Community Development Financial Institutions (CDFIs): Overview and Selected Issues

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Community Development Financial Institutions ~~August 16, 2022~~September 29, 2023
(CDFIs): Overview and Selected Issues
Darryl E. Getter
The Community Development Financial Institutions (CDFI) Fund was created by the Riegle The Community Development Financial Institutions (CDFI) Fund was created by the Riegle
Specialist in Financial Specialist in Financial
Community Development Regulatory Improvement Act of 1994 (P.L. 103-325) to promote Community Development Regulatory Improvement Act of 1994 (P.L. 103-325) to promote
Economics Economics
economic development in distressed urban and rural communities. The CDFI Fund can certify economic development in distressed urban and rural communities. The CDFI Fund can certify

banks, credit unions, nonprofit loan funds, microloan funds, and (for-profit and nonprofit) banks, credit unions, nonprofit loan funds, microloan funds, and (for-profit and nonprofit)
venture capital funds that can demonstrate having a primary mission of promoting community venture capital funds that can demonstrate having a primary mission of promoting community

development. After certification, CDFIs become eligible for financial awards and other assistance development. After certification, CDFIs become eligible for financial awards and other assistance
provided by the CDFI Fund that promotes community development in markets comprised of economically distressed people provided by the CDFI Fund that promotes community development in markets comprised of economically distressed people
and places. and places.
CDFIs are essentially a type of public-private partnership established to advance financial inclusion, the policy goal designed CDFIs are essentially a type of public-private partnership established to advance financial inclusion, the policy goal designed
to increase the accessibility of traditionally underserved populations and markets to affordable financial services and to increase the accessibility of traditionally underserved populations and markets to affordable financial services and
products. CDFIs accomplish this goal by serving people and businesses that traditional financial institutions cannot make products. CDFIs accomplish this goal by serving people and businesses that traditional financial institutions cannot make
their predominant focus. Higher-risk clients are more likely to have weak credit histories or face above-normal levels of their predominant focus. Higher-risk clients are more likely to have weak credit histories or face above-normal levels of
income volatility, making them generally more costly to serve. Consequently, traditional institutions, which must manage income volatility, making them generally more costly to serve. Consequently, traditional institutions, which must manage
their liquidity and other financial risks to support public confidence in the overall financial system, often focus primarily on their liquidity and other financial risks to support public confidence in the overall financial system, often focus primarily on
markets consisting of higher credit quality borrowers rather than on higher-risk borrowers. markets consisting of higher credit quality borrowers rather than on higher-risk borrowers.
CDFIs are tasked with acquiring circumstantial and more granular information about customers with less traditional financial CDFIs are tasked with acquiring circumstantial and more granular information about customers with less traditional financial
characteristics. CDFIs subsequently use this information to match their customers with suitable financial products. Because characteristics. CDFIs subsequently use this information to match their customers with suitable financial products. Because
their portfolios consist of localized and highly customized loans made to higher-risk borrowers, CDFIs have limited access to their portfolios consist of localized and highly customized loans made to higher-risk borrowers, CDFIs have limited access to
the conventional markets where traditional financial institutions acquire the funds to originate loans. Instead, CDFIs rely on a the conventional markets where traditional financial institutions acquire the funds to originate loans. Instead, CDFIs rely on a
combination of public and private funding that includes grants, awards, and donations. These subsidies are used to offset the combination of public and private funding that includes grants, awards, and donations. These subsidies are used to offset the
heightened costs of loss mitigation efforts that CDFIs incur while advancing their financial inclusion mission. Consequently, heightened costs of loss mitigation efforts that CDFIs incur while advancing their financial inclusion mission. Consequently,
these public and private subsidies arguably provide CDFIs a financial advantage over both traditional and subprime lenders these public and private subsidies arguably provide CDFIs a financial advantage over both traditional and subprime lenders
that attempt to serve higher-risk clients. that attempt to serve higher-risk clients.
The CDFI business model requires both public and private subsidies for several reasons. Private funding is needed to The CDFI business model requires both public and private subsidies for several reasons. Private funding is needed to
supplement any gaps in public funding, which may occur following government budgets cuts or modification of supplement any gaps in public funding, which may occur following government budgets cuts or modification of
requirements. The ability to obtain private sector funding may also signal a CDFI’s expertise with respect to serving higher-requirements. The ability to obtain private sector funding may also signal a CDFI’s expertise with respect to serving higher-
risk clients or serve as an endorsement of a CDFI’s specific mission-related activities. Furthermore, a substantive share of risk clients or serve as an endorsement of a CDFI’s specific mission-related activities. Furthermore, a substantive share of
private sector funding mitigates the risk that a CDFI would shift to the public sector the additional costs and elevated default private sector funding mitigates the risk that a CDFI would shift to the public sector the additional costs and elevated default
risks that stem from serving higher-risk clients. risks that stem from serving higher-risk clients.
Public and private stakeholders are interested in the CDFI industry’s ability to help higher-risk clients gain access to capital Public and private stakeholders are interested in the CDFI industry’s ability to help higher-risk clients gain access to capital
and succeed, but measuring and evaluating that performance is difficult. Because CDFIs must engage in more default and succeed, but measuring and evaluating that performance is difficult. Because CDFIs must engage in more default
mitigation activities compared to traditional financial institutions, the interpretation of metrics used to measure their financial mitigation activities compared to traditional financial institutions, the interpretation of metrics used to measure their financial
strength and performance is more ambiguous. Furthermore, data collection gaps and other issues complicate the ability to strength and performance is more ambiguous. Furthermore, data collection gaps and other issues complicate the ability to
directly link CDFIs’ activities to their clients. Even if more data were available, however, CDFIs’ customers in underserved directly link CDFIs’ activities to their clients. Even if more data were available, however, CDFIs’ customers in underserved
areas face greater income volatility and would be expected to fail more often than conventional borrowers. In short, areas face greater income volatility and would be expected to fail more often than conventional borrowers. In short,
measuring the extent that CDFI activities in underserved markets are advancing financial inclusion is challenging. measuring the extent that CDFI activities in underserved markets are advancing financial inclusion is challenging.

Congressional Research Service Congressional Research Service

Community Development Financial Institutions (CDFIs): Overview and Selected Issues

Introduction
The Community Development Financial Institutions (CDFI) Fund was created by the Riegle The Community Development Financial Institutions (CDFI) Fund was created by the Riegle
Community Development Regulatory Improvement Act of 1994 (P.L. 103-325)1 within the U.S. Community Development Regulatory Improvement Act of 1994 (P.L. 103-325)1 within the U.S.
Department of the Treasury to promote economic development in distressed urban and rural Department of the Treasury to promote economic development in distressed urban and rural
communities, particularly through certifying and supporting CDFIs.2 The CDFI Fund is communities, particularly through certifying and supporting CDFIs.2 The CDFI Fund is
authorized to certify banks, credit unions, nonprofit loan funds, microloan funds, and (for-profit authorized to certify banks, credit unions, nonprofit loan funds, microloan funds, and (for-profit
and nonprofit) venture capital funds as designated CDFIs. Financial institutions that wish to and nonprofit) venture capital funds as designated CDFIs. Financial institutions that wish to
become CDFIs must meet specified eligibility criteria, such as demonstrating that their primary become CDFIs must meet specified eligibility criteria, such as demonstrating that their primary
mission is to promote community development by serving economically distressed people and mission is to promote community development by serving economically distressed people and
places.3 With the CDFI designation, these institutions are eligible to receive financial awards and places.3 With the CDFI designation, these institutions are eligible to receive financial awards and
other assistance from the CDFI Fund.4 other assistance from the CDFI Fund.4
Congress has formalized systems for various categories of financial intermediaries—such as Congress has formalized systems for various categories of financial intermediaries—such as
banks, credit unions, the Federal Home Loan Bank System, and CDFIs—all of which facilitate banks, credit unions, the Federal Home Loan Bank System, and CDFIs—all of which facilitate
linking borrowers with savers.5 When creating these formal systems, Congress usually linking borrowers with savers.5 When creating these formal systems, Congress usually
encourages covered financial intermediaries—even if they predominantly serve more encourages covered financial intermediaries—even if they predominantly serve more
creditworthy borrowers—to provide financial services and products to underserved populations creditworthy borrowers—to provide financial services and products to underserved populations
and markets when feasible to do so and in a prudent manner. The CDFI Fund and designated and markets when feasible to do so and in a prudent manner. The CDFI Fund and designated
CDFIs, however, were established to focus predominantly on financially distressed borrowers and CDFIs, however, were established to focus predominantly on financially distressed borrowers and
areas.6 CDFIs, which are essentially a type of public-private partnership, promote accessibility of areas.6 CDFIs, which are essentially a type of public-private partnership, promote accessibility of
traditionally underserved populations and markets to affordable financial services and products, traditionally underserved populations and markets to affordable financial services and products,
the policy goal generally referred to as the policy goal generally referred to as financial inclusion.7 .7
Traditional financial institutions generally do not focus primarily on customers with higher Traditional financial institutions generally do not focus primarily on customers with higher
default propensities, referred to as subprime borrowers, due to profitability and risk exposure default propensities, referred to as subprime borrowers, due to profitability and risk exposure
concerns. Subprime customers often require more labor-intensive counseling, underwriting, concerns. Subprime customers often require more labor-intensive counseling, underwriting,
monitoring, and servicing (e.g., loan workouts) to mitigate even costlier outcomes (e.g., defaults) monitoring, and servicing (e.g., loan workouts) to mitigate even costlier outcomes (e.g., defaults)

that would negatively affect both borrowers and lenders. They also often require nontraditional financial products (e.g., loans for short-term emergencies, credit repair). Thus, financial 1 See U.S. Department of the Treasury, “Community Development Financial Institutions Fund,” 1 See U.S. Department of the Treasury, “Community Development Financial Institutions Fund,”
http://www.cdfifund.gov/who_we_are/about_us.asp. http://www.cdfifund.gov/who_we_are/about_us.asp.
2 See Federal Reserve Bank of Richmond, 2 See Federal Reserve Bank of Richmond, Community Development Financial Institutions: A Unique Partnership for
Banks, Special Issue 2011, pp. 1-7, https://www.richmondfed.org/~/media/richmondfedorg/community_development/, Special Issue 2011, pp. 1-7, https://www.richmondfed.org/~/media/richmondfedorg/community_development/
resource_centers/cdfi/pdf/cdfi-special-2011.pdf. resource_centers/cdfi/pdf/cdfi-special-2011.pdf.
3 For more information, see CDFI Fund, “CDFI Certification,” https://www.cdfifund.gov/programs-training/ 3 For more information, see CDFI Fund, “CDFI Certification,” https://www.cdfifund.gov/programs-training/
certification/cdfi. certification/cdfi.
4 Office of the Comptroller of the Currency (OCC), 4 Office of the Comptroller of the Currency (OCC), CDFI Certification for National Banks and Federal Savings
Associations, March 2014, http://www.occ.gov/topics/community-affairs/publications/fact-sheets/fact-sheet-cdfi-, March 2014, http://www.occ.gov/topics/community-affairs/publications/fact-sheets/fact-sheet-cdfi-
certification.pdf. certification.pdf.
5 For background on the CDFI industry prior to the 1994 statute, see Nellie R. Santiago, Thomas T. Holyoke, and Ross 5 For background on the CDFI industry prior to the 1994 statute, see Nellie R. Santiago, Thomas T. Holyoke, and Ross
D. Levi, “Turning David and Goliath into the Odd Couple: How the New Community Reinvestment Act Promotes D. Levi, “Turning David and Goliath into the Odd Couple: How the New Community Reinvestment Act Promotes
Community Development Financial Institutions,” Community Development Financial Institutions,” Journal of Law and Policy, vol. 6, no. 2 (1998), pp. 571-651. , vol. 6, no. 2 (1998), pp. 571-651.
6 See CDFI Fund, 6 See CDFI Fund, The CDFI Fund: Empowering Underserved Communities, https://www.cdfifund.gov/sites/cdfi/files/, https://www.cdfifund.gov/sites/cdfi/files/
documents/cdfi_brochure-updated-dec2017.pdf. documents/cdfi_brochure-updated-dec2017.pdf.
7 The term 7 The term public-private partnership is often used in the context of completing or operating large-scale government is often used in the context of completing or operating large-scale government
projects (e.g., infrastructure) with various percentages of funding support from the private sector. In this context, projects (e.g., infrastructure) with various percentages of funding support from the private sector. In this context,
public-private partnership refers to using limited federal resources to attract private sector investment into low- and refers to using limited federal resources to attract private sector investment into low- and
moderate-income communities. See CDFI Fund, “How Do the CDFI Fund’s Programs Work?,” moderate-income communities. See CDFI Fund, “How Do the CDFI Fund’s Programs Work?,”
https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi_infogrpahic_v03aaf.pdf. For more information about financial https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi_infogrpahic_v03aaf.pdf. For more information about financial
inclusion efforts, see CRS Report R45979, inclusion efforts, see CRS Report R45979, Financial Inclusion and Credit Access Policy Issues, by Cheryl R. Cooper; , by Cheryl R. Cooper;
and CRS In Focus IF11631, and CRS In Focus IF11631, Financial Inclusion: Access to Bank Accounts, by Cheryl R. Cooper. , by Cheryl R. Cooper.
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Community Development Financial Institutions (CDFIs): Overview and Selected Issues

~~that would negatively affect both borrowers and lenders. They also often require non-traditional~~
~~financial products (e.g., loans for short-term emergencies, credit repair). Thus, financial~~
intermediaries must limit their exposure to above-normal risks and additional costs that could intermediaries must limit their exposure to above-normal risks and additional costs that could
threaten both their actual and perceived financial well-being. threaten both their actual and perceived financial well-being.
If broad financial stability concerns precipitate the neglect of higher-risk customers’ needs, the If broad financial stability concerns precipitate the neglect of higher-risk customers’ needs, the
CDFI industry’s public-private partnership structure may be able to help fill the void.8 CDFIs can CDFI industry’s public-private partnership structure may be able to help fill the void.8 CDFIs can
absorb the increased risks and costs associated with subprime lending because they receive absorb the increased risks and costs associated with subprime lending because they receive
funding in the form of public and private subsidies, grants, and awards. Subsidized funds give funding in the form of public and private subsidies, grants, and awards. Subsidized funds give
CDFIs a cost advantage over both traditional and non-CDFI subprime lenders when offering CDFIs a cost advantage over both traditional and non-CDFI subprime lenders when offering
financial services to higher-risk customers. This financial support also provides CDFIs with financial services to higher-risk customers. This financial support also provides CDFIs with
another funding source to meet cash flow (liquidity) needs typically faced by traditional financial another funding source to meet cash flow (liquidity) needs typically faced by traditional financial
institutions. institutions.
Measuring CDFIs’ performance and effectiveness is challenging. Certain performance metrics are Measuring CDFIs’ performance and effectiveness is challenging. Certain performance metrics are
difficult to fully understand because the large volume of activity to mitigate default losses, which difficult to fully understand because the large volume of activity to mitigate default losses, which
is essential when serving is essential when serving ~~non-traditional~~nontraditional borrowers, adds ambiguity to the usual interpretations. borrowers, adds ambiguity to the usual interpretations.
Data collection gaps also exist, particularly in regard to the lending activities of small institutions Data collection gaps also exist, particularly in regard to the lending activities of small institutions
and small loans with and small loans with ~~non-standardized~~nonstandardized (financial) characteristics.9 Furthermore, greater income (financial) characteristics.9 Furthermore, greater income
volatility experienced in underserved communities can undermine efforts facilitated by CDFIs volatility experienced in underserved communities can undermine efforts facilitated by CDFIs
toward financial inclusion. toward financial inclusion.
This report begins with an overview of the CDFI industry. It then explains the target markets This report begins with an overview of the CDFI industry. It then explains the target markets
served by CDFIs as well as the higher costs associated with serving these niche segments. Next, served by CDFIs as well as the higher costs associated with serving these niche segments. Next,
challenges related to evaluating the performance and effectiveness of CDFIs are discussed. The challenges related to evaluating the performance and effectiveness of CDFIs are discussed. The
CDFIs’ public and private funding sources are summarized. Finally, the report provides CDFIs’ public and private funding sources are summarized. Finally, the report provides
considerations for Congress. considerations for Congress.
CDFI Industry: Composition, Size, Product Lines
Depository institutions (i.e., for-profit banks and nonprofit credit unions), loan funds, and venture Depository institutions (i.e., for-profit banks and nonprofit credit unions), loan funds, and venture
capital funds may become designated CDFIs. capital funds may become designated CDFIs.
• Depository institutions provide financial services to savers (via accepting Depository institutions provide financial services to savers (via accepting
checking and savings deposits) and borrowers (via providing consumer and checking and savings deposits) and borrowers (via providing consumer and
business loans). The deposits, generally insured by the federal government (up to business loans). The deposits, generally insured by the federal government (up to
an account limit), are a low-cost and largely stable source of funds to provide an account limit), are a low-cost and largely stable source of funds to provide
loans. Depositories also have prudential government regulators monitoring their loans. Depositories also have prudential government regulators monitoring their
financial safety and soundness practices. For example, depositories must hold financial safety and soundness practices. For example, depositories must hold
reserves to buffer against financial losses due to borrowers’ defaults. Many CDFI reserves to buffer against financial losses due to borrowers’ defaults. Many CDFI
depositories consist of small community banks (defined in this report as having depositories consist of small community banks (defined in this report as having
$1 billion in assets or less) and similarly sized or smaller credit unions.10 $1 billion in assets or less) and similarly sized or smaller credit unions.10

