WASHINGTON — A recent infusion of billions of dollars of federal aid is being hailed as a game-changer for community development financial institutions.
The assortment of funding assistance includes $1.25 billion that Congress added in December to the new Rapid Response Program, which the Treasury Department's CDFI Fund administers to provide automatic grants to CDFIs
CDFIs say the new funding — which is on top of aid they receive from banks and other corporations — will multiply their capacity by several times, shifting focus away from what is often just an effort to stay sustainable toward expanding their community development activities.
“CDFIs always could have been bigger, larger, more impactful,” said Ed Sivak, executive vice president of policy and communications of Hope Credit Union and the loan fund Hope Enterprise Corp., both certified CDFIs.
“I think we’re just getting to a point now where the public-private-philanthropic sector is beginning to align their resources with the true capacity that exists within the industry. And we need to make sure that continues."
The money provided for the Rapid Response Program is only the first part of a total of $3 billion for CDFIs appropriated by the Coronavirus Response and Relief Supplemental Appropriations Act at the end of last year. Meanwhile, the Biden administration's proposed 2022 budget would hike the CDFI Fund's normal appropriation by 22% to $330 million.
Observers say the net result of more financial resources could be a trend of CDFIs experimenting with offering new services rather than sticking to old models they have honed for years. Some say community development lenders could test out innovative products in their current lending markets, expand into new types of lending, and pursue novel partnerships with other, larger financial institutions.
“Without these dollars, we would all be very much concentrated on our own sustainability and would be more conservative — sticking to what we know how to do and what we feel safe with, because there's a survival mode that kicks in with CDFIs that are mission-driven,” said Duanne Andrade, chief financial officer of the Solar and Energy Loan Fund, a CDFI based in Florida that focuses on financing climate-friendly housing repairs and upgrades.
With the right amount of flexibility, Doug Coward, SELF's executive director, said that one approach his CDFI could take is to "blend" the CDFI Fund's new federal funding with other existing programs, like the Community Development Block Grant program offered by the Department of Housing and Urban Development, to help finance environmentally sustainable air conditioning units and hurricane windows in new housing.
"One of the things that SELF is trying to do is further penetrate low-income markets," Coward said. "And if we had the ability to take our low-cost financing and merge it with affordable housing grant programs that may be available from [the Community Development Block Grant program] or some other federal program — if you could blend those dollars together, you would be able to further penetrate the very low-income homeowners who need assistance."
State programs
In addition to the Rapid Response Program, the American Rescue Plan appropriated $10 billion for the State Small Business Credit Initiative, an Obama-era program dating back to 2011 that started with just $1.5 billion at its inception. It provides funding for CDFIs and other institutions through programs overseen by state governments.
Observers say the Biden administration's approach to CDFIs has been a welcome development following attempts by the Trump administration to
“The Biden administration has come out as a really, really strong supporter of CDFIs and their work — that, in fact, CDFIs are integral to the financial system in our country,” said Dave Glaser, president of MoFi, a CDFI based in Missoula, Mont. “It’s a watershed moment."
Yet the new funding capacity still leaves questions about where states and CDFIs will devote resources.
Some observers note that the impact of more aid through the SSBCI ultimately rests with states, and that some jurisdictions could devote resources elsewhere.
“The structure of the program matters,” said Sivak. “If you look at places like Pennsylvania, there was money that was directed through that program directly to CDFIs. That money got to CDFIs, and CDFIs got the money out, and you'll see a track record of deployment. That's in contrast to places like Mississippi that set up a cumbersome loan guarantee program.”
The private sector — and banks, in particular — has also stepped up its support over the past year. In February, for instance, JPMorgan Chase pledged more than
“There's a recognition that CDFIs are financial first responders,” said Sivak.
Administrative improvements still needed
CDFIs see a generational opportunity to capitalize on that burst of funding. But many say that to optimize the impact of infusion, the administrative side of allocating grants for loan funds and other CDFIs needs to be more efficient than in the past.
Robert Villarreal, chief external affairs officer of CDC Small Business Finance, which owns a CDFI, says the Small Business Administration, CDFI Fund and the Minority Business Development Agency need to coordinate where and how funds are being deployed to avoid redundancy.
"We want to make sure there is a lot of communication at the federal level and there's not a lot of overlap, and that we use these dollars wisely, so that they can hit as many communities as they can, particularly communities of color and rural communities," Villarreal said. “We want to make sure that there's coordination amongst all these agencies, because it is a flood of money coming in. People say, ‘Well, that's a good thing.’ Not always, if it isn't managed correctly.”
Still, CDFI leaders say that the investment from the federal government in recent months is a crucial development for institutions that frequently operate on slim margins.
“It allows for the industry to better adapt to the needs, and to also play a little bit more, experiment and create new programs, to be able to respond to something that we've never had to deal with before,” Andrade said.
Of particular importance, CDFI representatives say, is the automatic grant funding enabled through the CDFI Fund’s Rapid Response Program. That’s a far cry from the previous best option for CDFIs to receive grant funding from the federal government: institutions competing against each other for a much smaller annual pool of less than $300 million.
“The Rapid Response Program is huge,” said Jennifer Vasiloff, chief external affairs officer at the Opportunity Finance Network, a trade organization for CDFIs. “That's going to be an immediate source of strength for the CDFIs that are lucky enough to receive it.”
“We’re hoping that the CDFI Fund can act really quickly to get that money out the door, because this will be the first substantial source of grant funding, or equity-like funding, that CDFIs have received since the pandemic," she added, "which will strengthen them and put them in a better position to borrow low-cost debt to continue their financing and further help with the recovery.”
Longer-term funding needs
But representatives also say it is critical that policymakers don’t think of CDFIs as a one-time emergency responder to the nation’s economic woes, arguing that the increases in federal grant funding should be made permanent in the long run.
“There should be a billion dollars in the CDFI Fund financial assistance program every year,” Sivak said.
For all the praise heaped on the industry, others said it was important for policymakers to bear in mind the long-term difficulties that some CDFIs may have in making business planning decisions for the months and years after the pandemic, meaning that robust federal support may be necessary longer than some policymakers may anticipate.
“The biggest concern as a business — and CDFIs are businesses, also — is trying to figure out how long will this last, and how do you plan for this moving forward,” said Sara Razavi, CEO of Working Solutions, a CDFI based in San Francisco that focuses on microlending to small businesses.
Razavi said that even with significant increases in federal funding, it remains deeply unclear when the business and lending climate would return to some semblance of normal.
“That unpredictability in the market’s appetite, not for need, but for whether [a microloan] is the right product match — because, yes, people are in need of cash. But is debt the right thing? And at what charge and what are the terms?” Razavi said. “We are still figuring it out.”
“I'd really like folks to know that this is a long game,” Razavi added. “This is not a six-months-to-a-year venture — like, you inject money into CDFIs and this time next year, everything's going to be crazy. There's probably going to be a need for subsidizing and supporting CDFIs in 2022 as well, because our model is just so tight on margins.”
