Struggling to find ways to bring affordable, flexible capital into your community while creating net income for your bank? A partnership with a Community Development Financial Institution (CDFI) might be the answer you’re looking for!
As you know, your bank is constrained to ensure that you make safe and sound loans that meet your underwriting and regulatory requirements. Sometimes these restrictions prevent you from making smaller loans and loans that push your underwriting and regulatory boundaries. This is where our CDFIs come into the picture.
CDFIs are often nonprofit organizations that do not have the same regulatory oversight and restrictions, therefore they are able to provide more flexible funding than traditional financial institutions. They also pair their loans with technical assistance that create a powerful combination to serve those who don’t typically have access to credit. An investment in and partnerships with a CDFI can then help you reinvest your capital and resources into the community in creative ways that may also generate income (interest income and maintain deposits) and earn your bank CRA credit.
CDFIs are financial institutions who have a primary mission of community development and have been certified by the CDFI Fund. They can be banks, credit unions, loan funds, or venture capital funds. CDFIs have a long rich history of supporting low-income communities across the country. Today they are better understood than ever before and are being recognized for the great impact they can have. And billions of dollars are cycling through these innovative financing entities.
CDFIs foster economic opportunity and revitalize neighborhoods. They help families finance their first homes, support community residents starting businesses, and invest in local health centers, schools, or community centers. There is a power in leveraging your program to support the CDFI movement and numerous opportunities for you to get involved.
How to Support CDFIs
Later in this series, we will highlight the various ways banks can partner with CDFIs. To highlight the first level of support, we have to mention capital. CDFIs need affordable capital, but that doesn’t have to mean grants. For example, consider how your bank can use equity equivalent investments or loan pools to bring lower cost microloans into your community.
Equity Equivalent Investments (EQ2s) are the most flexible and powerful investment you can provide to a CDFI. They are long-term, fully subordinated debt instruments with features, such as rolling terms, that allow them to function in a manner similar to equity. EQ2s make it easier for CDFIs to offer more responsive financing products with longer loan terms.
Loan Pools bring two or more financial institutions together to participate in a loan to a CDFI for a larger amount than either bank may have been willing or able to make independently. The funds can be organized as a lending consortium in which the participating banks pool their funds as investments in a consortium.
Capital investments are numerous, varied, and can come in the form of stock purchase, ownership interest, and grants. There’s a CDFI investment opportunity out there to fit your bank’s portfolio while supporting your CRA goals!
Where To Start
Before investing in a CDFI, you might want to get to know one or more in your community. Look for opportunities to provide your services to your local CDFIs. CDFIs can benefit from:
- Loan servicing arrangements,
- Traditional banking services, and
- Volunteers for their technical assistance and training programs.
You can leverage your bank’s core business with CDFI resources to can produce a power difference in meeting the credit needs of those who are underserved in your local communities. Use this leverage and opportunity to reach minority neighborhoods and micro-businesses.
Check out the Opportunity Finance Network’s interactive map to find a CDFI in your community today!
Next week we will highlight bank partnerships with Minority Depository Institutions (MDIs) for even more impact.
Cheers to us and this work!
P.S. Did you see I have a free course for bankers who are new to CRA? Click the button below or share this article with a colleague that might have inherited their bank’s CRA program and are not sure where to start!
- Equity Equivalent Investments-Multiplying Future Impact - June 17, 2021
- Wait, what? You want me to place a deposit with a “competing” financial institution? - June 10, 2021
- Spotlight on CDFIs-Your Partners in Community Development - June 3, 2021