• Nonprofit and micro loan funds, which tend to target specific projects, are nondepository financial entities without access to federally insured deposits.11 8 See Brent C. Smith, “The Sources and Uses of Funds for Community Development Financial Institutions: The Role of 8 See Brent C. Smith, “The Sources and Uses of Funds for Community Development Financial Institutions: The Role of
the Nonprofit Intermediary,” the Nonprofit Intermediary,” Nonprofit and Voluntary Sector Quarterly, vol. 37, no. 1 (March 2008), pp. 19-38. , vol. 37, no. 1 (March 2008), pp. 19-38.
9 See CRS In Focus IF11742, 9 See CRS In Focus IF11742, Too Small to Collect Big Data: Financial Inclusion Implications, by Darryl E. Getter. , by Darryl E. Getter.
10 A more extensive definition of a 10 A more extensive definition of a community bank incorporates its functions along with asset size. See Federal incorporates its functions along with asset size. See Federal
Deposit Insurance Corporation (FDIC), Deposit Insurance Corporation (FDIC), FDIC Community Banking Study, December 2012, http://www.fdic.gov/, December 2012, http://www.fdic.gov/
regulations/resources/cbi/report/cbi-full.pdf; and CRS In Focus IF11048, regulations/resources/cbi/report/cbi-full.pdf; and CRS In Focus IF11048, Introduction to Bank Regulation: Credit
Unions and Community Banks: A Comparison, by Darryl E. Getter. , by Darryl E. Getter.
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~ Nonprofit and micro loan funds, which tend to target specific projects, are non-~~
~~depository financial entities without access to federally insured deposits.11~~
11 Some loan funds may be referred to as community development loan funds. For more information, see OCC, (continued...) Congressional Research Service 2 Community Development Financial Institutions (CDFIs): Overview and Selected Issues Instead, loan funds rely on multiple fundraising strategies.12 Loan funds borrow Instead, loan funds rely on multiple fundraising strategies.12 Loan funds borrow
or accept grants and awards from public or private sources. Various types of or accept grants and awards from public or private sources. Various types of
private sector investors include pension funds, university endowments, various private sector investors include pension funds, university endowments, various
types of financial institutions, (philanthropic) foundations, and individuals. Some types of financial institutions, (philanthropic) foundations, and individuals. Some
of these private sector sources may donate funds. Loan funds also adopt various of these private sector sources may donate funds. Loan funds also adopt various
types of business models. types of business models. Revolving loan funds, which rely upon the repayment loan funds, which rely upon the repayment
of principal and interest to replenish funds that were used to make loans, can of principal and interest to replenish funds that were used to make loans, can
reduce some dependence on ongoing grant support.13 Their ability to make new reduce some dependence on ongoing grant support.13 Their ability to make new
loans, however, may still be limited until after various percentages of the loans, however, may still be limited until after various percentages of the
outstanding balances of existing loans are repaid.14 Some loan funds issue debt outstanding balances of existing loans are repaid.14 Some loan funds issue debt
securities to investors (in exchange for cash) that must be repaid with interest, securities to investors (in exchange for cash) that must be repaid with interest,
and some micro loan funds may use crowdfunding.15 and some micro loan funds may use crowdfunding.15
• For-profit and nonprofit venture capital funds are non-bank financial entities that For-profit and nonprofit venture capital funds are non-bank financial entities that
make equity investments rather than loans. When providing funds, venture make equity investments rather than loans. When providing funds, venture
capital firms do not receive repayments of principal and interest as in the case of capital firms do not receive repayments of principal and interest as in the case of
a traditional loan obligation. Instead, they have ownership interests (equity a traditional loan obligation. Instead, they have ownership interests (equity
stakes) and receive an unspecified return linked to the fluctuating value of a stakes) and receive an unspecified return linked to the fluctuating value of a
specific investment. A CDFI venture capitalist, for example, may invest directly specific investment. A CDFI venture capitalist, for example, may invest directly
in a startup or a small business located in an underserved area. in a startup or a small business located in an underserved area.
As of September 30, 2021, the CDFI Fund reported 1,271 certified CDFIs that were comprised of As of September 30, 2021, the CDFI Fund reported 1,271 certified CDFIs that were comprised of
566 (45%) loan funds and 16 (1%) of venture capital funds, which do not collect federally insured 566 (45%) loan funds and 16 (1%) of venture capital funds, which do not collect federally insured
deposits; and 387 (30%) credit unions, 168 (13%) banks, and 134 (11%) depository institution deposits; and 387 (30%) credit unions, 168 (13%) banks, and 134 (11%) depository institution
holding companies, which collect federally insured deposits.16 Thus, loan funds make up the holding companies, which collect federally insured deposits.16 Thus, loan funds make up the
largest share of CDFIs. However, 689 (54%) of the CDFI industry consists of banks and credit largest share of CDFIs. However, 689 (54%) of the CDFI industry consists of banks and credit
unions that interact directly with the public. The CDFI Fund also reported that CDFI credit unions unions that interact directly with the public. The CDFI Fund also reported that CDFI credit unions
held 61.1% of all CDFI industry assets in 2020.17 held 61.1% of all CDFI industry assets in 2020.17

~~11 Some loan funds may be referred to as community development loan funds. For more information, see OCC,~~
The CDFI industry represents a small percentage of the overall U.S. financial system. In 2020, the 1,271 CDFIs collectively held $151.8 billion in assets (loans).18 By comparison, the credit Community Development Loan Funds: Partnership Opportunities for Banks, October 2014, https://www.occ.gov/, October 2014, https://www.occ.gov/
publications-and-resources/publications/community-affairs/community-developments-insights/pub-insights-oct-publications-and-resources/publications/community-affairs/community-developments-insights/pub-insights-oct-
2014.pdf. 2014.pdf.
12 Despite not having prudential regulators, loan funds are subject to the applicable disclosure and investor protection 12 Despite not having prudential regulators, loan funds are subject to the applicable disclosure and investor protection
regulations promulgated by the Securities and Exchange Commission (SEC). regulations promulgated by the Securities and Exchange Commission (SEC).
13 For more information about loan funds as well as an example of a type of loan funds, see CRS In Focus IF11449, 13 For more information about loan funds as well as an example of a type of loan funds, see CRS In Focus IF11449,
Economic Development Revolving Loan Funds (ED-RLFs), by Julie M. Lawhorn. , by Julie M. Lawhorn.
14 See Charles Tansey et al., 14 See Charles Tansey et al., Capital Markets, CDFIs, and Organizational Credit Risk (Durham, NH: Carsey Institute, (Durham, NH: Carsey Institute,
2010), p. 4, https://www.cdfifund.gov/sites/cdfi/files/documents/capital-markets-cdfis-and-organizational-credit-2010), p. 4, https://www.cdfifund.gov/sites/cdfi/files/documents/capital-markets-cdfis-and-organizational-credit-
risk.pdf. risk.pdf.
15 See SEC, “Updated Investor Bulletin: Crowdfunding for Investors,” May 10, 2017, https://www.sec.gov/oiea/ 15 See SEC, “Updated Investor Bulletin: Crowdfunding for Investors,” May 10, 2017, https://www.sec.gov/oiea/
investor-alerts-bulletins/ib_crowdfunding-.html. investor-alerts-bulletins/ib_crowdfunding-.html.
16 See Department of the Treasury, Office of Inspector General, 16 See Department of the Treasury, Office of Inspector General, Audit of the Community Development Financial
Institutions Fund’s Financial Statements for Fiscal Years 2021 and 2020, December 15, 2021, p. 12, , December 15, 2021, p. 12,
https://www.cdfifund.gov/sites/cdfi/files/2021-12/FY2021_Agency_Financial_Report.pdf. https://www.cdfifund.gov/sites/cdfi/files/2021-12/FY2021_Agency_Financial_Report.pdf.
17 Although credit unions have membership restrictions, they are allowed to add underserved areas to their membership 17 Although credit unions have membership restrictions, they are allowed to add underserved areas to their membership
fields and provide financial services in those designated areas. See National Credit Union Administration (NCUA), fields and provide financial services in those designated areas. See National Credit Union Administration (NCUA),
“Expanding Service to Underserved Areas: Application Guidance,” https://www.ncua.gov/support-services/credit-“Expanding Service to Underserved Areas: Application Guidance,” https://www.ncua.gov/support-services/credit-
union-resources-expansion/field-membership-expansion/serving-underserved/expanding-service-underserved-areas-union-resources-expansion/field-membership-expansion/serving-underserved/expanding-service-underserved-areas-
application. application.
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~The CDFI industry represents a small percentage of the overall U.S. financial system. In 2020,~~
~~the 1,271 CDFIs collectively held $151.8 billion in assets (loans).18 By comparison, the credit~~
18 See Department of the Treasury, Office of Inspector General, Audit of the Community Development Financial Institutions Fund’s Financial Statements for Fiscal Years 2021 and 2020, p. 12. Congressional Research Service 3 Community Development Financial Institutions (CDFIs): Overview and Selected Issues union industry in 2020 consisted of 5,099 federally insured institutions that collectively held union industry in 2020 consisted of 5,099 federally insured institutions that collectively held
$1.16 trillion in assets, and 4,074 small community banks, defined as having $1 billion or less in $1.16 trillion in assets, and 4,074 small community banks, defined as having $1 billion or less in
total assets, collectively held $1.158 trillion in assets.19 The CDFI industry is approximately 13% total assets, collectively held $1.158 trillion in assets.19 The CDFI industry is approximately 13%
of the credit union industry’s size, 13% of the small community banks’ size, or 6.5% of both of the credit union industry’s size, 13% of the small community banks’ size, or 6.5% of both
groups combined. The CDFI industry size would fall to 3.5% if their total assets were calculated groups combined. The CDFI industry size would fall to 3.5% if their total assets were calculated
as a percentage of total assets held by credit unions and all community banks (if community as a percentage of total assets held by credit unions and all community banks (if community
banks are defined as having $10 billion or less in assets). Furthermore, if these calculations banks are defined as having $10 billion or less in assets). Furthermore, if these calculations
included assets held by all depositories and other included assets held by all depositories and other ~~non-depository~~nondepository financial institutions (without financial institutions (without
CDFI designations), then the percentage of CDFI representation in the U.S. financial system CDFI designations), then the percentage of CDFI representation in the U.S. financial system
would be less than 1%. would be less than 1%.
The primary product lines of CDFIs are consumer, residential real estate, and small business The primary product lines of CDFIs are consumer, residential real estate, and small business
loans. By the end of FY2020, the CDFI Fund reported that the loans. By the end of FY2020, the CDFI Fund reported that the consumer finance category category
accounted for 36.8% of the dollar amount and 83.2% of the products offered by CDFIs.20 The accounted for 36.8% of the dollar amount and 83.2% of the products offered by CDFIs.20 The
consumer finance category includes loans for health, education, emergency, credit repair, debt consumer finance category includes loans for health, education, emergency, credit repair, debt
consolidation, and other consumer purposes. These products are likely to consist of payday consolidation, and other consumer purposes. These products are likely to consist of payday
alternative loans, secured credit cards, prepayment cards, or installment loans.21 In addition, alternative loans, secured credit cards, prepayment cards, or installment loans.21 In addition,
CDFIs provide mainstream financial products with longer-term maturities such as residential CDFIs provide mainstream financial products with longer-term maturities such as residential
mortgages, automobile loans, and student loans. The mortgages, automobile loans, and student loans. The residential real estate financing category, category,
which represents 34.7% of the dollar amount but 6% of the products offered, includes loans for which represents 34.7% of the dollar amount but 6% of the products offered, includes loans for
the purchase, construction, and renovation of single-family residential and rental housing as well the purchase, construction, and renovation of single-family residential and rental housing as well
as for multifamily housing. Credit cards, which are revolving loans that allow for continuous as for multifamily housing. Credit cards, which are revolving loans that allow for continuous
access to credit as long as borrowers make at least periodic minimum payments, are also access to credit as long as borrowers make at least periodic minimum payments, are also
considered a mainstream financial product despite being open-ended without a definite maturity considered a mainstream financial product despite being open-ended without a definite maturity
date. (CDFI depositories can also offer mainstream checking and savings accounts.) The CDFI date. (CDFI depositories can also offer mainstream checking and savings accounts.) The CDFI
Fund, however, does not report a ratio of consumer products with more mainstream features Fund, however, does not report a ratio of consumer products with more mainstream features
relative to those without, which could inform about the extent CDFI customers are eligible to use relative to those without, which could inform about the extent CDFI customers are eligible to use
traditional financial products to meet their needs. traditional financial products to meet their needs.
Additionally, a Federal Reserve survey of CDFIs—which was conducted in 2021 and received Additionally, a Federal Reserve survey of CDFIs—which was conducted in 2021 and received
345 responses, representing 27% of all certified CDFIs—found that many CDFIs, particularly 345 responses, representing 27% of all certified CDFIs—found that many CDFIs, particularly
CDFI loan funds, reported small business lending to be their primary or secondary line of CDFI loan funds, reported small business lending to be their primary or secondary line of
business.22 Although not as prominent, CDFIs provide credit products to finance multifamily business.22 Although not as prominent, CDFIs provide credit products to finance multifamily

~~18 See Department of the Treasury, Office of Inspector General,~~ ~~Audit of the Community Development Financial~~
~~Institutions Fund’s Financial Statements for Fiscal Years 2021 and 2020, p. 12.~~
(e.g., apartment buildings, senior residence facilities and nursing homes) and commercial (e.g., medical and healthcare facilities, educational facilities) structures. 19 See NCUA, 19 See NCUA, 2019 Annual Report, https://www.ncua.gov/files/annual-reports/annual-report-2020.pdf; and FDIC, , https://www.ncua.gov/files/annual-reports/annual-report-2020.pdf; and FDIC,
Quarterly Banking Profile Fourth Quarter 2020, https://www.fdic.gov/analysis/quarterly-banking-profile/fdic-, https://www.fdic.gov/analysis/quarterly-banking-profile/fdic-
quarterly/2021-vol15-1/fdic-v15n1-4q2020.pdf. Because the banking industry is comparably larger than the credit quarterly/2021-vol15-1/fdic-v15n1-4q2020.pdf. Because the banking industry is comparably larger than the credit
union industry, a union industry, a small community bank is defined as having assets of $1 billion or less in this report. For 2020, the is defined as having assets of $1 billion or less in this report. For 2020, the
banking industry held $21.884 trillion in assets. Using the $10 billion definition of banking industry held $21.884 trillion in assets. Using the $10 billion definition of community bank, this segment of the , this segment of the
banking system held $3.2 trillion in assets in 2020. For more information, see CRS In Focus IF11048, banking system held $3.2 trillion in assets in 2020. For more information, see CRS In Focus IF11048, Introduction to
Bank Regulation: Credit Unions and Community Banks: A Comparison, by Darryl E. Getter. , by Darryl E. Getter.
20 See CDFI Fund, 20 See CDFI Fund, CDFI Annual Certification and Data Collection Report (ACR): A Snapshot for Fiscal Year 2020, ,
October 2021, https://www.cdfifund.gov/sites/cdfi/files/2021-10/October 2021, https://www.cdfifund.gov/sites/cdfi/files/2021-10/
ACR_Public_Report_Final_10062021_508Compliant_v2.pdf. ACR_Public_Report_Final_10062021_508Compliant_v2.pdf.
21 Credit unions offer payday alternative loan products. For more information, see CRS Report R44868, 21 Credit unions offer payday alternative loan products. For more information, see CRS Report R44868, Short-Term,
Small-Dollar Lending: Policy Issues and Implications, by Darryl E. Getter. , by Darryl E. Getter.
22 See Surekha Carpenter et al., 22 See Surekha Carpenter et al., 2021 CDFI Survey Key Findings, Federal Reserve System, August 12, 2021, , Federal Reserve System, August 12, 2021,
https://fedcommunities.org/data/2021-cdfi-survey-key-findings/. https://fedcommunities.org/data/2021-cdfi-survey-key-findings/.
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~~(e.g., apartment buildings, senior residence facilities and nursing homes) and commercial (e.g.,~~
~~medical and healthcare facilities, educational facilities) structures.~~
CDFI Niche Markets
Financial institutions serve different market segments.23 CDFIs serve a specific customer segment Financial institutions serve different market segments.23 CDFIs serve a specific customer segment
that is more costly for traditional financial intermediaries to serve, as explained in this section. that is more costly for traditional financial intermediaries to serve, as explained in this section.
Defining and Reporting of Target Markets
CFDIs must have a primary mission of promoting community development to maintain CFDIs must have a primary mission of promoting community development to maintain
certification and qualify for financial assistance awards. The CDFI Fund requires that 60% of a certification and qualify for financial assistance awards. The CDFI Fund requires that 60% of a
CDFI’s financial products (e.g., loans) must be deployed in an approved CDFI’s financial products (e.g., loans) must be deployed in an approved target market or or eligible
market, which is defined as one or more (1) investment areas or (2) targeted populations.24 , which is defined as one or more (1) investment areas or (2) targeted populations.24
• Investment area refers to a geographic area that meets requirements set forth in refers to a geographic area that meets requirements set forth in
Title 12, Section 1805.201(b)(3)(ii)(D), of the Title 12, Section 1805.201(b)(3)(ii)(D), of the Code of Federal Regulations and and
would have a significant unmet need for loans, equity investments, or other would have a significant unmet need for loans, equity investments, or other
financial products or services or is wholly located within an Empowerment Zone financial products or services or is wholly located within an Empowerment Zone
currently in effect or Enterprise Community (as designated under Section 1391 of currently in effect or Enterprise Community (as designated under Section 1391 of
the Internal Revenue Code of 1986 [26 U.S.C. 1391]).25 the Internal Revenue Code of 1986 [26 U.S.C. 1391]).25
• For a specified geographic area, target populations consist of individuals from the For a specified geographic area, target populations consist of individuals from the
following populations. First, following populations. First, low-income targeted population is defined as is defined as
individuals whose family income, adjusted for family size, is individuals whose family income, adjusted for family size, is not more than (1) (1)
for metropolitan areas, 80% of the area median family income in metropolitan for metropolitan areas, 80% of the area median family income in metropolitan
areas; and (2) for areas; and (2) for ~~non-metropolitan~~nonmetropolitan areas, the greater of 80% of the area median areas, the greater of 80% of the area median
family income or 80% of the statewide family income or 80% of the statewide ~~non-metropolitan~~nonmetropolitan area median family area median family
income. Second, other targeted populations include African Americans, income. Second, other targeted populations include African Americans,
Hispanics, Native Americans, Native Alaskans residing in Alaska, Native Hispanics, Native Americans, Native Alaskans residing in Alaska, Native
Hawaiians residing in Hawaii, other Pacific Islanders residing in other Pacific Hawaiians residing in Hawaii, other Pacific Islanders residing in other Pacific
Islands, and other groups with CDFI Fund approval. Islands, and other groups with CDFI Fund approval.

