Facilities
Individuals
19

Affordable Housing Developers
For-profit and nonprofit developers
Pre-construction
i.e. acquisition, pre-development
Construction & renovation
Single & Multi-family housing
Rental and ownership, transitional housing
Coops, land-trusts, & other innovative
approaches to affordability
20

Business
Micro, small and medium-sized business
Start-ups and existing
Non-profit and for-profit businesses
Working capital, equipment, acquisition
21

Community Facilities
Childcare Centers
Charter Schools
Community Health Facilities
Social Service Agencies
Cultural Organizations
For-profit and nonprofit borrowers
22

Individuals (Consumers)
Housing: loans for mortgages or home
repair
Personal loans: health, education,
emergency, debt consolidation
Transportation (car)
23

Financing Products Offered
Loans
CDFI expects repayment within a specified time on certain terms
and conditions
Equity Investments
CDFI receives an ownership interest in the business
Debt with equity features
Includes convertible debt, debt with warrants, participation
agreements, royalties or other features that link the investment's
return with the performance of the business
Guarantees
Guarantees or letters of credit are provided to enhance the
creditworthiness of a borrower receiving a loan from a third
party
24

Technical Assistance
What TA a CDFI offers depends on the needs
of the CDFI's target market.
CDFI borrowers generally require TA.
Conventional financial institutions do not
provide this service.
CDFIs provide TA both before and after
making a loan.
Some CDFIs contract out TA work.
25

Technical Assistance
Housing & Facilities
Developing project budgets and plans
Identifying and packaging other funding / loan
sources
Micro & Small Business
Business plan training
Marketing, bookkeeping
Individual
Home ownership counseling
Credit counseling
26

Retail Financial Services
Savings & checking accounts
Check cashing
Money Orders
ATM
Wire Transfer
Individual Development Accounts (IDAs)
27

Geographic Markets
% of CDFIs Serving
National - 4%
Neighborhood - 9%
Multiple states - 11%
Single City/Town - 8%
Single State - 16%
Single metropolitan area -14%
Single county - 11%
Multiple counties - 27%
28

Where CDFIs Work
% of Clients served
Rural, 34%
Major Urban, 41%
Minor Urban, 25%
29

Breakdown of Customers
72% Low-income
61% Minority
54% Female
30

CDFI Fund
Program of the federal government
Housed within The Treasury Department
Created in 1994
Mission:
To expand the capacity of financial institutions
to provide capital, credit, and financial
services to underserved markets
31

"Certified" CDFI
CDFI Certification is determined by the
CDFI Fund
Can be a CDFI without CDFI Certification
Application process is extensive
Certification increases opportunities for
access to capital from the CDFI Fund,
banks and others.
643 Certified CDFIs as of November 25, 2003
32

The CDFI Fund Criteria Require:
6 criteria for certification:
Primary mission
Financing entity
Target market
Development services
Accountability
Non-government entity
www.cdfifund.gov
33

CDFI Fund Programs
CDFI Fund has three core programs
CDFI Programs:
Financial Assistance: provides equity, debt and grants to CDFIs
Technical assistance: provides funding for capacity-building
Native American Initiatives: provides capital and TA for the development of
CDFIs serving Native American communities
Bank Enterprise Award Program: provides cash
incentives to banks for banks investing in CDFIs and
other community development activities
New Markets Tax Credit: Creates a tax incentive for
equity investment in Community Development Entities
(CDEs)
34

Questions?
35

National Community Capital Association 2003