Community Development Finance in Smaller Markets

August 15, 2018

There is a role for Community Development Financial Institution (CDFI) presence and activity in smaller markets, where the needs of low- and moderate-income (LMI) communities are often no different than those in larger markets. With a mandate to understand the credit needs of all communities across the Seventh District, the Community Development and Policy Studies division of the Federal Reserve Bank of Chicago will host events focusing on increasing awareness about the potential role of CDFIs in smaller markets. The most recent gathering was held in Merrillville, Indiana, on June 14, 2018, along with the Federal Deposit Insurance Corporation, the Office of the Comptroller for the Currency, and the Legacy Foundation, the community foundation of Lake County, Indiana.

About CDFIs

CDFIs are mission-driven organizations that provide needed capital to underserved or disadvantaged communities. CDFIs function as banks, credit unions, loan funds, microloan funds, and venture capital providers. Currently more than 1,000 CDFIs have been certified by the CDFI Fund of the U.S. Department of the Treasury and serve communities across the nation. Demonstrating CDFI ability to deploy capital in disadvantaged communities, a recent Urban Institute study1 highlights that CDFIs lent more than $34B from 2011 to 2015 with 64 percent of lending activity in census tracts with one or more low- or moderate-income (LMI) indicators, including:

  • 10 percent or higher unemployment;
  • Poverty rate of 20 percent or higher;
  • 50 percent or more of residents earning less than 200 percent of the federal poverty level; or
  • A population with at least half non-white residents

Since inception in 1994, the CDFI Fund has provided nearly $2.1B in Financial and Technical Assistance awards to CDFIs driving capital and support services into distressed communities2 particularly in and around large urban centers. However, smaller urban and rural markets may not benefit from the CDFI community for a variety of reasons, including, but not limited to, a lack of:

  • Local community development capital (civic, human, financial);
  • Network of investors (banks, foundations);
  • Knowledge and awareness about CDFIs; and
  • What is sometimes referred to as “capital absorption capacity” or the capacity of an entity to apply for, deploy, and manage CDFI funds.

Community Development Finance in Smaller Markets explored the role, varying types, and benefits of CDFIs working in communities where conventional financing mechanisms may not meet the complex development and financing needs of a community or region. The event sought to:

  • Better understand the community/economic development needs of Northwest Indiana;
  • Hear how local and regional CDFIs work with community and financial institutions to achieve positive, measurable impact, as well as the ecosystem necessary to support this work; and
  • Introduce the CDFI Friendly City™ Model created by Mark Pinsky of FiveFour Advisors and utilized in Bloomington, Indiana, led by Mayor John Hamilton and Tina Peterson of the Community Foundation of Bloomington and Monroe County.

Sixty-nine individuals representing 53 organizations from academia, advisory services, CDFI, community/economic development, philanthropy, financial institutions, municipal/federal legislative, and regulatory communities participated in the half-day meeting with a long-term goal of increasing community development finance activity in Northwest Indiana. Northwest Indiana (NWI) presents an interesting case study for the potential of CDFIs in smaller markets. Although Indiana is home to 11 CDFIs, only two of them (Federal Credit Unions)3 are located in or directly serve the NWI region. And, although the region benefits from services extended by CDFIs working in the Chicago metro area, it is lacking an organization dedicated to meeting the unique needs of a landscape that is both industrial and rural, populated by small communities – some with significant economic challenges.

Table 1 illustrates a sample of these challenges drawing on data from the Federal Reserve Bank of Chicago’s Peer City Identification Tool (PCIT).4 In this example, three primary cities in NWI exhibit strong signs of distress (declining populations, low incomes, and high unemployment), which compare unfavorably with the median of PCIT database. CDFIs are well positioned to catalyze such communities by providing capital for small businesses, affordable housing, and a broad range of community facilities.

Table 1

The Federal Reserve Bank of Chicago will continue to host meetings across the Seventh District to inform stakeholders about the benefits and challenges of community development finance in smaller markets, including rural communities, with an eye towards identifying models that demonstrate success meeting community and economic development needs and discussing the ecosystem of investors, intermediaries, and service providers necessary to ensure capital is deployed and absorbed by communities.

The next Community Development Finance in Smaller Markets convening is scheduled for October 23, 2018 in South Bend, Indiana.


1 Theodos, Brett, and Eric Hangen, “Expanding Community Development Financial Institutions,” Urban Institute, available online.

2 CDFI Fund, A Year of Impact: FY 2017 Year in Review, United States Department of Treasury, available online.

3 ProFinance Federal Credit Union, Merrillville, and REGIONAL Federal Credit Union, Hammond.

4 Peer Cities Identification Tool, Federal Reserve Bank of Chicago, available online.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.


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