The CDFI Fund administers the Bank Enterprise Award (BEA), which relies upon two definitions—distressed communities and persistent poverty counties (PPCs)—to define the market that a CDFI bank must serve to qualify for the award. 23 For example, wholesale banks provide services to large clients, such as large corporations and other financial 23 For example, wholesale banks provide services to large clients, such as large corporations and other financial
institutions, rather than retail clients, such as individuals and small businesses. Individual credit unions serve customers institutions, rather than retail clients, such as individuals and small businesses. Individual credit unions serve customers
that share an occupational or geographical association. Limited purpose banks offer a narrow product line such as a that share an occupational or geographical association. Limited purpose banks offer a narrow product line such as a
concentration in credit card lending. concentration in credit card lending.
24 See 12 C.F.R. §1805.201, Certification as a Community Development Financial Institution, 24 See 12 C.F.R. §1805.201, Certification as a Community Development Financial Institution,
https://www.law.cornell.edu/cfr/text/12/1805.201; CDFI Fund, https://www.law.cornell.edu/cfr/text/12/1805.201; CDFI Fund, CDFI Program & NACA Program SF-424 & TA
Application Guidance, February 18, 2021, p. 45 Appendix A, https://www.cdfifund.gov/sites/cdfi/files/2021-05/, February 18, 2021, p. 45 Appendix A, https://www.cdfifund.gov/sites/cdfi/files/2021-05/
3_FY21_CDFI_NACA_TA_Application_Guidance.pdf; CDFI Fund, “Update from CDFI Fund Director Jodie Harris: 3_FY21_CDFI_NACA_TA_Application_Guidance.pdf; CDFI Fund, “Update from CDFI Fund Director Jodie Harris:
CDFI Fund Expands Target Market Eligibility for Payroll Protection Program Lending,” December 9, 2020, CDFI Fund Expands Target Market Eligibility for Payroll Protection Program Lending,” December 9, 2020,
https://www.cdfifund.gov/news/402; and CDFI Fund, https://www.cdfifund.gov/news/402; and CDFI Fund, CDFI Program & NACA Program: SF-424, Base-FA
Application, and Supplemental FA Applications Guidance, February 18, 2021, p. 33, https://www.cdfifund.gov/sites/, February 18, 2021, p. 33, https://www.cdfifund.gov/sites/
cdfi/files/2021-02/3.%20FA%20Application%20Guidance%20FY%202021.pdf. The CDFI Fund appears to use the cdfi/files/2021-02/3.%20FA%20Application%20Guidance%20FY%202021.pdf. The CDFI Fund appears to use the
terms terms target market and and eligible market interchangeably. interchangeably.
25 For more information about equity investments, see Beth Lipson, “Equity Equivalent Investments,” 25 For more information about equity investments, see Beth Lipson, “Equity Equivalent Investments,” Community
Investments, vol. 14, no. 1 (March 2002), pp. 10-12, https://www.cdfifund.gov/sites/cdfi/files/documents/(22)-equity-, vol. 14, no. 1 (March 2002), pp. 10-12, https://www.cdfifund.gov/sites/cdfi/files/documents/(22)-equity-
equivalent-investments.pdf. For more information about Empowerment Zones and Enterprise Communities, see CRS equivalent-investments.pdf. For more information about Empowerment Zones and Enterprise Communities, see CRS
Report R41639, Report R41639, Empowerment Zones, Enterprise Communities, and Renewal Communities: Comparative Overview
and Analysis, by Donald J. Marples. , by Donald J. Marples.
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Community Development Financial Institutions (CDFIs): Overview and Selected Issues

~~The CDFI Fund administers the Bank Enterprise Award (BEA), which relies upon two~~
~~definitions—distressed communities and persistent poverty counties (PPCs)—to define the~~
~~market that a CDFI bank must serve to qualify for the award.~~
• A distressed community must be a continuous area of general local government A distressed community must be a continuous area of general local government
that (1) has a population of at least 4,000 if located in a metropolitan statistical that (1) has a population of at least 4,000 if located in a metropolitan statistical
area; (2) has a population of at least 1,000 in nonmetropolitan areas; or (3) is area; (2) has a population of at least 1,000 in nonmetropolitan areas; or (3) is
located entirely within an Indian reservation.26 Additionally, at least 30% of located entirely within an Indian reservation.26 Additionally, at least 30% of
eligible residents in the community must have incomes below the national eligible residents in the community must have incomes below the national
poverty level (as published by the U.S. Census Bureau), and the community must poverty level (as published by the U.S. Census Bureau), and the community must
have an unemployment rate at least 1.5 times greater than the national average have an unemployment rate at least 1.5 times greater than the national average
(as determined by the U.S. Bureau of Labor Statistics’ most recent data).27 (as determined by the U.S. Bureau of Labor Statistics’ most recent data).27
• A PPC is any county, including county equivalent areas in Puerto Rico, that has A PPC is any county, including county equivalent areas in Puerto Rico, that has
had 20% or more of its population living in poverty over the past 30 years or any had 20% or more of its population living in poverty over the past 30 years or any
other territory or possession of the United States that has had 20% or more of its other territory or possession of the United States that has had 20% or more of its
population living in poverty over the past 30 years, as measured by the U.S. population living in poverty over the past 30 years, as measured by the U.S.
Census Bureau.28 PPCs do not need to be located in a CDFI’s approved target Census Bureau.28 PPCs do not need to be located in a CDFI’s approved target
market. However, only qualified activities that occur in areas determined by the market. However, only qualified activities that occur in areas determined by the
CDFI Fund to be distressed communities will count toward eligibility for a BEA CDFI Fund to be distressed communities will count toward eligibility for a BEA
award.29 The CDFI Fund adopted these administrative procedures to ensure that award.29 The CDFI Fund adopted these administrative procedures to ensure that
at least 10% of funds designated for the BEA are used to support PPCs.30 at least 10% of funds designated for the BEA are used to support PPCs.30
The CDFI Fund also relies upon CDFIs to serve communities with specific needs. In addition to The CDFI Fund also relies upon CDFIs to serve communities with specific needs. In addition to
the PPCs, the CDFI Fund provides supplementary awards to support the following programs: the PPCs, the CDFI Fund provides supplementary awards to support the following programs:
• The Healthy Food Financing Initiative is part of a multiagency effort to combat The Healthy Food Financing Initiative is part of a multiagency effort to combat
food deserts.31 The CDFI Fund provides grants to CDFIs that subsequently target food deserts.31 The CDFI Fund provides grants to CDFIs that subsequently target
organizations serving low-income neighborhoods with limited access to organizations serving low-income neighborhoods with limited access to
affordable and nutritious food. affordable and nutritious food.
• The CDFI Fund initiated a capacity-building program to expand credit and other The CDFI Fund initiated a capacity-building program to expand credit and other
financial services to people with disabilities. Disabilities may increase the financial services to people with disabilities. Disabilities may increase the
difficulty to maintain gainful employment, thus increasing the difficulty to difficulty to maintain gainful employment, thus increasing the difficulty to
qualify for financial loan products provided by traditional financial institutions. qualify for financial loan products provided by traditional financial institutions.

The demographic characteristics for this program include people with autism, veterans, elderly, and generally people who may be impaired from working.32 26 12 C.F.R. §1806.200(b)(1). 26 12 C.F.R. §1806.200(b)(1).
27 See CDFI Fund, “Bank Enterprise Award Program,” https://www.cdfifund.gov/programs-training/programs/bank-27 See CDFI Fund, “Bank Enterprise Award Program,” https://www.cdfifund.gov/programs-training/programs/bank-
enterprise-award. enterprise-award.
28 Specifically, the data from U.S. Census Bureau includes the decennial censuses, the American Community Survey, 28 Specifically, the data from U.S. Census Bureau includes the decennial censuses, the American Community Survey,
and the Island Areas Decennial Census. For more information, see “Persistent Poverty Counties—CDFI Fund,” and the Island Areas Decennial Census. For more information, see “Persistent Poverty Counties—CDFI Fund,”
https://view.officeapps.live.com/op/view.aspx?src=https://view.officeapps.live.com/op/view.aspx?src=
https%3A%2F%2Fwww.cdfifund.gov%2Fsites%2Fcdfi%2Ffiles%2F2021-https%3A%2F%2Fwww.cdfifund.gov%2Fsites%2Fcdfi%2Ffiles%2F2021-
05%2F12_FY21_CDFI_NACA_Persistent_Poverty_Counties_2011_2015_ACS_and_Island_Areas_Decennial_Census05%2F12_FY21_CDFI_NACA_Persistent_Poverty_Counties_2011_2015_ACS_and_Island_Areas_Decennial_Census
.xlsx. .xlsx.
29 See CDFI Fund, 29 See CDFI Fund, Bank Enterprise Award Program 2020 CIMS User Instructions, https://www.cdfifund.gov/sites/, https://www.cdfifund.gov/sites/
cdfi/files/documents/7.-fy-2020-bea-program-application-cims-instructions.pdf. cdfi/files/documents/7.-fy-2020-bea-program-application-cims-instructions.pdf.
30 See CDFI Fund, 30 See CDFI Fund, Expanding Opportunity: The CDFI Fund’s FY 2019 Year in Review, https://www.cdfifund.gov/, https://www.cdfifund.gov/
sites/cdfi/files/documents/cdfi_annual-report-2019_final-3.30.20_508_final.pdf. sites/cdfi/files/documents/cdfi_annual-report-2019_final-3.30.20_508_final.pdf.
31 Other agencies involved in the HHFI include the Departments of 31 Other agencies involved in the HHFI include the Departments of the Treasury, Agriculture, and Health and Human Treasury, Agriculture, and Health and Human
Services. Services.
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~The demographic characteristics for this program include people with autism,~~
~~veterans, elderly, and generally people who may be impaired from working.32~~
32 See CDFI Fund, “Access for All: Expanding CDFI Market Impact in the Disability Community,” https://www.cdfifund.gov/programs-training/training-ta/access-for-all; and CDFI Fund, Expanding the Capacity of CDFIs to Serve People with Disabilities, December 4-5, 2019, https://www.cdfifund.gov/sites/cdfi/files/documents/in-person-workshop-training-presentation.pdf. Congressional Research Service 6 Community Development Financial Institutions (CDFIs): Overview and Selected Issues • The Economic Mobility Corps (EMC) is a joint initiative of the CDFI Fund and The Economic Mobility Corps (EMC) is a joint initiative of the CDFI Fund and
AmeriCorps designed to enhance the capacity of CDFIs to provide financial AmeriCorps designed to enhance the capacity of CDFIs to provide financial
literacy, financial planning, budgeting, saving, and other financial counseling.33 literacy, financial planning, budgeting, saving, and other financial counseling.33
EMC volunteers receive training in financial counseling and financial literary and EMC volunteers receive training in financial counseling and financial literary and
are then placed in various CDFIs to work with residents in target markets and are then placed in various CDFIs to work with residents in target markets and
eligible markets.34 Any organization—and not just CDFIs—may apply for EMC eligible markets.34 Any organization—and not just CDFIs—may apply for EMC
awards to place AmeriCorps service volunteers in CDFIs. awards to place AmeriCorps service volunteers in CDFIs.
Since October 1, 2012, CDFIs have been required to use the U.S. Census Bureau data, available from CDFI Information Mapping System (CIMS), to designate and reaffirm their target markets.35 In 2016, the CDFI Fund required CDFIs to submit Annual Certification and Data Collection In 2016, the CDFI Fund required CDFIs to submit Annual Certification and Data Collection
Reports (ACR).Reports (ACR).3536 The CDFI Fund uses ACRs to ensure that its awards are disbursed to The CDFI Fund uses ACRs to ensure that its awards are disbursed to
intermediaries predominantly engaged with serving the people and communities consistent with intermediaries predominantly engaged with serving the people and communities consistent with
its mission. ACR data may also facilitate better understanding of the types of financial products its mission. ACR data may also facilitate better understanding of the types of financial products
obtained by customers and the development of a policy map comprised of CDFI target markets. obtained by customers and the development of a policy map comprised of CDFI target markets.
In 2020, the CDFI Fund solicited public comments on proposed data modifications to ACR and to In 2020, the CDFI Fund solicited public comments on proposed data modifications to ACR and to
introduce the Certification Transaction Level Report, which is designed to standardize and introduce the Certification Transaction Level Report, which is designed to standardize and
automate the data collection process.automate the data collection process.3637 Additionally, Additionally, ~~the CDFI Information Mapping System~~
~~(CIMS)~~CIMS, which maps census tracts and counties based upon the CDFI Fund’s various program , which maps census tracts and counties based upon the CDFI Fund’s various program
criteria, would identify the localities that either fully or partially qualify as distressed criteria, would identify the localities that either fully or partially qualify as distressed
communities.communities.~~37 Since~~38 On October 1, October 1, ~~2012, CDFIs have been required to use the U.S. Census Bureau~~
~~data, available at CIMS, to designate and reaffirm their target markets.38~~
~~Banking Deserts, Remote Banking, and Physical CDFI Locations~~
~~A banking desert exists in a census tract area with no physical financial institutions, such as a credit union or bank~~
branch, located within a 10-mile radius from the tract’s center.39 (In addition to banks and credit unions, a financial

~~32 See CDFI Fund, “Access for All: Expanding CDFI Market Impact in the Disability Community,”~~
~~https://www.cdfifund.gov/programs-training/training-ta/access-for-all; and CDFI Fund,~~ ~~Expanding the Capacity of~~
~~CDFIs to Serve People with Disabilities, December 4-5, 2019, https://www.cdfifund.gov/sites/cdfi/files/documents/in-~~
~~person-workshop-training-presentation.pdf.~~
2022, the CDFI Fund temporarily paused the acceptance of new applications and target market modification requests to update and test its reporting tools.39 The CDFI Fund announced that operations were expected to resume in the “fall of 2023.”40 33 See CDFI Fund, “Apply Now for $1.9 Million in FY 2022 Economic Mobility Corps Funding,” September 24, 2021, 33 See CDFI Fund, “Apply Now for $1.9 Million in FY 2022 Economic Mobility Corps Funding,” September 24, 2021,
https://www.cdfifund.gov/node/1004951; and AmeriCorps, “AmeriCorps and CDFI Fund Launch Economic Mobility https://www.cdfifund.gov/node/1004951; and AmeriCorps, “AmeriCorps and CDFI Fund Launch Economic Mobility
Corps,” press release, August 11, 2021, https://americorps.gov/newsroom/press-release/americorps-cdfi-fund-launch-Corps,” press release, August 11, 2021, https://americorps.gov/newsroom/press-release/americorps-cdfi-fund-launch-
economic-mobility-corps. For more information about AmeriCorp, see CRS Report RL33931, economic-mobility-corps. For more information about AmeriCorp, see CRS Report RL33931, The Corporation for
National and Community Service: Overview of Programs and Funding, by Joselynn H. Fountain and Abigail R. , by Joselynn H. Fountain and Abigail R.
Overbay. Overbay.
34 For more information, see CRS Report R46941, 34 For more information, see CRS Report R46941, Financial Literacy and Financial Education Policy Issues, by , by
Cheryl R. Cooper. Cheryl R. Cooper.
35 35 See CDFI Fund, “Target Markets Based on 2011-2015 American Community Survey Census Data,” October 1, 2018, https://www.cdfifund.gov/news/325. 36 See CDFI Fund, “CDFI Certification, Step 2: Reporting,” https://www.cdfifund.gov/programs-training/certification/ See CDFI Fund, “CDFI Certification, Step 2: Reporting,” https://www.cdfifund.gov/programs-training/certification/
cdfi/reporting-step. cdfi/reporting-step.
3637 See CDFI Fund, “Agency Information Collection Activities; Proposed Collect: Comment Request,” 85 See CDFI Fund, “Agency Information Collection Activities; Proposed Collect: Comment Request,” 85 Federal
Register 27274-27275, May 7, 2020; and CDFI Fund, “Annual Certification and Data Collection Report and 27274-27275, May 7, 2020; and CDFI Fund, “Annual Certification and Data Collection Report and
Certification Transaction Level Report: Overview of Request for Public Comment,” May 2020, Certification Transaction Level Report: Overview of Request for Public Comment,” May 2020,
https://www.cdfifund.gov/sites/cdfi/files/documents/slides-ctlr-and-acr-may-final.pdf. https://www.cdfifund.gov/sites/cdfi/files/documents/slides-ctlr-and-acr-may-final.pdf.
3738 See CDFI Fund, “Community Development Financial Institutions Fund Mapping System (CIMS),” See CDFI Fund, “Community Development Financial Institutions Fund Mapping System (CIMS),”
https://www.cdfifund.gov/Pages/mapping-system.aspx. https://www.cdfifund.gov/Pages/mapping-system.aspx.
~~38 See CDFI Fund, “Target Markets Based on 2011-2015 American Community Survey Census Data,” October 1,~~
~~2018, https://www.cdfifund.gov/news/325.~~
~~39 See Drew Dahl and Michelle Franke, “Banking Deserts Become a Concern as Branches Dry Up,” Federal Reserve~~
~~Bank of St. Louis, July 25, 2017, https://www.stlouisfed.org/publications/regional-economist/second-quarter-2017/~~
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

