What Is a Community Development Financial Institution (CDFI)?

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Updated on Thursday, May 30, 2019

More and more people are being mindful about the way they spend money in order to drive positive change in their communities. This has given rise to values investing, the buy local movement and it even extends to banking services, thanks to a little-known federal program.

Community Development Financial Institutions (CDFIs) are special banks and credit unions that focus on revitalizing low-income communities around the United States. They provide loans, bank accounts and support to people and developers in disadvantaged communities who in turn create housing, businesses, jobs and opportunities to support others in need.

These institutions are certified and supported by the CDFI Fund, a branch of the U.S. Department of the Treasury. The CDFI Fund got its start in 1994, and since then, it has quietly provided over $2 billion in funds and $50 billion in tax credits to help support investments in low-income communities.

These institutions were always meant to be a part of a community’s financial landscape, which means that you can take advantage of them yourself even if you don’t need a loan.

How a financial institution becomes a CDFI

Not just any community-focused financial organization gets to be a CDFI. In order to qualify, a group has to apply for the designation and meet the following criteria:

  • Have a primary focus on helping a specific segment of the local community
  • Be located in the same community as it serves
  • Register as either a for-profit or nonprofit corporation
  • Be a non-governmental organization
  • Issue loans and hold those loans on its books
  • Provide assistance to people seeking out loans

Besides banks, the CDFI Fund certifies credit unions, venture capital funds and loan funds. Banks and credit unions provide a safe place for everyday people and businesses to deposit their money or receive loans. Venture capital funds and loan funds, on the other hand, stimulate the community by providing loans to developers for things like affordable housing and small businesses that provide jobs.

How does the CDFI Fund work?

This program is unique because it’s based on a leverage model: First, these institutions raise their own funds, then the CDFI Fund matches the money they raise dollar for dollar, essentially doubling its impact on local communities.

This powerful leverage model is one of the reasons the CDFI Fund has been around for so long, despite shifting political winds.

The CDFI Fund spoke with us, and noted that Republicans appreciate the program because the model works with local actors in the private sector to get things done, rather than the federal government telling people how to invest. Meanwhile, the CDFI Fund also said the Democrats like them because they work to lift minority communities and low-income communities into the economic mainstream.

Even in the current political climate, in which many federal programs are being reduced or even cut entirely, the CDFI Fund stands out. This year, the program was awarded the most amount of money by Congress that it’s ever received: $250 million.

Community development banks and credit unions

You can do all of the same things at a CDFI-certified bank or credit union as you can at a normal bank or credit union, like open a high-yield savings or checking account, or get a mortgage loan. But there are a few other features that make these institutions unique.

The first thing you’ll notice about a CDFI-certified bank or credit union is that it’s more community-oriented than the local branch of a big corporate bank. That’s due to the requirements of becoming certified: the organization has to be focused primarily on bettering underserved and low-income communities.

These institutions do this in a few ways. They may partner with or provide financial support to local nonprofits that make your community a better place to live. They often encourage employees, customers and members to volunteer with local organizations. MAC Federal Credit Union, a CDFI based in Fairbanks, Alaska, has a volunteer team and allows people to choose a local nonprofit to donate $10 to when they open an eChecking account, for example.

These institutions may provide more flexible loan terms to people who might not otherwise qualify for credit at a traditional bank. In addition, they are required to provide “development services,” which can take the form of first-time homebuyer education programs, business planning assistance and budgeting assistance.

The CDFI Fund told us that if a loan applicant wanted to open a small business and a CDFI found that they were not quite ready for credit, possibly due to a poor credit score, it would help them find a class on how to build your credit score. The institution could follow up by helping the applicant learn how to design a business plan or maintain small business records. These steps are the heart of the CDFI approach.

OneUnited Bank

OneUnited Bank is a great example of a CDFI. This $670-million Boston-based bank is one of the most prominent bank CDFIs, offering nationwide service through its online platform, in addition to physical branches in California, Florida and Massachusetts. OneUnited says it is the nation’s largest black-owned bank, formed by merging several independent black-owned banks located around the country.

More importantly, OneUnited Bank has a mission: to uplift low-income, urban people by providing banking services to the African-American community. It encourages its customers to participate in the Buy Black movement, and advertises its services with the phrase “BankBlack”.

The program helps it achieve this mission. In 1997, the bank was awarded $750,000 when it became a certified CDFI. The CDFI Fund has awarded OneUnited Bank between $227,282 and $1.5 million almost every year since then through 2017, as a part of the Bank Enterprise Award program for the investments it has made in its communities.

CDFIs in your community

These institutions are one of the best-kept secrets in community banking. It’s important to note that you don’t necessarily have to be considered a minority or low-income yourself in order to work with a CDFI yourself. In general, people of all ages, races and socioeconomic statuses are welcome to do their banking at local CDFIs, which you can located using the CDFI Fund website. It’s a great way to support your local community by banking.