Vince Toye is Head of Community Development Banking at JP Morgan Chase.
Community Development Financial Institutions (CDFIs) are invaluable resources to local economies across the U.S. These mission-driven organizations, certified by the U.S. Treasury, provide alternative capital and services to local businesses, which in turn allows them to strengthen their communities through essential services and economic growth, including increasing access to affordable housing and eliminating food deserts.
CDFIs understand the foundational issues of the communities in which they serve, working hand in hand with small businesses and local organizations, which is why it is critical for banks to support this ecosystem.
Local Focus, Local Results
A prime example of a CDFI in action is the Neighborhood Housing Services of San Antonio (NHSSA) which helps working families in San Antonio purchase homes. Ninety percent of their customers are Latino and Black households which earn a median income of $46,000. To grow its impact within the community, NHSSA sought capital from Opportunity Finance Network’s (OFN) Finance Justice Fund, a socially responsible investment initiative that provides financing to underserved communities. With the help of Finance Justice Fund capital, NHSSA is ramping up its lending activity and deploying more down payment assistance (DPA) loans.
NHSSA is one of dozens of OFN members that have received capital from the Finance Justice Fund. The influx of resources is crucial, since these small institutions can’t overcome systemic economic barriers on their own. NHSSA’s story illustrates how CDFIs are becoming increasingly crucial in bridging the economic gap, providing tailored financial solutions that empower local economies and foster inclusive growth—and in the process helping address long-standing issues of disinvestment and persistent poverty.
With their local focus, CDFIs understand the needs of their communities and their constituents. Employees of CDFIs often live in the communities they serve and know their residents personally, which builds trust. They can provide more flexible and tailored financing solutions for both small businesses and housing development.
Rising Demand, Moderating Future Economic Risk
Rising inflation and interest rates over the past five years, spurred by the Covid-19 pandemic, have made it even more difficult for customers in traditionally underserved communities to get access to capital. Economic challenges tend to accumulate toward the bottom of the financial ladder, which means CDFIs will play an even larger role in the future. According to a 2023 survey from the Federal Reserve, “three out of four CDFIs saw an increase in demand over the past year,” and some faced limitations due to staffing and lending capital challenges.
The biggest hurdle CDFIs face is securing stable, low-cost funding over the long term, such as the next five or 10 years, so they can lend to higher-risk borrowers in their communities at reasonable rates. Some larger financial institutions make it a policy to lend to CDFIs, sometimes at below-market rates.
By supporting CDFIs through intermediary lending, larger banks help them support their customers through the difficult initial phases of launching businesses. If everything goes well, these small businesses will eventually be stable and successful enough to borrow from mainstream banks.
Larger financial institutions also provide financing to industry groups like OFN, a national network of CDFIs in the U.S. OFN acts as a collaborative platform that connects CDFIs, investors and policymakers, and channels over $1 billion in flexible capital to these institutions. By providing resources, training and advocacy to bolster CDFIs’ ability to serve low-to-moderate-income communities, OFN plays a crucial role in advancing economic development and financial inclusion to ensure a more sustainable future.
Mainstream banks can also invest in nonprofit funds like the Enterprise Community Loan Fund (ECLF). This certified CDFI helps underserved developers and communities in urban and rural areas across the country by investing in housing, economic development, education, healthcare and other community development services.
Going forward, it’s important that local constituents and businesses are aware of the CDFI options that are available. Whether it’s a mom-and-pop grocery store, barber shop or gas station, CDFIs help local entrepreneurs realize their dreams, build wealth and lift their community together.
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