Serving the underprivileged takes more than money

A Native American couple in Anchorage, Alaska received down payment assistance to purchase their first home. A refugee from Burma received a loan to renovate a restaurant in Battle Creek, Michigan. Survivors of historic flooding in eastern Kentucky have secured money to help repair their homes and replace damaged appliances and vehicles.

These are just some of the people who have access to capital when they need it, thanks to Community Development Financial Institutions (CDFIs).

Households and businesses borrow trillions of dollars each quarter, but that doesn't mean credit is equally available to all potential borrowers. CDFIs have filled this financing gap since the 1970s using a unique business model. First, they pool funds from various sources so that they can lend to people and businesses in underserved areas at low costs for borrowers. Then, they offer loans with additional leverage to help borrowers get the most out of the funds.

As mission-driven rather than profit-driven organizations, CDFIs also benefit from capacity building. Opportunity Finance Network (OFN) is a major source of that support, which comes in the form of funding, knowledge sharing and policy advocacy. In recent years, Federal Reserve Banks have partnered with such nonprofits to better understand and promote CDFIs in the community development space.

Capacity building through lending and information sharing

According to Dafina Williams, executive vice president, chief public policy officer and head of government affairs for OFN, some businesses and community development organizations could really use a loan but aren't ready to borrow. “A lot of times, the goal might be to help them become bankable — to help them graduate to mainstream financing,” Williams said.

Capacity building can look like a CDFI helping a small business owner develop a business plan. Or it could mean providing technical assistance to a community so that local leaders are prepared to take on a loan. But the support doesn't stop after the IOU is signed. CDFI continues to assist their clients to ensure successful completion of a project and repayment of the loan.

Not surprisingly, increasing capacity can be expensive. “It doesn't necessarily lead to profits, and you have to invest a lot to do it well,” said Adrienne Smith, OFN's senior vice president of research. For this reason traditional credit providers often do not offer it.

CDFIs pool many types of funds so they can lend safely and soundly while providing technical support. “This funding could come from banks inspired by the Community Reinvestment Act,” Williams explained. “But it can also come from philanthropic partners or corporate partners or governments.” The federal government is a key partner for CDFIs, “especially for a lot of flexible, low-cost, long-term capital that they really need, as well as grants that help them build equity and build their balance sheets.”

“Sometimes, the goal may be to help them become bankable—to help them graduate to mainstream financing.“
-Daphina Williams, Executive Vice President, Chief Public Policy Officer and Head of Government Affairs, Opportunity Finance Network

Helping helpers

OFN acts as a capacity builder for CDFIs in several ways. It provides support services including research, tools and training to a network of over 420 CDFIs.

OFN itself also operates as a CDFI — as of September 2024, it managed more than $1 billion in assets. By pooling funds and channeling them through network members in the form of affordable grants or loans, members can pass savings on to their borrowers.

Also, investors find it easier to work with an intermediary like OFN, Williams noted. They may not have time to dig in to understand the meaning, market and risk of each CDFI. Instead, “they can work with one entity — OFN — and we can make those investments and be good stewards of their capital,” Williams added. “We know our members. We understand them.”

For example, OFN recently received a $2.3 billion grant from the US Environmental Protection Agency's Greenhouse Gas Reduction Fund. Over the next six years, OFN will provide technical assistance and capital to its member CDFIs to finance projects to reduce or avoid greenhouse gas emissions and other air pollutants. The objective is to provide the benefits of clean energy, energy efficiency, and clean transportation more broadly.

How the Fed supports OFN's work

During the 17 years Williams worked at OFN, he turned to the Federal Reserve many times as a source of data and research.

“As we're meeting on the Hill and talking about the value of CDFIs, there's an appetite and interest for more information and more data about where CDFIs are lending, what they're doing and how they're performing,” Williams described. “It's really valuable for our policy and advocacy work to be able to have this growing body of research that can help point to the real impacts of our work.”

When Smith joined OFN about three years ago, she wanted to do more research about CDFIs and their benefits. Fed researchers became integral partners in that effort. For example, Smith co-authored a Summary paper with input from Mike Eggleston of the St. Louis Fed. Surekha is a carpenter Richmond Fed, and Charlene Van Dyke of the Atlanta Fed.

Over time, Williams has seen the relationship between the Fed and OFN grow and deepen. The Fed doesn't just share information and expertise. It collects insights and data from OFN about their member CDFIs, which informs the research work of Fed's community development staff.

“San Francisco Fed made a piece To explain the meaning of CDFI debt funds to investors who may be new to debt funds,” Smith said. “Sarah Sims and Rocio Sanchez-Moano came to us and wanted background information and how that report should be prepared. So, we had Fed researchers coming to us to get a lay of the land about the need for research.”

Smith shared the aggregate data with Jacob Scott, Maria Carmelita Recto, and Jonathan Kivell at the New York Fed for their report. Secondary market for CDFI loans.

In addition, the Fed uses its other connections to connect CDFIs with the resources they need. “During the pandemic, the Fed has been an excellent partner for the CDFI industry to ensure that we are able to access the capital to be able to make Paycheck Protection Program loans available to our customers,” Williams said.

“CDFIs focus on social impact,” notes Smith. “Research is needed to know whether and to what extent that social impact is occurring.“
– Adrienne Smith, Senior Vice President of Research, Opportunity Finance Network

CDFI Survey

A more extensive partnership is between the OFN and the Fed CDFI survey. The Richmond Fed commissioned the survey in 2009 to learn more about the impact of CDFIs in the Southeast.

“We recognize the public policy importance of CDFIs, as well as existing data gaps that make answering research questions about them challenging,” said Emily Wavering Corcoran, senior manager of regional and community analysis at the Richmond Fed. Corcoran oversaw the administration of the survey in his previous role as a senior research analyst. “The survey helped us understand where CDFIs were and weren't actively filling market gaps.” The Richmond Fed also used the survey results to create a regional directory of CDFIs.

Today, Surekha Carpenter helps lead the biennial survey, which has expanded nationwide and employs the resources of 12 Federal Reserve Banks. Carpenter works with partner organizations like OFN to expand the geographic reach of the survey as well as refine its questions.

Also, OFN and other partners help the Fed craft survey questions that make sense to CDFIs, Carpenter said.

The Richmond Fed appreciates the work Smith does in designing each CDFI survey. “Surekha and her team came to us to get input on what to focus on in each survey,” Smith noted.

The result is a wealth of insights that have spawned multiple reports. Smith recently co-authored a brief with Carpenter that looks at key findings from the 2023 survey. Measuring CDFI outputs and outcomes. “CDFIs focus on social impact,” notes Smith “Research is needed to know whether and to what extent that social impact is occurring.” Other reports highlight CDFI's innovative practices Supports housing access and stabilityand to serve Consumer and small business lines.

This is why OFN will continue to partner with the Fed in the future. A OFN's upcoming annual conferenceFor the first time there will be a research symposium. Fed researchers “are on the invitation list to lend their expertise and really make this a robust discussion,” Smith said. “I think there is good interest in this, not just among 'researchers' like myself but among all practitioners and other stakeholders.”