39 For more information, see CDFI Fund, “CDFI Fund Certification Blackout Period Frequently Asked Questions,” https://www.cdfifund.gov/programs-training/certification/cdfi/faqs. 40 See CDFI Fund, “Further Updates on Revisions to the CDFI Certification Application,” May 1, 2023, https://www.cdfifund.gov/news/520. Congressional Research Service 7 Community Development Financial Institutions (CDFIs): Overview and Selected Issues Banking Deserts, Remote Banking, and Physical CDFI Locations A banking desert exists in a census tract area with no physical financial institutions, such as a credit union or bank branch, located within a 10-mile radius from the tract’s center.41 (In addition to banks and credit unions, a financial services desert also lacks a physical presence of check-cashing, payday loan, and other non-bank alternative financial also lacks a physical presence of check-cashing, payday loan, and other non-bank alternative financial
service providers.) Areas with banking deserts tend to have low-income and minority populations, higher housing service providers.) Areas with banking deserts tend to have low-income and minority populations, higher housing
vacancy rates, and are more likely to occur in rural tracts.vacancy rates, and are more likely to occur in rural tracts.4042 The concern that banking deserts may rise increases The concern that banking deserts may rise increases
with the decline in the number of physical branches.with the decline in the number of physical branches.4143
Although the demand for physical branch services may have decreased more broadly as online banking services Although the demand for physical branch services may have decreased more broadly as online banking services
have grown, a physical CDFI location may have grown, a physical CDFI location may ~~still~~ stil be useful for the be useful for the ~~following~~fol owing reasons. reasons.4244 Banking deserts, particularly Banking deserts, particularly
those in rural areas, may lack broadband access.those in rural areas, may lack broadband access.4345 Online financial services cannot be provided without broadband Online financial services cannot be provided without broadband
access as well as secure (encrypted) WiFi access. In addition, rather than access as well as secure (encrypted) WiFi access. In addition, rather than ~~collecting~~col ecting traditional financial information traditional financial information
in digital form, CDFIs in digital form, CDFIs ~~collect~~col ect soft information, which requires detailed elaboration and is normally information, which requires detailed elaboration and is normally ~~collected~~col ected from from
customers in person at physical locations.customers in person at physical locations.4446 Furthermore, CDFIs may need to stay in close geographical proximity Furthermore, CDFIs may need to stay in close geographical proximity
to their customers to monitor their changing financial circumstances as well as any to their customers to monitor their changing financial circumstances as well as any ~~collateral~~col ateral (e.g., local real estate) (e.g., local real estate)
used to secure any loans. For these reasons, even though offering more web-based and mobile banking services used to secure any loans. For these reasons, even though offering more web-based and mobile banking services
may reduce costs, CDFIs may face challenges attempting to automate some services.may reduce costs, CDFIs may face challenges attempting to automate some services.4547 Generally speaking, banks Generally speaking, banks
(or other financial institutions) in vulnerable locations tend to be vulnerable themselves to the localized financial (or other financial institutions) in vulnerable locations tend to be vulnerable themselves to the localized financial
risks faced by their clientele.risks faced by their clientele.4648
The Higher Costs to Serve and Service Target Markets
Given the target market requirements, certified CDFIs are likely to be principally engaged in Given the target market requirements, certified CDFIs are likely to be principally engaged in risk-
based or or subprime lending. lending.4749 CDFI customers with impaired or limited credit histories typically CDFI customers with impaired or limited credit histories typically

41 See Drew Dahl and Michelle Franke, “Banking Deserts Become a Concern as Branches Dry Up,” Federal Reserve Bank of St. Louis, July 25, 2017, https://www.stlouisfed.org/publications/regional-economist/second-quarter-2017/banking-deserts-become-a-concern-as-branches-dry-up. Similarly, a Community Reinvestment Act desert is a location banking-deserts-become-a-concern-as-branches-dry-up. Similarly, a Community Reinvestment Act desert is a location
where banks do not have a large concentration of deposits. See OCC, “Community Reinvestment Act Regulations,” 85where banks do not have a large concentration of deposits. See OCC, “Community Reinvestment Act Regulations,” 85
Federal Register 34748, June 5, 2020. 34748, June 5, 2020.
4042 See CDFI Fund, See CDFI Fund, BEA Program Awardee Provides Affordable Banking Access to Rural Alabamans: United Bank,
Atmore, Alabama, January 13, 2020, https://www.cdfifund.gov/sites/cdfi/files/documents/bea-impact-story-1-13-, January 13, 2020, https://www.cdfifund.gov/sites/cdfi/files/documents/bea-impact-story-1-13-
20c.pdf. 20c.pdf.
4143 See Dahl and Franke, See Dahl and Franke, Banking Deserts Become a Concern. .
4244 See Donald P. Morgan, Maxim L. Pinkovskiy, and Bryan Yang, “Banking Deserts, Branch Closings, and Soft See Donald P. Morgan, Maxim L. Pinkovskiy, and Bryan Yang, “Banking Deserts, Branch Closings, and Soft
Information,” Federal Reserve Bank of New York, March 7, 2016, https://libertystreeteconomics.newyorkfed.org/2016/Information,” Federal Reserve Bank of New York, March 7, 2016, https://libertystreeteconomics.newyorkfed.org/2016/
03/banking-deserts-branch-closings-and-soft-information/. 03/banking-deserts-branch-closings-and-soft-information/.
4345 Broadband access refers to the ability to transmit data over a high-speed internet connection, which enhances refers to the ability to transmit data over a high-speed internet connection, which enhances
commercial, educational, and social activities. See U.S. Government Accountability Office (GAO), commercial, educational, and social activities. See U.S. Government Accountability Office (GAO), Broadband: FCC
Is Taking Steps to Accurately Map Locations That Lack Access, September 2021, GAO-21-104447, , September 2021, GAO-21-104447,
https://www.gao.gov/assets/720/716822.pdf. https://www.gao.gov/assets/720/716822.pdf.
4446 For more information about soft information, see CRS In Focus IF11742, For more information about soft information, see CRS In Focus IF11742, Too Small to Collect Big Data: Financial
Inclusion Implications, by Darryl E. Getter; and Morgan, Pinkovskiy, and Yang, “Banking Deserts, Branch Closings, , by Darryl E. Getter; and Morgan, Pinkovskiy, and Yang, “Banking Deserts, Branch Closings,
and Soft Information.” and Soft Information.”
4547 See Thomas F. Siems and Jonathan A. Scott, “Adapting to the Digital Age: Community Bank Tech Usage,” See Thomas F. Siems and Jonathan A. Scott, “Adapting to the Digital Age: Community Bank Tech Usage,”
Conference of State Bank Supervisors, February 15, 2022, https://www.csbs.org/newsroom/adapting-digital-age-Conference of State Bank Supervisors, February 15, 2022, https://www.csbs.org/newsroom/adapting-digital-age-
community-bank-tech-usage; and CDFI Fund, community-bank-tech-usage; and CDFI Fund, Training Module: Organic Capital Growth—New Revenue Strategies, ,
https://www.cdfifund.gov/sites/cdfi/files/Documents/7%20Revenue%20Strategies_Training%20Deck.pdf. https://www.cdfifund.gov/sites/cdfi/files/Documents/7%20Revenue%20Strategies_Training%20Deck.pdf.
4648 See Dahl and Franke, See Dahl and Franke, Banking Deserts Become a Concern; and David Benson, Serafin Grundl, and Richard Windle, ; and David Benson, Serafin Grundl, and Richard Windle,
“How Do Rural and Urban Retail Banking Customers Differ?,” Board of Governors of the Federal Reserve System, “How Do Rural and Urban Retail Banking Customers Differ?,” Board of Governors of the Federal Reserve System,
June 12, 2020, https://www.federalreserve.gov/econres/notes/feds-notes/how-do-rural-and-urban-retail-banking-June 12, 2020, https://www.federalreserve.gov/econres/notes/feds-notes/how-do-rural-and-urban-retail-banking-
customers-differ-20200612.htm. customers-differ-20200612.htm.
4749 There is no consensus definition of There is no consensus definition of subprime relative to prime borrowers. The definitions may vary by certain relative to prime borrowers. The definitions may vary by certain
attributes (e.g., personal or business credit scores, whether a derogatory incident appears on an applicant’s credit attributes (e.g., personal or business credit scores, whether a derogatory incident appears on an applicant’s credit
history, whether the borrower received a loan from a lender specializing in lending to borrowers with impaired or history, whether the borrower received a loan from a lender specializing in lending to borrowers with impaired or ~~non-~~
~~existent credit histories). Furthermore, the financial attributes and thresholds to segment prime and subprime borrowers~~
~~can vary by credit market (e.g., automobile loan, residential mortgage, business loan). For the purposes of this report,~~
~~prime borrowers are those with traditional financial attributes that would be deemed creditworthy; subprime borrowers~~
~~are those with nontraditional financial attributes that would increase the difficulty to be approved for credit.~~(continued...)
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conduct fewer transactions with traditional depositories. conduct fewer transactions with traditional depositories.4850 Small business startups that lack Small business startups that lack
comprehensive financial and performance data or sufficient collateral to secure loans may be comprehensive financial and performance data or sufficient collateral to secure loans may be
considered subprime borrowers.considered subprime borrowers.4951 Small businesses that operate in distressed communities may Small businesses that operate in distressed communities may
also be considered subprime borrowers that face less predictable revenues streams.also be considered subprime borrowers that face less predictable revenues streams.5052 For For
example, developers of multifamily projects in CDFI target-market communities may face greater example, developers of multifamily projects in CDFI target-market communities may face greater
difficulty generating the cash flows necessary to repay loans without raising future rents on low- difficulty generating the cash flows necessary to repay loans without raising future rents on low-
and moderate-income tenants, thus defeating the purpose of building affordable housing.and moderate-income tenants, thus defeating the purpose of building affordable housing.5153 A A
survey of CDFIs corroborates that income loss was the most significant challenge facing their survey of CDFIs corroborates that income loss was the most significant challenge facing their
clients in 2020 and 2021.clients in 2020 and 2021.5254
CDFIs, therefore, rely extensively on CDFIs, therefore, rely extensively on relationship lending, which allows lenders to better , which allows lenders to better
understand their customers’ financial risks. Although relationship lending is also important for understand their customers’ financial risks. Although relationship lending is also important for
prime borrowers, it requires even more meticulous interaction with higher-risk consumers and prime borrowers, it requires even more meticulous interaction with higher-risk consumers and
businesses located in distressed communities—and also incurs more costs. Extensive relationship businesses located in distressed communities—and also incurs more costs. Extensive relationship
lending requires gathering lending requires gathering soft information, which contains circumstantial details for borrowers , which contains circumstantial details for borrowers
with less traditional financial information and records.with less traditional financial information and records.5355 By contrast, traditional data—such as By contrast, traditional data—such as
credit scores, recent pay stubs or tax returns, business licenses for self-employed applicants, or credit scores, recent pay stubs or tax returns, business licenses for self-employed applicants, or
other documentation pertaining to the ability to repay loans—is easily accessible and often other documentation pertaining to the ability to repay loans—is easily accessible and often
convertible to a digital format.convertible to a digital format.5456 For CDFIs, originating loans—evaluating lending risks, For CDFIs, originating loans—evaluating lending risks,
providing financial education programs, providing flexible underwriting criteria, offering less providing financial education programs, providing flexible underwriting criteria, offering less
mainstream and more specialized financial products (e.g., credit repair, debt consolidation, and mainstream and more specialized financial products (e.g., credit repair, debt consolidation, and
small-dollar loans for emergencies), and pricing loans—is typically a more manual process and small-dollar loans for emergencies), and pricing loans—is typically a more manual process and
generally more costly relative to automated processes that can be more readily adopted for generally more costly relative to automated processes that can be more readily adopted for
traditional customers.traditional customers.55

