As the country continues to rebound from the recession, a small group of lenders is working to meet the needs of communities that slipped through the cracks during this turbulent period or that had few safety nets even before the recession.
These lenders—called community development financial institutions (or CDFIs)—were established in 1994 as part of the formation of the CDFI Fund, a government agency within the U.S. Department of Treasury that provides funding to CDFIs through a competitive application process.
In spite of their small numbers, CDFIs perform. On February 24, 2015, the CDFI Fund issued two independent reports that provide the first-ever comparative analysis and evaluation of the effectiveness of CDFIs compared to mainstream lenders. The findings confirm that CDFIs are resilient and a reliable resource for capital in areas that need it the most.
Key highlights from the Carsey School report include:
- CDFI loan fund lending fills market gaps for key underserved low-income populations;
- CDFI loan funds deliver between roughly 66 percent to some 90 percent of all loan volume to borrowers living in a CDFI Fund–designated investment area;
- From 2005 through 2012, Community Reinvestment Act reported lending decreased while CDFI loan fund reported lending more than tripled;
- CDFI loan funds provide borrowers who may not qualify for loans from mainstream financial institutions with loan terms and interest rates comparable to mainstream products.
Key highlights from the Darden School report include:
- CDFI banks and credit unions were found to have no more risk of financial failure than mainstream financial institutions, even after controlling for the CDFIs’ degree of involvement in the mortgage market during the financial crisis;
- Despite serving predominately low-income markets, CDFI banks and credit unions had virtually the same level of performance as mainstream financial institutions.