Extending impact: Exploring CDFI strategies in smaller markets
CDFIs (Community Development Finance Institutions) are private, mission driven financing entities that provide capital to low-income, low-wealth, and other disadvantaged people and communities. Their mission compels them to serve customers who cannot meet conventional underwriting requirements by providing innovative, targeted financial products complemented by development and/or technical assistance services. In addition to some financial returns, CDFI outcomes are measured in terms of jobs, affordable housing units and community facilities created, small businesses financed, and other social impact metrics.
Where CDFIs are present, they play an important role in promoting access to credit and capital, especially in markets that struggle to access mainstream financial products and services. However, they are “one tool in the tool box,” according to Brad Little, president and CEO of the Community Foundation of Greater Fort Wayne (IN), who opened a recent session on Community Development Finance in Smaller Markets, hosted by the Federal Reserve Bank of Chicago, the Federal Deposit Insurance Corporation (FDIC), and the Office of Comptroller of the Currency (OCC). Gar Kelley, community development director for the Federal Reserve Bank of Chicago, equated the ideal CDFI environment to that of an ‘eco-system’ where multiple, interrelated entities leverage their core competencies to achieve a common goal. Within this landscape, “CDFIs see their capital base as dedicated to the community for the long haul,” said Lance Loethan, vice president of research for the Opportunity Finance Network, a national trade association of CDFIs, who kicked off the convening with some industry data.
The event drew out four key themes and concluded with tangible next steps:
- CDFIs respond to the context in which they operate; the challenges of small markets are often no different from those faced by larger, urban areas.
- With over 1,000 CDFIs nationwide, there is capacity to scale and extend the reach of existing CDFIs into smaller markets leveraging external expertise and capital with local knowledge and ‘skin in the game.’
- CRA-motivated banks have long been important partners in providing loan, equity, and operating capital for CDFIs; new, smaller markets create new opportunities for innovative partnerships that may qualify for CRA credit.
- Community stakeholder engagement and consensus are necessary to create an effective community development ecosystem targeting investments in places of need.
CDFIs respond to the context in which they operate; the challenges of small markets are often no different from those faced by larger, urban areas. CDFIs work at the neighborhood level to address financial needs that are often masked by more robust municipal or regional data. For example, in Allen County, IN (which is home to Fort Wayne), Rachel Blakeman, executive director of the Community Research Institute at Purdue University-Fort Wayne (IPFW), shared that the unemployment rate in 2018 is 3.2 percent, educational attainment (some college, associate’s, or bachelor’s degree) exceeds statewide levels, but earnings are on par. However, behind these strong numbers, she also noted that over half of female-headed households with young children live in poverty.
Economic development efforts in Fort Wayne and the region are meeting with success including almost 9,000 new jobs between 2014 and YTD 2019, generating $383 million in new payroll, according to John Urbahns, president and CEO of Greater Fort Wayne, Inc., the region’s economic development entity charged with “creat(ing) a competitive economy.” Brightpoint, a local community action agency, serves a population in Allen County, IN, that struggles to access the economic and financial mainstream. Brightpoint CEO, Steve Hoffman, stated that 18 percent of Brightpoint’s clients are unemployed; one-third have no health insurance; 39 percent have lived in their home for less than two years; and 7 percent have experienced homelessness in the past 12 months. CDFIs can play a vital role, in conjunction with other community partners, in closing the gap between broad-based community prosperity and the financial vulnerability still experienced by many residents.
With over 1,000 CDFIs nationwide, there is capacity to scale and extend the reach of existing CDFIs into smaller markets leveraging external expertise and capital with local knowledge and ‘skin in the game.’ Two smaller communities that are exploring strategies for bringing community development capital into their markets – South Bend and Bloomington, IN – shared their experiences with aligning external CDFI resources with community needs for affordable housing, small business financing, and community facility development. Both places benefit from strong leadership at the city level committed to pursuing CDFI strategies. CDFIs, Cinnaire, Community Investment Fund of Indiana, and Brightpoint, that serve regional, statewide, and local markets, respectively, provided their perspective on what they look for when engaging with a new market around a community financing deal and potentially working with a new cohort of partners. Cinnaire senior vice president, Keith Broadnax, summed it up simply: “Extend an invitation.” They then work to “get to know the partners; get to know the city.” Sherry Early-Aden, vice president of operations for Brightpoint, reflected that many CDFIs are looking for innovative ways to diversify capital sources and mitigate risk, saying, “We welcome more assistance; we hope to be in those (exploratory) conversations.”
CRA-motivated banks have long been important partners in providing loan, equity, and operating capital for CDFIs; smaller markets create new opportunities for innovative partnerships that may qualify for CRA credit. Since 1994, banks have played an increasingly important role in the CDFI financing profile (see chart 1).Loans, investments, and grants may qualify for credit under the CRA provided certain regulatory requirements are met, namely whether the activity meets the definition of community development or economic development. The extension of CDFI activity into new geographies provides opportunities for banks to play an integral role in building ‘infrastructures of opportunity,’ according to Jason Keller, economic development director at the Federal Reserve Bank of Chicago. Leveraging CDFI and other community networks enable financial institutions to play a role of ‘partner’ rather than as a lead investor, especially in unfamiliar markets, he added.
Chart 1: Sources of funds for CDFIs (1994-2017)
Community stakeholder engagement and consensus are necessary to create an effective community development ecosystem targeting investments in places of need. Following the Community Development Finance in Smaller Markets event, the Community Foundation of Greater Fort Wayne along with additional key stakeholders will convene a facilitated discussion to prioritize the local community and economic development needs and identify sources of capital, including engaging CDFI intermediaries to accomplish the community’s goals. The facilitated discussion will be informed by responses to a post-event survey distributed by the Federal Reserve Bank of Chicago to aid in setting priorities. In addition, the Community Foundation and other Greater Fort Wayne economic development professionals will review notes from a Louisville, KY, visit to better understand how a similarly sized market is addressing its community development investment challenges.
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. A key component of these convenings will be identifying successful and potentially replicable models, and discussing the necessary characteristics of networks of investors, intermediaries, and service providers to ensure capital is efficiently and effectively deployed to meet community goals and needs.