4857 nonexistent credit histories). Furthermore, the financial attributes and thresholds to segment prime and subprime borrowers can vary by credit market (e.g., automobile loan, residential mortgage, business loan). For the purposes of this report, prime borrowers are those with traditional financial attributes that would be deemed creditworthy; subprime borrowers are those with nontraditional financial attributes that would increase the difficulty to be approved for credit. 50 See Lehn Benjamin, Julia Sass Rubin, and Sean Zielenbach, “Community Development Financial Institutions: See Lehn Benjamin, Julia Sass Rubin, and Sean Zielenbach, “Community Development Financial Institutions:
Current Issues and Future Prospects,” Current Issues and Future Prospects,” Journal of Urban Affairs, vol. 26, no. 2 (2004), pp. 177-195. , vol. 26, no. 2 (2004), pp. 177-195.
4951 See CRS Report R45878, See CRS Report R45878, Small Business Credit Markets and Selected Policy Issues, by Darryl E. Getter. , by Darryl E. Getter.
5052 See Board of Governors of the Federal Reserve System, “Community Development Financial Institutions: Promoting See Board of Governors of the Federal Reserve System, “Community Development Financial Institutions: Promoting
Economic Growth and Opportunity, Speech by Chairman Ben S. Bernanke,” November 1, 2006, Economic Growth and Opportunity, Speech by Chairman Ben S. Bernanke,” November 1, 2006,
https://www.federalreserve.gov/newsevents/speech/bernanke20061101a.htm; and Carla Dickstein et al., https://www.federalreserve.gov/newsevents/speech/bernanke20061101a.htm; and Carla Dickstein et al., The Role of
CDFIs in Addressing the Subprime Mortgage Market: A Case Analysis of New England, CDFI Fund, October 2008, , CDFI Fund, October 2008,
https://www.cdfifund.gov/sites/cdfi/files/documents/the-role-of-cdfis-in-addressing-the-subprime-mortgage-market-a-https://www.cdfifund.gov/sites/cdfi/files/documents/the-role-of-cdfis-in-addressing-the-subprime-mortgage-market-a-
case-analysis-of-new-england.pdf. case-analysis-of-new-england.pdf.
5153 See CRS Report R46480, See CRS Report R46480, Multifamily Housing Finance and Selected Policy Issues, by Darryl E. Getter. , by Darryl E. Getter.
5254 See Carpenter et al., See Carpenter et al., 2021 CDFI Survey Key Findings. .
5355 See Matt Hanauer et al., “Community Banks’ Ongoing Role in the U.S. Economy,” Federal Reserve Bank of Kansas See Matt Hanauer et al., “Community Banks’ Ongoing Role in the U.S. Economy,” Federal Reserve Bank of Kansas
City, June 4, 2021, https://www.kansascityfed.org/research/economic-review/community-banks-ongoing-role-in-the-City, June 4, 2021, https://www.kansascityfed.org/research/economic-review/community-banks-ongoing-role-in-the-
us-economy/; and Board of Governors of the Federal Reserve System, “Community Development Financial us-economy/; and Board of Governors of the Federal Reserve System, “Community Development Financial
Institutions.” Institutions.”
5456 See CRS Report R44125, See CRS Report R44125, Consumer Credit Reporting, Credit Bureaus, Credit Scoring, and Related Policy Issues, by , by
Cheryl R. Cooper and Darryl E. Getter. Cheryl R. Cooper and Darryl E. Getter.
5557 With traditional, more standardized financial risks, borrowers can obtain more competitively priced loans. For more With traditional, more standardized financial risks, borrowers can obtain more competitively priced loans. For more
information regarding the costs of manual relative to automated underwriting of consumer loans, see Consumer information regarding the costs of manual relative to automated underwriting of consumer loans, see Consumer
Financial Protection Bureau, “Payday, Vehicle Title, and Certain High-Cost Installment Loans,” 82Financial Protection Bureau, “Payday, Vehicle Title, and Certain High-Cost Installment Loans,” 82 Federal Register
54472-54921, November 17, 2017. For more information on the use of quantifiable metrics by large banks and 54472-54921, November 17, 2017. For more information on the use of quantifiable metrics by large banks and
automated underwriting, see FDIC, automated underwriting, see FDIC, 2018 FDIC Small Business Lending Survey, https://www.fdic.gov/bank/historical/, https://www.fdic.gov/bank/historical/
sbls/full-survey.pdf; American Bankers Association, sbls/full-survey.pdf; American Bankers Association, The State of Digital Lending: Results of an American Bankers
~~Association Research Study, 2018, https://www.aba.com/Products/Endorsed/Documents/ABADigitalLending-~~
~~Report.pdf; and CRS In Focus IF11742, Too Small to Collect Big Data: Financial Inclusion Implications, by Darryl E.~~
~~Getter.~~(continued...)
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After origination, loans require After origination, loans require servicing, which can be done by a lender or contracted to a third , which can be done by a lender or contracted to a third
party for a fee. For performing loans, servicing entails collecting and remitting the principal and party for a fee. For performing loans, servicing entails collecting and remitting the principal and
interest payments. For a interest payments. For a ~~non-performing~~nonperforming loan, meaning that payment is not made in full or behind loan, meaning that payment is not made in full or behind
schedule, servicing requires greater monitoring of and interfacing with borrowers. Servicers may schedule, servicing requires greater monitoring of and interfacing with borrowers. Servicers may
have to deploy various loss mitigation strategies such as forbearance or restructuring the initial have to deploy various loss mitigation strategies such as forbearance or restructuring the initial
loan terms. Thus, as in the case of underwriting, servicing CDFIs’ customers is also more costly loan terms. Thus, as in the case of underwriting, servicing CDFIs’ customers is also more costly
due to greater interaction with higher-risk customers to avert defaults.due to greater interaction with higher-risk customers to avert defaults.5658
In small business lending, prospective clients sometimes lack the eligible collateral to secure a In small business lending, prospective clients sometimes lack the eligible collateral to secure a
loan.loan.5759 In these cases, lenders may require In these cases, lenders may require loan (debt) covenants, which are contractual , which are contractual
requirements to assure that a borrower’s initial financial standing at underwriting remains in place requirements to assure that a borrower’s initial financial standing at underwriting remains in place
over the life of a loan.over the life of a loan.5860 For the duration of a loan, a borrower would be required to abide by one For the duration of a loan, a borrower would be required to abide by one
or more covenant terms such as providing audited financial statements, maintaining a minimum or more covenant terms such as providing audited financial statements, maintaining a minimum
cash reserve, maintaining a constant debt-to-net assets ratio or other relevant financial ratios, or cash reserve, maintaining a constant debt-to-net assets ratio or other relevant financial ratios, or
limiting new acquisitions or assets sales. Loan covenants, therefore, allow lenders to monitor limiting new acquisitions or assets sales. Loan covenants, therefore, allow lenders to monitor
changes in borrowers’ financial conditions and better anticipate changes in default risk. changes in borrowers’ financial conditions and better anticipate changes in default risk.
Borrowers in violation of loan covenants typically risk paying penalties, having their loan rates Borrowers in violation of loan covenants typically risk paying penalties, having their loan rates
increased, having to put forth more collateral, or having their loans terminated. increased, having to put forth more collateral, or having their loans terminated.
CDFI lenders, however, are likely to make greater use of loss mitigation strategies—rather than CDFI lenders, however, are likely to make greater use of loss mitigation strategies—rather than
loan covenants with stringent financial consequences—to address higher default risks of small loan covenants with stringent financial consequences—to address higher default risks of small
business borrowers operating in their target market areas. Furthermore, in comparison to non-business borrowers operating in their target market areas. Furthermore, in comparison to non-
CDFIs that deploy loan covenants that may contain financial consequences, CDFI lenders bear CDFIs that deploy loan covenants that may contain financial consequences, CDFI lenders bear
more costs following a rise in default risk especially with smaller size loans that are less likely to more costs following a rise in default risk especially with smaller size loans that are less likely to
generate enough revenues to offset the additional servicing costs. In sum, CDFI lending costs generate enough revenues to offset the additional servicing costs. In sum, CDFI lending costs
more per transaction (relative to more traditional lending) given that the loan origination, more per transaction (relative to more traditional lending) given that the loan origination,
servicing, and monitoring tasks are more demanding and labor intensive. servicing, and monitoring tasks are more demanding and labor intensive.
Evaluating Performance and Effectiveness of CDFIs
CDFIs fund a significant portion of their lending activities with financial awards from both public CDFIs fund a significant portion of their lending activities with financial awards from both public
and private sector sources. By subsidizing the heightened costs and risks, the public and private and private sector sources. By subsidizing the heightened costs and risks, the public and private
sector funding allows CDFIs to facilitate the transitioning of sector funding allows CDFIs to facilitate the transitioning of ~~non-traditional~~nontraditional customers into customers into
mainstream financial markets, thus furthering financial inclusion goals. (In this report, the section mainstream financial markets, thus furthering financial inclusion goals. (In this report, the section
entitled entitled “Public and Private Funding Sources” summarizes the various funding awards and summarizes the various funding awards and
fundraising activities undertaken by CDFIs.) In view of the subsidies, public and private fundraising activities undertaken by CDFIs.) In view of the subsidies, public and private
stakeholders want to better understand CDFI performance and effectiveness. Measuring these stakeholders want to better understand CDFI performance and effectiveness. Measuring these
criteria is difficult as a result of various data issues, discussed in this section. criteria is difficult as a result of various data issues, discussed in this section.

56 Association Research Study, 2018, https://www.aba.com/Products/Endorsed/Documents/ABADigitalLending-Report.pdf; and CRS In Focus IF11742, Too Small to Collect Big Data: Financial Inclusion Implications, by Darryl E. Getter. 58 See Nancy Andrews, “Strength in Adversity: Community Capital Faces Up to the Economic Crisis,” See Nancy Andrews, “Strength in Adversity: Community Capital Faces Up to the Economic Crisis,” Federal Reserve
Bank of San Francisco Community Investments, vol. 21, no. 3 (Winter 2009/2010), p. 8, https://www.frbsf.org/, vol. 21, no. 3 (Winter 2009/2010), p. 8, https://www.frbsf.org/
community-development/files/andrews_nancy.pdf; and Federal Housing Finance Agency (FHFA), “Federal Home community-development/files/andrews_nancy.pdf; and Federal Housing Finance Agency (FHFA), “Federal Home
Loan Bank Membership for Community Development Financial Institutions,” 75Loan Bank Membership for Community Development Financial Institutions,” 75 Federal Register 678-704, January 5, 678-704, January 5,
2010. 2010.
5759 For example, if a restaurant defaulted on a loan, a lender may not be able to recoup losses by attempting to resell an For example, if a restaurant defaulted on a loan, a lender may not be able to recoup losses by attempting to resell an
inventory of perishable food items. inventory of perishable food items.
5860 See Ronald J. Mann, “The Role of Secured Credit in Small-Business Lending,” See Ronald J. Mann, “The Role of Secured Credit in Small-Business Lending,” Georgetown Law Journal, vol. 86, , vol. 86,
no. 1 (1997), pp. 1-44. no. 1 (1997), pp. 1-44.
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Evaluating the Financial Performance of CDFIs
Prudential regulators generally require their regulated entities to demonstrate various levels of Prudential regulators generally require their regulated entities to demonstrate various levels of
resiliency to key financial risks linked to their product lines.resiliency to key financial risks linked to their product lines.5961 Tailoring prudential standards for Tailoring prudential standards for
the CDFI industry is challenging because (1) CDFI financial institutions vary by type, and (2) the CDFI industry is challenging because (1) CDFI financial institutions vary by type, and (2)
each CDFI institution—including the ones that are of the same type—have portfolios consisting each CDFI institution—including the ones that are of the same type—have portfolios consisting
of localized and highly customized loans.of localized and highly customized loans.6062 Despite these challenges, the CDFI Fund has adopted Despite these challenges, the CDFI Fund has adopted
a set of minimum and prudent standards (MAPS), some described a set of minimum and prudent standards (MAPS), some described inin Table 1 at the end of this at the end of this
section, similar to the CAMELS composite rating system for prudentially regulated section, similar to the CAMELS composite rating system for prudentially regulated
depositories.depositories.6163 Because CDFI depositories already have government prudential regulators, the Because CDFI depositories already have government prudential regulators, the
MAPS are particularly useful to assess MAPS are particularly useful to assess ~~non-depository~~nondepository CDFIs such as loan funds that lack CDFIs such as loan funds that lack
prudential regulators.prudential regulators.6264
CDFIs are required to report and substantiate MAPS metrics to signal their expertise in risk-based CDFIs are required to report and substantiate MAPS metrics to signal their expertise in risk-based
lending when applying for awards and grants as well as when raising funds from both the public lending when applying for awards and grants as well as when raising funds from both the public
and private sectors. CDFIs must demonstrate financial health to the CDFI Fund as well as other and private sectors. CDFIs must demonstrate financial health to the CDFI Fund as well as other
sponsors to avoid what may be referred to as a sponsors to avoid what may be referred to as a misaligned incentive problem in public-private problem in public-private
partnerships, in which one partner shifts larger shares of risks and costs to the other partner.partnerships, in which one partner shifts larger shares of risks and costs to the other partner.6365 In In
this case, acceptable MAPS demonstrate that a CDFI is not merely making higher-risk loans that this case, acceptable MAPS demonstrate that a CDFI is not merely making higher-risk loans that
would require costly loss mitigation. Having acceptable MAPS arguably reflects best practices would require costly loss mitigation. Having acceptable MAPS arguably reflects best practices
and possibly some innovation in serving the higher-risk market segment. The CDFI Fund, and possibly some innovation in serving the higher-risk market segment. The CDFI Fund,
therefore, takes into account MAPS (along with factors such as past track record) when therefore, takes into account MAPS (along with factors such as past track record) when
determining whether and how much financial support to provide CDFI applicants. determining whether and how much financial support to provide CDFI applicants.

59 61 Risks vary among financial institutions based upon the types of financial services they provide. For example, Risks vary among financial institutions based upon the types of financial services they provide. For example,
institutions that lend or provide insurance—but do not provide savings or checking services—face default risk and little institutions that lend or provide insurance—but do not provide savings or checking services—face default risk and little
daily liquidity risk. Depositories, however, face default risk and higher levels of liquidity risk due to their daily cash daily liquidity risk. Depositories, however, face default risk and higher levels of liquidity risk due to their daily cash
needs. Financial institutions specializing in higher-risk subprime borrowers may face higher default risks relative to needs. Financial institutions specializing in higher-risk subprime borrowers may face higher default risks relative to
those that serve more traditional prime borrowers. For this reason, prudential regulations, which can frequently be those that serve more traditional prime borrowers. For this reason, prudential regulations, which can frequently be
adopted in the form of various ratio requirements, can be tailored to fit different types of institutions. adopted in the form of various ratio requirements, can be tailored to fit different types of institutions.
6062 See Opportunity Finance Network, See Opportunity Finance Network, CDFI Liquidity and Cash Management: Definitions, Practices, and Examples, ,
November 2015, https://cdn.ofn.org/uploads/2022/01/24093357/performance-counts-paper-liquidity-cash-November 2015, https://cdn.ofn.org/uploads/2022/01/24093357/performance-counts-paper-liquidity-cash-
management.pdf. management.pdf.
6163 The CAMELS acronym stands for Capital adequacy, Asset quality, Management capability, Earnings, Liquidity, and The CAMELS acronym stands for Capital adequacy, Asset quality, Management capability, Earnings, Liquidity, and
Sensitivity to various financial and market risks. A scale of 1 to 5 may be used, with 1 being the highest rating for the Sensitivity to various financial and market risks. A scale of 1 to 5 may be used, with 1 being the highest rating for the
CDFI Fund. See CDFI Fund, “Fiscal Year 2021 CDFI Rapid Response Program Application Evaluation Process,” CDFI Fund. See CDFI Fund, “Fiscal Year 2021 CDFI Rapid Response Program Application Evaluation Process,”
https://www.cdfifund.gov/sites/cdfi/files/2021-02/4.%20CDFI%20RRP%20Evaluation%20Process.pdf; and CDFI https://www.cdfifund.gov/sites/cdfi/files/2021-02/4.%20CDFI%20RRP%20Evaluation%20Process.pdf; and CDFI
Fund, “FY 2021 CDFI Program and NACA Program Base-Financial Assistance Application Evaluation Process,” Fund, “FY 2021 CDFI Program and NACA Program Base-Financial Assistance Application Evaluation Process,”
https://www.cdfifund.gov/sites/cdfi/files/2021-05/4_FY_2021_CDFI_NACA_Base_FA_Evaluation_Process.pdf. (For https://www.cdfifund.gov/sites/cdfi/files/2021-05/4_FY_2021_CDFI_NACA_Base_FA_Evaluation_Process.pdf. (For
prudential regulators of depository institutions, 1 is the highest value and 5 is the lowest value for CAMELS ratings.) prudential regulators of depository institutions, 1 is the highest value and 5 is the lowest value for CAMELS ratings.)
6264 See CDFI Fund, “Appendix B: CAMELS Key Considerations and Ratios,” https://www.cdfifund.gov/sites/cdfi/files/ See CDFI Fund, “Appendix B: CAMELS Key Considerations and Ratios,” https://www.cdfifund.gov/sites/cdfi/files/
documents/camels-key-considerations-and-ratios.pdf; CDFI Fund, “Fiscal Year 2021 CDFI Rapid Response Program documents/camels-key-considerations-and-ratios.pdf; CDFI Fund, “Fiscal Year 2021 CDFI Rapid Response Program
Application Evaluation Process;” Oweesta Corporation, Application Evaluation Process;” Oweesta Corporation, Native CDFI Capital Access Convening 2018, June 12-14, , June 12-14,
2018, https://www.oweesta.org/wp-content/uploads/2018/07/CAMELS-Session-2018.pdf; and Bethany Chaney, 2018, https://www.oweesta.org/wp-content/uploads/2018/07/CAMELS-Session-2018.pdf; and Bethany Chaney,
Community Development Financial Institutions: A Study on Growth and Sustainability, Mary Reynolds Babcock , Mary Reynolds Babcock
Foundation, June 2011, p. 36, https://www.cdfifund.gov/sites/cdfi/files/documents/(64)-cdfis-a-study-on-growth-and-Foundation, June 2011, p. 36, https://www.cdfifund.gov/sites/cdfi/files/documents/(64)-cdfis-a-study-on-growth-and-
sustainability.pdf. The CDFI Funds uses both MAPS and MPS acronyms for minimum and prudent standards. sustainability.pdf. The CDFI Funds uses both MAPS and MPS acronyms for minimum and prudent standards.
6365 See Peter V. Schaeffer and Scott Loveridge, “Toward an Understanding of Types of Public-Private Cooperation,” See Peter V. Schaeffer and Scott Loveridge, “Toward an Understanding of Types of Public-Private Cooperation,”
Public Performance and Management Review, vol. 26, no. 2 (December 2002), pp. 169-189; and Margaret H. Lemos , vol. 26, no. 2 (December 2002), pp. 169-189; and Margaret H. Lemos
and Guy-Uriel Charles, “Public Programs, Private Financing,” and Guy-Uriel Charles, “Public Programs, Private Financing,” Law and Contemporary Problems, vol. 81, no. 137 , vol. 81, no. 137
(2018), pp. 137-160. (2018), pp. 137-160.
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In addition, MAPS are important when CDFIs seek funding from other sources. Banks require In addition, MAPS are important when CDFIs seek funding from other sources. Banks require
CDFIs to exhibit tolerable levels of financial health before providing financial support.CDFIs to exhibit tolerable levels of financial health before providing financial support.6466 The The
Federal Home Loan Bank system requires member depository institutions to have prudential Federal Home Loan Bank system requires member depository institutions to have prudential
federal or state regulators; federal or state regulators; ~~non-depository~~nondepository CDFIs must comply with MAPS to become CDFIs must comply with MAPS to become
members.members.65 67 MAPS, therefore, may provide CDFI sponsors with some indication of a CDFI’s MAPS, therefore, may provide CDFI sponsors with some indication of a CDFI’s
ability to manage risk. ability to manage risk.
Interpreting individual MAPS at face value may provide limited information about the specific Interpreting individual MAPS at face value may provide limited information about the specific
circumstances of an individual CDFI. For examplecircumstances of an individual CDFI. For example:
• The The deployment ratio, computed as the gross number of loans outstanding , computed as the gross number of loans outstanding
divided by total available funds for lending, measures the amount of a CDFI’s divided by total available funds for lending, measures the amount of a CDFI’s
available funds that have been lent or invested. Deployment ratios vary by type available funds that have been lent or invested. Deployment ratios vary by type
and among individual CDFIs.and among individual CDFIs.6668 A low deployment ratio may indicate that a CDFI A low deployment ratio may indicate that a CDFI
may need to increase lending volume. Some CDFIs, however, may not deploy all may need to increase lending volume. Some CDFIs, however, may not deploy all
of their available funding for various reasons. Some applicants in target market of their available funding for various reasons. Some applicants in target market
areas pose excessive amounts of financial risk, which could jeopardize future areas pose excessive amounts of financial risk, which could jeopardize future
public and private funding awards. Some CDFIs may lack staffing capacity to public and private funding awards. Some CDFIs may lack staffing capacity to
quickly process a volume increase in loan applications. Some CDFIs may face quickly process a volume increase in loan applications. Some CDFIs may face
greater competition with non-CDFI lenders. Some CDFI depositories may not greater competition with non-CDFI lenders. Some CDFI depositories may not
have sufficient amounts of capital or net worth reserves as required by their have sufficient amounts of capital or net worth reserves as required by their
prudential regulators to buffer against the higher amounts of risk. One study prudential regulators to buffer against the higher amounts of risk. One study
found that both banks and loan funds cited that some prospective deals pose too found that both banks and loan funds cited that some prospective deals pose too
much risk, CDFI banks in the study were more likely to cite greater competition, much risk, CDFI banks in the study were more likely to cite greater competition,
and loan funds were more likely to cite lack of staffing capacity.and loan funds were more likely to cite lack of staffing capacity.6769 A 2021 CDFI A 2021 CDFI
Survey found that over 75% of surveyed CDFIs cited limited staffing and Survey found that over 75% of surveyed CDFIs cited limited staffing and
funding as preventing them from providing more services.funding as preventing them from providing more services.6870
• The The self-sufficiency ratio, the ratio of earned income to total operating expenses , the ratio of earned income to total operating expenses
(over a year), can gauge a CDFI’s need for financial assistance. (over a year), can gauge a CDFI’s need for financial assistance.6971 Interpretation Interpretation
of the self-sufficiency ratio, however, may not be straightforward.of the self-sufficiency ratio, however, may not be straightforward.7072 The self- The self-
sufficiency ratio does not reveal information about a CDFI’s default experience. sufficiency ratio does not reveal information about a CDFI’s default experience.
A CDFI’s other MAPS—such as its delinquency ratio, loan loss reserve ratio, A CDFI’s other MAPS—such as its delinquency ratio, loan loss reserve ratio,
portfolio at risk ratio, and change in portfolio at risk ratio—would also require portfolio at risk ratio, and change in portfolio at risk ratio—would also require
examining. Nevertheless, CDFIs without prudential regulators would not be examining. Nevertheless, CDFIs without prudential regulators would not be
required to write-off nonperforming assets or halt lending following a wave of required to write-off nonperforming assets or halt lending following a wave of

