CDFIs Are a Vital Lifeline for Communities, Let’s Treat them as Such

There’s a saying that the worst of times reveal one’s true colors. This goes for individuals, but it’s also true of governments and policymakers. During the tumultuous past year and a half, the federal government stepped in to support vulnerable Americans and communities, including a record $12 billion¹ in funding for community development financial institutions (CDFIs) through COVID-19 emergency assistance appropriations. That Congress identified CDFIs as essential businesses deserving of billions of dollars during the pandemic begs the question: Why are typical appropriations for the CDFI Fund a paltry .00004% of government spending?

Since formalization in 1994, CDFIs, defined as mission-driven, private financial institutions committed to providing access to financial products and services to low-income communities and the underbanked, have contributed to growth and recovery in thousands of neighborhoods across America. According to the CDFI Coalition, in 2020 alone CDFIs that were awarded funds through the federal CDFI Program distributed over one million loans² or investments in local communities totaling more than $25 billion. This is despite appropriations for the CDFI Fund³ totaling only $262 million for FY 2020.

And this represents the capabilities of only a fraction of the industry that was awarded funds through the federal program. Hundreds of certified CDFIs are unable to access federal funds and operate exclusively with capital from corporate investments, private investments, banks, foundations, and other private sources.

Systemic underfunding of the CDFI program shortchanges millions of Americans and prevents deployment of the whole of the capital and guarantees that are budgeted for CDFIs. In 2020, the CDFI Fund only deployed $100 million through its Bond Guarantee Program (BGP), despite budget approval for $500 million, and in 2021 there is growing concern that actual allocations will again fall far short of the $500 million mark. The result is billions in long-term capital withheld from CDFIs and an enormous void in lending to underserved and minority communities at a time it’s needed most. Surprisingly, the Yellen Treasury department has so far failed to request a budget increase for the Bond Guarantee Program back to its pre-Trump days of $1 billion, nor has the Secretary adequately financed the team to enable timely evaluations of BGP applications and deployed the full force of funds available.

All in all, the CDFI industry has demonstrated clear success in leveraging the federal dollars accessible to it — on average, the industry generates $12 in private capital for every dollar from the CDFI Fund. But these businesses can do so much more. The days of inadequate appropriations and three-year waits for a CDFI to be approved for BGP guarantees should end. With a steady stream of government funding, private investment, corporate grants, and more, CDFIs can add exponential value to the communities they serve.

We know the demand is there.

In FY 2020, applicant demand for funds through the CDFI Program was three times the amount appropriated. And the pandemic has further exacerbated demand. CDFIs stepped in where traditional borrowers fled, and in many cases CDFIs are literally the only traditional financial institution available to a local community. But despite the incredible work of CDFIs, communities still struggle, and the wealth gap is as big as it’s ever been.

The emergency relief funding for CDFIs during COVID is a start. But infusion of federal dollars into some of the most effective community development entities we have in the U.S. should not be limited to crises. To have the greatest impact, CDFIs need access to predictable funding over the long term.

Piecemeal appropriations that come in at a fraction of a percent of total federal spending and inadequate deployment of the entire swath of resources that should be available for CDFIs limit the work these institutions can do to support small businesses, create jobs, invest in affordable housing and fair mortgages, and provide basic banking services.

CDFIs represent impact investing at its finest. And it’s high time for our leaders to strive for the greatest impact. If the Treasury and Congress want to truly eliminate structural racial and economic inequality in the banking system, CDFIs should be their No. 1 priority, so that we can continue the difficult work of bringing adequate funds and services into Black, Latino, and underserved communities, provide economic opportunity, and close the wealth gap. It’s time for more robust annual funding for CDFIs.

Faith Bautista is the President and CEO of National Asian American Coalition (naac.org, formerly Mabuhay Alliance), a program-oriented nonprofit that provides housing counseling, small business lending, and technical assistance services to minority and low-income populations.

^{1 ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/summary-consolidated-appropriations-act-2021
2 cdfi.org/wp-content/uploads/2021/05/FY-22-Appropriations-Fact-Sheet-FInal-Draft-3.11.21.pdf
3 cdfi.org/policy-and-advocacy/appropriations-history}