64 66 Specifically, banks are allowed to make investments to CDFIs that are at least Specifically, banks are allowed to make investments to CDFIs that are at least adequately capitalized by their safety by their safety
and soundness regulators. See FDIC, and soundness regulators. See FDIC, Risk Management Manual of Examination Policies: Part II—CAMELS, 2.1
Capital, http://www.fdic.gov/regulations/safety/manual/section2-1.pdf. , http://www.fdic.gov/regulations/safety/manual/section2-1.pdf.
6567 See CRS Report R46499, See CRS Report R46499, The Federal Home Loan Bank (FHLB) System and Selected Policy Issues, by Darryl E. , by Darryl E.
Getter. Getter.
6668 See Lolita Sereleas, Ruth Barber, and Moira Warnement, See Lolita Sereleas, Ruth Barber, and Moira Warnement, Deployment Strategies for CDFI Small Business Lenders, ,
Opportunity Finance Network, January 2014, https://www.cdfifund.gov/sites/cdfi/files/documents/Opportunity Finance Network, January 2014, https://www.cdfifund.gov/sites/cdfi/files/documents/
deployment_strategies_ta_memo.pdf. deployment_strategies_ta_memo.pdf.
6769 See Sereleas, Barber, and Moira Warnement, See Sereleas, Barber, and Moira Warnement, Deployment Strategies for CDFI Small Business Lenders. .
6870 See Carpenter et al., See Carpenter et al., 2021 CDFI Survey Key Findings. .
6971 See Chaney, See Chaney, Community Development Financial Institutions. .
7072 See Valentina Hartarska, See Valentina Hartarska, Community Development Financial Institutions: Board Size and Diversity as Governance
Mechanisms, FDIC, September 2006, pp. 1-37, https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-11.pdf. , FDIC, September 2006, pp. 1-37, https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-11.pdf.
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link to page 17 link to page 17 Community Development Financial Institutions (CDFIs): Overview and Selected Issues

defaults. defaults.7173 Likewise, because CDFIs tend to quickly intervene to mitigate losses Likewise, because CDFIs tend to quickly intervene to mitigate losses
stemming from distressed loans, the efficacy of those outcomes would not stemming from distressed loans, the efficacy of those outcomes would not
necessarily be captured by those ratios and still require further scrutiny. Lastly, necessarily be captured by those ratios and still require further scrutiny. Lastly,
the self-sufficiency ratio does not distinguish between the types of financial the self-sufficiency ratio does not distinguish between the types of financial
products a CDFI offers or whether the CDFI relies more on awards or more products a CDFI offers or whether the CDFI relies more on awards or more
traditional funding. traditional funding.
Using multiple MAPS to assess CDFI performance while fulfilling their missions is still Using multiple MAPS to assess CDFI performance while fulfilling their missions is still
challenging, which may be illustrated using CDFI credit unions as an example. The CDFI Fund challenging, which may be illustrated using CDFI credit unions as an example. The CDFI Fund
reported that CDFI credit unions had the highest deployment ratios in FY2020.reported that CDFI credit unions had the highest deployment ratios in FY2020.7274 In addition, the In addition, the
mean self-sufficiency ratios of the 223 credit unions reporting in FY2020 was 1.0, which is above mean self-sufficiency ratios of the 223 credit unions reporting in FY2020 was 1.0, which is above
the 0.40 target for nonprofit firms shown the 0.40 target for nonprofit firms shown inin Table 1 below. In FY2020, CDFI credit unions also below. In FY2020, CDFI credit unions also
reported the highest mean (per unit) amounts of total charge-offs, total recoveries, and loans 90 reported the highest mean (per unit) amounts of total charge-offs, total recoveries, and loans 90
days or more past due. The funding awards to CDFI credit unions, therefore, subsidized the costs days or more past due. The funding awards to CDFI credit unions, therefore, subsidized the costs
of loss mitigation activities that would have otherwise translated into large losses for traditional of loss mitigation activities that would have otherwise translated into large losses for traditional
and subprime lenders without CDFI designations.and subprime lenders without CDFI designations.7375 In other words, if the subsidies indirectly In other words, if the subsidies indirectly
allow CDFIs to remain in compliance with their prudential reserve requirements, yet the higher allow CDFIs to remain in compliance with their prudential reserve requirements, yet the higher
costs and default losses incurred while serving these niche markets appear to be shifted onto costs and default losses incurred while serving these niche markets appear to be shifted onto
sponsors rather than abated, then CDFIs may arguably benefit more from the subsidies than their sponsors rather than abated, then CDFIs may arguably benefit more from the subsidies than their
customers.customers.7476 Furthermore, determining the feasibility of expanding target markets arguably Furthermore, determining the feasibility of expanding target markets arguably
becomes more difficult when financial metrics have contradictory interpretations and information becomes more difficult when financial metrics have contradictory interpretations and information
about CDFI profitability is limited.about CDFI profitability is limited.75

7177 Another performance interpretation issue can arise when calculating the percentage of funds used by a CDFI in its target market. For example, a CDFI must have at least 60% of its financial 73 See Jeremy Nowak, See Jeremy Nowak, CDFI Futures: An Industry at a Crossroads, Opportunity Finance Network, March 2016, p. 10, , Opportunity Finance Network, March 2016, p. 10,
https://ofn.org/sites/default/files/resources/PDFs/Publications/NowakPaper_FINAL.pdf. https://ofn.org/sites/default/files/resources/PDFs/Publications/NowakPaper_FINAL.pdf.
7274 See CDFI Fund, See CDFI Fund, CDFI Annual Certification and Data Collection Report (ACR): A Snapshot for Fiscal Year 2020, ,
October 2021, https://www.cdfifund.gov/sites/cdfi/files/2021-10/October 2021, https://www.cdfifund.gov/sites/cdfi/files/2021-10/
ACR_Public_Report_Final_10062021_508Compliant_v2.pdf. ACR_Public_Report_Final_10062021_508Compliant_v2.pdf.
7375 The aggregate amount of funding awarded by the CDFI Fund to credit unions or other financial institution by type in The aggregate amount of funding awarded by the CDFI Fund to credit unions or other financial institution by type in
a fiscal year could not be confirmed when this report was published. The CDFI Fund did report that 18 credit unions a fiscal year could not be confirmed when this report was published. The CDFI Fund did report that 18 credit unions
received $19.4 million from the BEA program during FY2019 compared to four loan funds and one bank that received $19.4 million from the BEA program during FY2019 compared to four loan funds and one bank that
collectively received $5 million. See CDFI Fund, collectively received $5 million. See CDFI Fund, Expanding Opportunity. .
7476 Economic theory states that the Economic theory states that the inelastic side of a market, which would be less responsive to changes in prices as a side of a market, which would be less responsive to changes in prices as a
result of having fewer choices, benefits more from a subsidy. In this case, higher-risk customers can choose among result of having fewer choices, benefits more from a subsidy. In this case, higher-risk customers can choose among
CDFIs and non-CDFI lenders (subprime and, under certain circumstances, prime) to obtain financial products. Thus CDFIs and non-CDFI lenders (subprime and, under certain circumstances, prime) to obtain financial products. Thus
market competition may still have a greater influence on market pricing than a subsidy. Because CDFIs must supply market competition may still have a greater influence on market pricing than a subsidy. Because CDFIs must supply
financial products primarily in target markets (and credit unions to their memberships), a subsidy is more likely to financial products primarily in target markets (and credit unions to their memberships), a subsidy is more likely to
reduce the costs to serve their established clientele rather than to compete on price. For more information, see Robert reduce the costs to serve their established clientele rather than to compete on price. For more information, see Robert
Frank et al., Frank et al., Principles of Microeconomics, 8th ed. (McGraw-Hill, 2022). For more information on the field of , 8th ed. (McGraw-Hill, 2022). For more information on the field of
membership and prudential requirements for credit unions, see CRS Report R46360, membership and prudential requirements for credit unions, see CRS Report R46360, The Credit Union System:
Developments in Lending and Prudential Risk Management, by Darryl E. Getter. In the economics banking literature, a , by Darryl E. Getter. In the economics banking literature, a
zombie is defined as a weak financial institution that would be insolvent in the absence of subsidies, which distort the is defined as a weak financial institution that would be insolvent in the absence of subsidies, which distort the
true costs of the default risks associated with serving unprofitable borrowers and can lead to a misallocation of credit true costs of the default risks associated with serving unprofitable borrowers and can lead to a misallocation of credit
that can reduce economic productivity and growth. For more information, see Joe Peek and Eric S. Rosengren, that can reduce economic productivity and growth. For more information, see Joe Peek and Eric S. Rosengren,
“Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan,” “Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan,” American Economic Review, vol. , vol.
95, no. 4 (September 2005), pp. 1144-1166; Ricardo J. Caballero, Takeo Hoshi, and Anil K. Kashyap, “Zombie 95, no. 4 (September 2005), pp. 1144-1166; Ricardo J. Caballero, Takeo Hoshi, and Anil K. Kashyap, “Zombie
Lending and Depressed Restructuring in Japan,” Lending and Depressed Restructuring in Japan,” American Economic Review, vol. 98, no. 5 (December 2008), pp. , vol. 98, no. 5 (December 2008), pp.
1943-1977; and Viral Acharya, Simone Lenzu, and Olivier Wang, 1943-1977; and Viral Acharya, Simone Lenzu, and Olivier Wang, Zombie Lending and Policy Traps, working paper, , working paper,
October 29, 2021, https://voxeu.org/article/zombie-lending-and-policy-traps. October 29, 2021, https://voxeu.org/article/zombie-lending-and-policy-traps.
7577 See Michael Ogden, “New Partnership Announces a Bold CDFI Expansion Nationwide,” See Michael Ogden, “New Partnership Announces a Bold CDFI Expansion Nationwide,” Credit Union Times, ,
December 17, 2020, https://www.cutimes.com/2020/12/17/new-partnership-announces-a-bold-cdfi-expansion-December 17, 2020, https://www.cutimes.com/2020/12/17/new-partnership-announces-a-bold-cdfi-expansion-
nationwide/. The CDFI Fund does not report the return on average assets for the CDFI industry or by institution type. nationwide/. The CDFI Fund does not report the return on average assets for the CDFI industry or by institution type.
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~~Another performance interpretation issue can arise when calculating the percentage of funds used~~
~~by a CDFI in its target market. For example, a CDFI must have at least 60% of its financial~~
activities, measured either in number or dollar amount of its total activities, occur in at least one activities, measured either in number or dollar amount of its total activities, occur in at least one
eligible target market.eligible target market.7678 Suppose a CDFI depository made numerous small dollar loans in its Suppose a CDFI depository made numerous small dollar loans in its
target market area but only a few large (e.g., mortgage) loans outside of its target market area. In target market area but only a few large (e.g., mortgage) loans outside of its target market area. In
this case, the percentage of dollars deployed in a target market could fall below 60% even though this case, the percentage of dollars deployed in a target market could fall below 60% even though
60% or more products were provided to the target market.60% or more products were provided to the target market.7779 For this reason, the CDFI Fund has For this reason, the CDFI Fund has
proposed lowering the minimum dollar threshold to 50%.proposed lowering the minimum dollar threshold to 50%.7880
Table 1. CDFI Fund’s Minimum and Prudent Standards (MAPS): Selected Metrics,
Definitions, and Key Considerations
MAPS Metric Name
Definition and Explanation
Considerations and Targets
Annual Net Charge-Off Annual Net Charge-Off
The sum of total loans charged off The sum of total loans charged off
Asset quality Asset quality
Ratio Ratio
minus recoveries, divided by total loans minus recoveries, divided by total loans
receivable. receivable.
Current Ratio Current Ratio
Total current assets divided by current Total current assets divided by current
Liquidity Liquidity
liabilities. liabilities.
Target Value = 1.25 Target Value = 1.25
Target Value for Native CDFIs > 1.0 Target Value for Native CDFIs > 1.0
Deployment Ratio Deployment Ratio
The total gross loans outstanding The total gross loans outstanding
Liquidity Liquidity
divided by a CDFI’s total available funds divided by a CDFI’s total available funds
CDFI Fund historical target > 50% CDFI Fund historical target > 50%
that can be used for lending. that can be used for lending.
Earnings Ratio (Income Earnings Ratio (Income
Total revenue divided by total Total revenue divided by total
Earnings Earnings
Ratio) Ratio)
expenses. expenses.
Loan Loss (Reserves) Loan Loss (Reserves)
The total amount of loan loss reserves The total amount of loan loss reserves
Asset quality Asset quality
Ratio Ratio
(that can be used to buffer against loan (that can be used to buffer against loan
loss) divided by the total amount of loss) divided by the total amount of
loans outstanding. This ratio, which has loans outstanding. This ratio, which has
similarities to certain bank capital-asset similarities to certain bank capital-asset
ratios, measures a CDFI’s vulnerability ratios, measures a CDFI’s vulnerability
to to anticipated loan defaults. loan defaults.
Net Asset Ratio Net Asset Ratio
Total net assets (equity) divided by Total net assets (equity) divided by
Capital adequacy Capital adequacy
total assets. This ratio, which has total assets. This ratio, which has
CDFI Fund Historical target > 20% CDFI Fund Historical target > 20%
similarities to certain bank capital-asset similarities to certain bank capital-asset
ratios, measures a CDFI’s vulnerability ratios, measures a CDFI’s vulnerability
to to unanticipated loan defaults. loan defaults.
Net Income Net Income

Earnings Earnings
Target value >0Target value >0

76 Operating Liquidity The total amount of unrestricted cash Liquidity (Cash) Ratio and cash equivalents divided by 25% of Target value ≥1.0 total operating expenses for the four most recently completed quarters, which measures whether a CDFI has sufficient liquidity to cover at least three months of operating expenses. 78 A CDFI that does not meet the 60% threshold in terms of either number or dollar amount can provide an explanation A CDFI that does not meet the 60% threshold in terms of either number or dollar amount can provide an explanation
to the CDFI Fund, which has the right to accept or reject the explanation. See CDFI Fund, “Announcement Type: to the CDFI Fund, which has the right to accept or reject the explanation. See CDFI Fund, “Announcement Type:
Notice and Request for Information,” 82Notice and Request for Information,” 82 Federal Register 2251-2254, January 9, 2017. 2251-2254, January 9, 2017.
7779 See letter from Terry Ratigan, Senior CDFI Specialist, Inclusiv, to Tanya McInnis, Program Manager, Office of See letter from Terry Ratigan, Senior CDFI Specialist, Inclusiv, to Tanya McInnis, Program Manager, Office of
Certification, Compliance, Monitoring and Evaluation, CDFI Fund, November 4, 2020, https://www.inclusiv.org/wp-Certification, Compliance, Monitoring and Evaluation, CDFI Fund, November 4, 2020, https://www.inclusiv.org/wp-
content/uploads/2020/11/Inclusiv-Comments-CDFI-Certification-Application-11-2020.pdf. content/uploads/2020/11/Inclusiv-Comments-CDFI-Certification-Application-11-2020.pdf.
7880 See CDFI Fund, “Notice of Information Collection and Request for Public Comment,” 85 See CDFI Fund, “Notice of Information Collection and Request for Public Comment,” 85 Federal Register 27275- 27275-
27278, May 7, 2020. 27278, May 7, 2020.
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MAPS Metric Name
Definition and Explanation
Considerations and Targets
~~Operating Liquidity~~
~~The total amount of unrestricted cash~~
~~Liquidity~~
~~(Cash) Ratio~~
~~and cash equivalents divided by 25% of~~
~~Target value ≥1.0~~
~~total operating expenses for the four~~
~~most recently completed quarters,~~
~~which measures whether a CDFI has~~
~~sufficient liquidity to cover at least~~
~~three months of operating expenses.~~
Portfolio Concentration Portfolio Concentration
The percentage of loans outstanding to The percentage of loans outstanding to
Sensitivity to future market changes and Sensitivity to future market changes and
Risk Risk
a particular industry divided by total a particular industry divided by total
concentration risk concentration risk
loans in portfolio, which measures the loans in portfolio, which measures the
degree of concentration a CDFI’s degree of concentration a CDFI’s
lending portfolio has to risk stemming lending portfolio has to risk stemming
from a particular industry. from a particular industry.
Portfolio at Risk Portfolio at Risk
The total amount of loans delinquent The total amount of loans delinquent
Asset quality Asset quality
by 30+, 60+, or 90+ days divided by the Target values: by 30+, 60+, or 90+ days divided by the Target values:
total outstanding loans in portfolio. total outstanding loans in portfolio.
Affordable Housing (First Lien) ≤ 7% Affordable Housing (First Lien) ≤ 7%
Affordable Housing (Second Lien) ≤ 7% Affordable Housing (Second Lien) ≤ 7%
Business Loans ≤ 10% Business Loans ≤ 10%
Consumer Loans ≤ 12% Consumer Loans ≤ 12%
Reliance on Largest Reliance on Largest
Revenue from largest fund/total Revenue from largest fund/total
Earnings Earnings
Funding Source Funding Source
revenue. revenue.
Self-Sufficiency Ratio Self-Sufficiency Ratio
The ratio of earned income to total The ratio of earned income to total
Earnings Earnings
operating expenses [over a year]. operating expenses [over a year].
Target for Target for ~~non-profit~~nonprofit CDFIs ≥ 0.40 CDFIs ≥ 0.40
Target for for-profit CDFIs ≥ 0.70 Target for for-profit CDFIs ≥ 0.70
Troubled Debt Troubled Debt
TDRs/total loans receivable. TDRs/total loans receivable.
Asset quality Asset quality
Restructures (TDR) Ratio Restructures (TDR) Ratio
~~Source~~Sources: Oweesta Corporation and the CDFI Fund. Oweesta Corporation and the CDFI Fund.
~~Notes~~Note: The target values presented in this table, which have been obtained from an Oweesta presentation, The target values presented in this table, which have been obtained from an Oweesta presentation,
should be interpreted as an informal guide and not as an official requirement of the CDFI Fund. should be interpreted as an informal guide and not as an official requirement of the CDFI Fund.
Evaluating the Effectiveness of CDFIs
The ability to directly link CDFIs’ activities to improvements in financial inclusion is difficult The ability to directly link CDFIs’ activities to improvements in financial inclusion is difficult
due to various data collecting and reporting issues. due to various data collecting and reporting issues.
• Target areas with CDFI depositories might contribute to declines in unbanked or Target areas with CDFI depositories might contribute to declines in unbanked or
underbanked households, which can lead to establishing formal credit histories underbanked households, which can lead to establishing formal credit histories
and transitioning to mainstream financial products. Neither the Federal Deposit and transitioning to mainstream financial products. Neither the Federal Deposit
Insurance Corporation (FDIC) survey of unbanked households nor its survey of Insurance Corporation (FDIC) survey of unbanked households nor its survey of
household use of banking services, however, ask respondents, who are likely to household use of banking services, however, ask respondents, who are likely to
lack familiarity with the CDFI Fund, whether they rely upon depositories with lack familiarity with the CDFI Fund, whether they rely upon depositories with
CDFI designations.CDFI designations.7981 Furthermore, as previously discussed, a ratio of Furthermore, as previously discussed, a ratio of ~~non-~~
~~traditional~~nontraditional to mainstream financial products that are included in the CDFI Fund’s to mainstream financial products that are included in the CDFI Fund’s
consumer finance category is not reported, which might also provide consumer finance category is not reported, which might also provide insight about the extent CDFI intermediation lowers transaction and information costs in target markets. • The Home Mortgage Disclosure Act of 1975 (HMDA; P.L. 94-200, 12 U.S.C. §§2801-2809) requires originators to disclose mortgage information to facilitate the monitoring of lending activity. On April 16, 2020, the Consumer Financial Protection Bureau (CFPB) issued a final rule implementing modified loan- 81~~insight~~

79 See FDIC, “2017 FDIC National Survey of Unbanked and Underbanked Households,” December 17, 2021, See FDIC, “2017 FDIC National Survey of Unbanked and Underbanked Households,” December 17, 2021,
https://www.fdic.gov/analysis/household-survey/2017/index.html; and FDIC, “How America Banks: Household Use of https://www.fdic.gov/analysis/household-survey/2017/index.html; and FDIC, “How America Banks: Household Use of
Banking and Financial Services,” December 17, 2021, https://www.fdic.gov/analysis/household-survey/index.html. Banking and Financial Services,” December 17, 2021, https://www.fdic.gov/analysis/household-survey/index.html.
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~~about the extent CDFI intermediation lowers transaction and information costs in~~
~~target markets.~~
~~ The Home Mortgage Disclosure Act of 1975 (HMDA; P.L. 94-200, 12 U.S.C.~~
~~§§2801-2809) requires originators to disclose mortgage information to facilitate~~
~~the monitoring of lending activity. On April 16, 2020, the Consumer Financial~~
~~Protection Bureau (CFPB) issued a final rule implementing modified loan-~~
volume thresholds for reporting open- and closed-ended loans via Regulation C.volume thresholds for reporting open- and closed-ended loans via Regulation C.8082
Going forward, the revised thresholds are likely to have the greatest impact on Going forward, the revised thresholds are likely to have the greatest impact on
HMDA data collected from less densely populated areas, although the overall HMDA data collected from less densely populated areas, although the overall
impact on HMDA reporting may be minimal.impact on HMDA reporting may be minimal.8183 The specific effect of this change The specific effect of this change
on CDFI mortgage reporting is ambiguous. Although raising the threshold would on CDFI mortgage reporting is ambiguous. Although raising the threshold would
likely result in less reporting by rural CDFIs, it may not matter if these CDFIs likely result in less reporting by rural CDFIs, it may not matter if these CDFIs
were unable to provide enough traditional mortgages to higher-risk borrowers were unable to provide enough traditional mortgages to higher-risk borrowers
under the lower threshold.under the lower threshold.8284 Additionally, lenders that underwrite and make the Additionally, lenders that underwrite and make the
mortgage credit decisions are responsible for HMDA reporting. Therefore, CDFIs mortgage credit decisions are responsible for HMDA reporting. Therefore, CDFIs
that act as brokers on behalf of the ultimate lenders would not need to report.that act as brokers on behalf of the ultimate lenders would not need to report.8385
• CDFIs report on numbers and dollar amounts of small business lending in target CDFIs report on numbers and dollar amounts of small business lending in target
markets, but the CDFI Fund may not collect credit applications information that markets, but the CDFI Fund may not collect credit applications information that
may be useful for comparing applicant experiences from non-CDFIs that serve may be useful for comparing applicant experiences from non-CDFIs that serve
similar small businesses. On September 1, 2021, the CFPB issued a proposed similar small businesses. On September 1, 2021, the CFPB issued a proposed
rule for Section 1071 of the 2010 Dodd-Frank Wall Street Reform and Consumer rule for Section 1071 of the 2010 Dodd-Frank Wall Street Reform and Consumer
Protection Act (P.L. 111-203).Protection Act (P.L. 111-203).8486 Section 1071 requires financial institutions to Section 1071 requires financial institutions to
collect data pertaining to credit applications for women-owned, minority-owned, collect data pertaining to credit applications for women-owned, minority-owned,
and small businesses. The data would be reported annually to the CFPB, thus and small businesses. The data would be reported annually to the CFPB, thus
being conceptually similar to the HMDA database. Using CDFI Fund ACR data being conceptually similar to the HMDA database. Using CDFI Fund ACR data
from FY2019, the CFPB estimates that 340 from FY2019, the CFPB estimates that 340 ~~non-depository~~nondepository CDFIs are engaged in CDFIs are engaged in
small business lending; 240 of these would meet the proposed reporting threshold small business lending; 240 of these would meet the proposed reporting threshold
of originating at least 25 covered credit transactions for small businesses in each of originating at least 25 covered credit transactions for small businesses in each
of the two preceding calendar years. In addition, reporting financial institutions of the two preceding calendar years. In addition, reporting financial institutions
would likely be able to identify whether they are CDFIs, thus linking some small would likely be able to identify whether they are CDFIs, thus linking some small
business lending activities to the CDFI industry. The CFPB received comments business lending activities to the CDFI industry. The CFPB received comments
from stakeholders estimating that compliance with the rule (once finalized) may from stakeholders estimating that compliance with the rule (once finalized) may

80take up to three years, particularly for those nondepository CDFIs that were generally subject only to CDFI Fund reporting requirements. For populations that lack access to the traditional financial system, income volatility may still undermine any progress made toward credit repair, reducing debt balances, increasing savings, and repaying small business loans—all efforts facilitated by CDFIs. In 2020 and 2021, CDFIs reported that the most significant factor facing their clients is the loss of income or revenue, which may arguably be considered an exogenous or random happenstance.87 For this reason, 82 See CFPB, “Consumer Financial Protection Bureau Issues Final Rule Raising Data Reporting Thresholds Under the See CFPB, “Consumer Financial Protection Bureau Issues Final Rule Raising Data Reporting Thresholds Under the
Home Mortgage Disclosure Act,” April 16, 2020, https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-Home Mortgage Disclosure Act,” April 16, 2020, https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-
final-rule-raising-data-reporting-thresholds-under-hmda/; and CFPB, “Home Mortgage Disclosure Reporting final-rule-raising-data-reporting-thresholds-under-hmda/; and CFPB, “Home Mortgage Disclosure Reporting
Requirements (HMDA),” https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/Requirements (HMDA),” https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/
hmda-reporting-requirements/. hmda-reporting-requirements/.
8183 See GAO, Home Mortgage Disclosure Act: Reporting Exemptions Had a Minimal Impact on Data Availability, but See GAO, Home Mortgage Disclosure Act: Reporting Exemptions Had a Minimal Impact on Data Availability, but
Additional Information Would Enhance Oversight, GAO-21-350, May 17, 2021, https://www.gao.gov/assets/gao-21-Additional Information Would Enhance Oversight, GAO-21-350, May 17, 2021, https://www.gao.gov/assets/gao-21-
350.pdf. 350.pdf.
8284 See Emily Wavering Corcoran, “Follow the Money: Rural and Urban CDFIs in the Fifth District,” Federal Reserve See Emily Wavering Corcoran, “Follow the Money: Rural and Urban CDFIs in the Fifth District,” Federal Reserve
Bank of Richmond, December 19, 2019, https://www.richmondfed.org/research/regional_economy/regional_matters/Bank of Richmond, December 19, 2019, https://www.richmondfed.org/research/regional_economy/regional_matters/
2019/rm_12_19_2019_cdfis. 2019/rm_12_19_2019_cdfis.
8385 The HMDA data do not provide an indicator for a reporting institution to indicate whether it is also a CDFI. The HMDA data do not provide an indicator for a reporting institution to indicate whether it is also a CDFI.
8486 See CFPB, “Small Business Lending Data Collection Under the Equal Credit Opportunity Act (Regulation B),” See CFPB, “Small Business Lending Data Collection Under the Equal Credit Opportunity Act (Regulation B),”
September 1, 2021, https://www.consumerfinance.gov/rules-policy/rules-under-development/small-business-lending-September 1, 2021, https://www.consumerfinance.gov/rules-policy/rules-under-development/small-business-lending-
data-collection-under-equal-credit-opportunity-act-regulation-b/; and CFPB, “Small Business Lending Data Collection data-collection-under-equal-credit-opportunity-act-regulation-b/; and CFPB, “Small Business Lending Data Collection
Under the Equal Credit Opportunity Act (Regulation B),” 86Under the Equal Credit Opportunity Act (Regulation B),” 86 Federal Register 56356-56606, October 8, 2021. 56356-56606, October 8, 2021.
87 See Carpenter et al., 2021 CDFI Survey Key Findings. Congressional Research Service Congressional Research Service

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~~take up to three years, particularly for those non-depository CDFIs that were~~
~~generally subject only to CDFI Fund reporting requirements.~~
~~For populations that lack access to the traditional financial system, income volatility may still~~
~~undermine any progress made toward credit repair, reducing debt balances, increasing savings,~~
~~and repaying small business loans—all efforts facilitated by CDFIs. In 2020 and 2021, CDFIs~~
~~reported that the most significant factor facing their clients is the loss of income or revenue,~~
~~which may arguably be considered an exogenous or random happenstance.85 For this reason,~~
measuring the effectiveness of this industry may still be challenging—even with greater data measuring the effectiveness of this industry may still be challenging—even with greater data
collection and reporting—given that their activities occur in areas characterized by above-normal collection and reporting—given that their activities occur in areas characterized by above-normal
levels of income volatility that CDFIs cannot control.levels of income volatility that CDFIs cannot control.
Public and Private Funding Sources
This section summarizes the public and private funding sources for CDFIs. For sake of This section summarizes the public and private funding sources for CDFIs. For sake of
comparison, the textbox below summarizes how traditional intermediaries obtain the funds to comparison, the textbox below summarizes how traditional intermediaries obtain the funds to
serve their clients with more standard financial risk attributes. serve their clients with more standard financial risk attributes.
Traditional (Wholesale) Funding Methods and Liquidity Risks
Financial intermediators originate consumer loans, business loans, and purchase bonds—all of which are longer- Financial intermediators originate consumer loans, business loans, and purchase bonds—all of which are longer-
term assets that can be held in their lending portfolios. Financial intermediaries obtain the funds used to make the term assets that can be held in their lending portfolios. Financial intermediaries obtain the funds used to make the
loans via sequences of shorter-term borrowings. The loans via sequences of shorter-term borrowings. The lending spread is the difference between yield earned by is the difference between yield earned by
making longer-term loans at higher interest rates and the yields paid from borrowing successive sequences of making longer-term loans at higher interest rates and the yields paid from borrowing successive sequences of
shorter-term loans at lower rates. Lending spreads generate profits (i.e., revenues minus costs) for financial shorter-term loans at lower rates. Lending spreads generate profits (i.e., revenues minus costs) for financial
intermediaries, particularly if they retain loans in their asset portfolios. (Some financial intermediaries, however, intermediaries, particularly if they retain loans in their asset portfolios. (Some financial intermediaries, however,
act more like brokers, meaning that they receive a fee for originating a loan on behalf of other financial entities act more like brokers, meaning that they receive a fee for originating a loan on behalf of other financial entities
that would subsequently create the lending spreads.) that would subsequently create the lending spreads.)
Because profitable lending spreads are created using loans with different maturities, namely long-term loans Because profitable lending spreads are created using loans with different maturities, namely long-term loans
(assets) funded with short-term loans (liabilities), access to cash or other short-term loans is vital. In addition to (assets) funded with short-term loans (liabilities), access to cash or other short-term loans is vital. In addition to
holding some cash reserves, depository intermediaries (i.e., banks and credit unions) can obtain short-term holding some cash reserves, depository intermediaries (i.e., banks and credit unions) can obtain short-term
funding by funding by ~~collecting~~col ecting federally insured checking and savings deposits and paying interest to their depositors. federally insured checking and savings deposits and paying interest to their depositors.
Depositories and Depositories and ~~non-depository~~nondepository intermediaries, which do not have access to federally insured deposits, may intermediaries, which do not have access to federally insured deposits, may
obtain funds from obtain funds from wholesale funding markets, where financial intermediaries borrow and lend cash funds to each , where financial intermediaries borrow and lend cash funds to each
other. For example, an intermediary may enter into a repurchase agreement contract to sell an asset held in other. For example, an intermediary may enter into a repurchase agreement contract to sell an asset held in
portfolio for cash and simultaneously commit to repurchase it on a future date at a higher price. The borrowed portfolio for cash and simultaneously commit to repurchase it on a future date at a higher price. The borrowed
proceeds can be used to repay existing short-term loans or fund new longer-term customer loans. Some proceeds can be used to repay existing short-term loans or fund new longer-term customer loans. Some
intermediaries may obtain cash funds by issuing their own debt securities, which are similar to bonds, to third-intermediaries may obtain cash funds by issuing their own debt securities, which are similar to bonds, to third-
party investors. In sum, stable operations of traditional financial intermediaries and the financial system as a whole party investors. In sum, stable operations of traditional financial intermediaries and the financial system as a whole
depends upon access to short-term loans and their timely repayment. (A systemic risk event, which has historically depends upon access to short-term loans and their timely repayment. (A systemic risk event, which has historically
led to financial system disruptions, can emerge when financial entities begin to question whether they led to financial system disruptions, can emerge when financial entities begin to question whether they ~~will~~ wil receive receive
timely payments from other financial entities.) timely payments from other financial entities.)
CDFIs—and particularly CDFIs—and particularly ~~non-depository~~nondepository CDFIs—fund loans by relying considerably on CDFIs—fund loans by relying considerably on net
assets rather than short-term borrowing. Net assets are analogous to a bank’s equity or a credit rather than short-term borrowing. Net assets are analogous to a bank’s equity or a credit
union’s net worth, defined as the difference between assets (e.g., long-term consumer and union’s net worth, defined as the difference between assets (e.g., long-term consumer and
business loans) and liabilities (e.g., short-term borrowings). CDFIs rely on net assets, which business loans) and liabilities (e.g., short-term borrowings). CDFIs rely on net assets, which
consist largely of subsidized and donated funds due to limited access to private funding markets, consist largely of subsidized and donated funds due to limited access to private funding markets,
for the following for the following reasons.88 •~~reasons.86~~

~~85 See Carpenter et al., 2021 CDFI Survey Key Findings.~~
~~86 See Mark Pinsky, Growing Opportunities in Bank/CDFI Partnerships, OCC, 2002, http://www.occ.gov/static/~~
~~community-affairs/community-developments-newsletter/Summer-01.pdf.~~
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 CDFI loan portfolios and particularly CDFI loan fund portfolios, which are CDFI loan portfolios and particularly CDFI loan fund portfolios, which are
typically comprised of loans with above-normal default risk levels, frequently typically comprised of loans with above-normal default risk levels, frequently
lack sufficient comparable historical performance data on loan repayment lack sufficient comparable historical performance data on loan repayment
patterns (e.g., loan defaults and prepayment rates).patterns (e.g., loan defaults and prepayment rates).8789 Payment history lapses and Payment history lapses and
geographical concentrations, which require manual underwriting of loan geographical concentrations, which require manual underwriting of loan
originations (as opposed to automated underwriting that would rely on greater originations (as opposed to automated underwriting that would rely on greater
data observations), limit the ability to compare or understand the embedded data observations), limit the ability to compare or understand the embedded
88 See Mark Pinsky, Growing Opportunities in Bank/CDFI Partnerships, OCC, 2002, http://www.occ.gov/static/community-affairs/community-developments-newsletter/Summer-01.pdf. 89 See Michael Swack, Jack Northrup, and Eric Hangen, CDFI Industry Analysis: Summary Report, University of New Hampshire Carsey Institute, May 2, 2012, https://www.cdfifund.gov/sites/cdfi/files/documents/carsey-report-pr-042512.pdf. Congressional Research Service 17 Community Development Financial Institutions (CDFIs): Overview and Selected Issues financial risks of niche CDFI loans and, therefore, raises questions about the financial risks of niche CDFI loans and, therefore, raises questions about the
accuracy of CDFI loan pricing.accuracy of CDFI loan pricing.8890 For this reason, wholesale lenders either will For this reason, wholesale lenders either will
not accept CDFI loans as collateral for short-term borrowings or charge much not accept CDFI loans as collateral for short-term borrowings or charge much
higher rates.higher rates.8991 The pricing issues also limit the ability of CDFIs to sell loans in The pricing issues also limit the ability of CDFIs to sell loans in
secondary loan markets. Thus, when providing funds to CDFIs, wholesale secondary loan markets. Thus, when providing funds to CDFIs, wholesale
lenders must generally be willing to accept lower returns or longer investment lenders must generally be willing to accept lower returns or longer investment
horizons, which better suits the CDFIs’ business model by alleviating the horizons, which better suits the CDFIs’ business model by alleviating the
recurrent need to repay shorter-term loans.recurrent need to repay shorter-term loans.90
92 • Small financial institutions typically lack loan portfolios sufficiently large Small financial institutions typically lack loan portfolios sufficiently large
enough to justify the expense to acquire funding from wholesale market lenders, enough to justify the expense to acquire funding from wholesale market lenders,
where many large financial entities borrow cash funds from each other. where many large financial entities borrow cash funds from each other.
Consequently, the higher costs typically incurred with equity funding may still be Consequently, the higher costs typically incurred with equity funding may still be
a less expensive alternative for financial institutions with small loan portfolios. a less expensive alternative for financial institutions with small loan portfolios.
The net assets of CDFIs are often acquired via awards or grants from the CDFI Fund, other The net assets of CDFIs are often acquired via awards or grants from the CDFI Fund, other
federally related sources, for-profit banks, and philanthropy.federally related sources, for-profit banks, and philanthropy.9193 The low- and no-cost funding The low- and no-cost funding
allows CDFIs to better absorb the heightened loss mitigation costs that can reduce bad outcomes allows CDFIs to better absorb the heightened loss mitigation costs that can reduce bad outcomes
for borrowers.for borrowers.9294 The ability to deploy low- or no-cost funding to originate loans for higher-risk The ability to deploy low- or no-cost funding to originate loans for higher-risk
borrowers provides CDFIs with a financial advantage over both traditional and subprime lenders borrowers provides CDFIs with a financial advantage over both traditional and subprime lenders
competing in this market. competing in this market.

~~87 See Michael Swack, Jack Northrup, and Eric Hangen, CDFI Industry Analysis: Summary Report, University of New~~
~~Hampshire Carsey Institute, May 2, 2012, https://www.cdfifund.gov/sites/cdfi/files/documents/carsey-report-pr-~~
~~042512.pdf.~~
88 CDFIs’ Access to Federally Subsidized Funding The federal government provides CDFIs with low- or no-cost funds to support their mission of financial inclusion. After certifying CDFIs, the CDFI Fund administers the funding programs described below.95 CDFIs may apply for the following programs administered by the CDFI Fund. • Financial Assistance (FA) and Technical Assistance (TA). The CDFI Fund provides FA and TA monetary awards to qualified CDFIs.96 The monetary awards, however, are subject to restrictions. For example, CDFI applicants must 90 See Charles Tansey et al., “Making Sense of CDFI Financial Statements,” in See Charles Tansey et al., “Making Sense of CDFI Financial Statements,” in Capital Markets, CDFIs, and
Organizational Credit Risk (Durham, NH: Carsey Institute, 2010), p. 222, https://www.cdfifund.gov/sites/cdfi/files/ (Durham, NH: Carsey Institute, 2010), p. 222, https://www.cdfifund.gov/sites/cdfi/files/
documents/capital-markets-cdfis-and-organizational-credit-risk.pdf. documents/capital-markets-cdfis-and-organizational-credit-risk.pdf.
8991 For more information on how CDFIs typically fund loans, see Swack, Northrup, and Hangen, For more information on how CDFIs typically fund loans, see Swack, Northrup, and Hangen, CDFI Industry
Analysis. .
9092 See GAO, See GAO, Community Development Capital Initiative: Status of the Program Investments and Participants, GAO-, GAO-
15-542, May 2015, p. 17, https://www.gao.gov/assets/gao-15-542.pdf. 15-542, May 2015, p. 17, https://www.gao.gov/assets/gao-15-542.pdf.
9193 See Willa Seldon and Isabelle Brantley, “Back to the Future: Why Philanthropies Should (Re)turn to CDFIs to See Willa Seldon and Isabelle Brantley, “Back to the Future: Why Philanthropies Should (Re)turn to CDFIs to
Support an Equitable Recovery from COVID-19,” Bridgespan Group, August 4, 2020, https://www.bridgespan.org/Support an Equitable Recovery from COVID-19,” Bridgespan Group, August 4, 2020, https://www.bridgespan.org/
insights/library/philanthropy/why-philanthropies-should-re-turn-to-cdfis. insights/library/philanthropy/why-philanthropies-should-re-turn-to-cdfis.
9294 Wolff and Ratcliffe (78-79) find that CDFI delinquency rates on first-lien loans may be high, but they are less likely Wolff and Ratcliffe (78-79) find that CDFI delinquency rates on first-lien loans may be high, but they are less likely
to reach serious delinquency or foreclosure compared to Federal Housing Administration or subprime loans, which are to reach serious delinquency or foreclosure compared to Federal Housing Administration or subprime loans, which are
the appropriate comparison for the level of risk of CDFI loans. Sarah Wolff and Janneke Ratcliffe, “The Role of CDFIs the appropriate comparison for the level of risk of CDFI loans. Sarah Wolff and Janneke Ratcliffe, “The Role of CDFIs
in Home Ownership Finance,” October 2008, https://www.cdfifund.gov/sites/cdfi/files/documents/the-role-of-in Home Ownership Finance,” October 2008, https://www.cdfifund.gov/sites/cdfi/files/documents/the-role-of-
community-development-financial.pdf; and Carla Dickstein et al., “The Role of CDFIs in Addressing the Subprime community-development-financial.pdf; and Carla Dickstein et al., “The Role of CDFIs in Addressing the Subprime
Mortgage Market: A Case Analysis of New England,” October 2008, https://www.cdfifund.gov/sites/cdfi/files/Mortgage Market: A Case Analysis of New England,” October 2008, https://www.cdfifund.gov/sites/cdfi/files/
documents/the-role-of-cdfis-in-addressing-the-subprime-mortgage-market-a-case-analysis-of-new-england.pdf. documents/the-role-of-cdfis-in-addressing-the-subprime-mortgage-market-a-case-analysis-of-new-england.pdf.
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~CDFIs’ Access to Federally Subsidized Funding~~
~~The federal government provides CDFIs with low- or no-cost funds to support their mission of~~
~~financial inclusion. After certifying CDFIs, the CDFI Fund administers the funding programs~~
~~described below.93 CDFIs may apply for the following programs administered by the CDFI Fund.~~
~~ Financial Assistance (FA) and Technical Assistance (TA). The CDFI Fund~~
~~provides FA and TA monetary awards to qualified CDFIs.94 The monetary~~
~~awards, however, are subject to restrictions. For example, CDFI applicants must~~
95 For more detailed information, see CDFI Fund, “Searchable Awards Database,” https://www.cdfifund.gov/awards/state-awards; and CRS Report R47169, Community Development Financial Institutions (CDFI) Fund: Overview and Programs, by Donald J. Marples and Darryl E. Getter. 96 Laws pertaining to the CDFI Fund’s financial assistance and technical assistance are located in 46 U.S.C. §§1805.300-1805.303. Congressional Research Service 18 Community Development Financial Institutions (CDFIs): Overview and Selected Issues generally demonstrate that any award can be matched dollar-for-dollar with a generally demonstrate that any award can be matched dollar-for-dollar with a
grant (as opposed to a loan) from a nonfederal source, and an entity (or its grant (as opposed to a loan) from a nonfederal source, and an entity (or its
affiliate) cannot receive more than $5 million in awards within a three-year affiliate) cannot receive more than $5 million in awards within a three-year
period. However, these restrictions may vary with congressional actions. For period. However, these restrictions may vary with congressional actions. For
example, P.L. 111-5 waived the dollar-for-dollar matching requirement in example, P.L. 111-5 waived the dollar-for-dollar matching requirement in
FY2009, FY2010, and FY2011. The requirement was reinstated for FY2012. The FY2009, FY2010, and FY2011. The requirement was reinstated for FY2012. The
CFDI Fund may specify other requirements in the applicable notice of funds CFDI Fund may specify other requirements in the applicable notice of funds
availability.availability.95
97 • Native American CDFI Assistance (NACA) Program. Native American CDFIs Native American CDFIs
may receive funding awards via the NACA component of the CDFI program. may receive funding awards via the NACA component of the CDFI program.
Native American CDFIs Native American CDFIs primarily serve (defined at 50% or more of an (defined at 50% or more of an
applicant’s activities) Native Communities (defined as Native American, Alaska applicant’s activities) Native Communities (defined as Native American, Alaska
Native, and Native Hawaiian communities). The CDFI Fund certifies new Native Native, and Native Hawaiian communities). The CDFI Fund certifies new Native
CDFIs and issues financial assistance and technical assistance monetary awards CDFIs and issues financial assistance and technical assistance monetary awards
to facilitate capital access in Native Communities via its authority.to facilitate capital access in Native Communities via its authority.96
98 • Bank Enterprise Award (BEA). CDFIs whose deposits are insured by the FDIC CDFIs whose deposits are insured by the FDIC
may apply for the CDFI Fund’s BEA program. may apply for the CDFI Fund’s BEA program.9799 The BEA provides formula- The BEA provides formula-
based grants to banks, including CDFI-designated banks, to provide loans, equity based grants to banks, including CDFI-designated banks, to provide loans, equity
investments, grants, and technical assistance to CDFIs.investments, grants, and technical assistance to CDFIs.98100 The CDFI Fund The CDFI Fund
measures increases in an applicant’s lending, investment, and service activities measures increases in an applicant’s lending, investment, and service activities
relative to a baseline of similar, qualified activities conducted by the applicant in relative to a baseline of similar, qualified activities conducted by the applicant in
the previous application cycle. In contrast to the CDFI Fund’s awards based upon the previous application cycle. In contrast to the CDFI Fund’s awards based upon
proposed future projects, BEA awards are proposed future projects, BEA awards are retrospective, meaning that applicants , meaning that applicants

~~93 For more detailed information, see CDFI Fund, “Searchable Awards Database,” https://www.cdfifund.gov/awards/~~
~~state-awards; and CRS Report R47169,~~ ~~Community Development Financial Institutions (CDFI) Fund: Overview and~~
~~Programs, by Donald J. Marples and Darryl E. Getter.~~
~~94 Laws pertaining to the CDFI Fund’s financial assistance and technical assistance are located in 46 U.S.C.~~
~~§§1805.300-1805.303.~~
~~95 12 C.F.R. §1806.200(b)(2).~~
96receive awards for activities they have already completed.101 The retrospective awards allow bank recipients to offset some of the financial risks associated with making riskier loans and, therefore, satisfy prudential capital (equity) requirements. • New Markets Tax Credits (NMTC) Program. CDFIs may acquire equity investments by participating in the NMTC program. After receiving the Community Development Entity (CDE) certification by the CFDI Fund, a CDFI may apply for NMTCs, also allocated by the CDFI Fund.102 The NMTC is a 97 12 C.F.R. §1806.200(b)(2). 98 See Section 117(c) of the Riegle Act. NACA made its first awards in 2002 following the November 2001 release of See Section 117(c) of the Riegle Act. NACA made its first awards in 2002 following the November 2001 release of
the Native American Lending Study, which was directed by Congress to study lending and investment practices on the Native American Lending Study, which was directed by Congress to study lending and investment practices on
Indian reservations, For the results of this study, see CDFI Fund, Indian reservations, For the results of this study, see CDFI Fund, The Report of the Native American Lending Study, ,
November 2001, http://www.cdfifund.gov/docs/2001_nacta_lending_study.pdf. November 2001, http://www.cdfifund.gov/docs/2001_nacta_lending_study.pdf.
9799 See CDFI Fund, See CDFI Fund, Bank Enterprise Award Program: Maximizing Investments in Distressed Communities, ,
https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi7205_fs_bea_updatedaug2020.pdf. https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi7205_fs_bea_updatedaug2020.pdf.
98100 The BEA was originally authorized by the Bank Enterprise Act of 1991 in the Agriculture, Rural Development, Food The BEA was originally authorized by the Bank Enterprise Act of 1991 in the Agriculture, Rural Development, Food
and Drug Administration, and Related Agencies Appropriations Act, 1992 (P.L. 102-142). Prior to the creation of the and Drug Administration, and Related Agencies Appropriations Act, 1992 (P.L. 102-142). Prior to the creation of the
CDFI Fund, the BEA was administered by the OCC and the FDIC. Section 114 of the Riegle Community Development CDFI Fund, the BEA was administered by the OCC and the FDIC. Section 114 of the Riegle Community Development
and Regulatory Improvement Act of 1994 (P.L. 103-325) moved the BEA under the operations of the and Regulatory Improvement Act of 1994 (P.L. 103-325) moved the BEA under the operations of the CDFI Fund. 101 The CDFI Fund publishes a more in-depth account of its BEA application process regularly in the program’s notice of funds availability. For example, see Department of the Treasury, “Community Development Financial Institutions Fund—Funding Opportunity Title: Notice of Funds Availability (NOFA) Inviting Applications for the Fiscal Year (FY) 2017 Funding Round of the Bank Enterprise Award Program (BEA Program),” 82 Federal Register 45663-45674, September 29, 2017. 102 A certified CDE is a domestic corporation or partnership that is an intermediary vehicle for the provision of loans, (continued...) Congressional Research Service 19 Community Development Financial Institutions (CDFIs): Overview and Selected Issues ~~CDFI Fund.~~
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~receive awards for activities they have already completed.99 The retrospective~~
~~awards allow bank recipients to offset some of the financial risks associated with~~
~~making riskier loans and, therefore, satisfy prudential capital (equity)~~
~~requirements.~~
~~ New Markets Tax Credits (NMTC) Program. CDFIs may acquire equity~~
~~investments by participating in the NMTC program. After receiving the~~
~~Community Development Entity (CDE) certification by the CFDI Fund, a CDFI~~
~~may apply for NMTCs, also allocated by the CDFI Fund.100 The NMTC is a~~
competitively awarded nonrefundable tax credit intended to encourage qualified competitively awarded nonrefundable tax credit intended to encourage qualified
investors to support CDEs that operate in eligible low-income communities.investors to support CDEs that operate in eligible low-income communities.~~101~~103
Once awarded an allocation of NMTCs, CDEs that are CDFIs may award Once awarded an allocation of NMTCs, CDEs that are CDFIs may award
NMTCs to taxpaying entities in exchange for equity investments.NMTCs to taxpaying entities in exchange for equity investments.~~102~~104 (A bank, for (A bank, for
example, that makes equity investments in CDFIs can reduce its tax liabilities via example, that makes equity investments in CDFIs can reduce its tax liabilities via
obtaining NMTCs.) obtaining NMTCs.)
• Capital Magnet Fund (CMF). The CMF was established by the Housing and The CMF was established by the Housing and
Economic Recovery Act of 2008 (P.L. 110-289) to competitively award grants to Economic Recovery Act of 2008 (P.L. 110-289) to competitively award grants to
CDFIs and other nonprofit housing organizations for the development, CDFIs and other nonprofit housing organizations for the development,
rehabilitation, and purchase of affordable housing and economic development rehabilitation, and purchase of affordable housing and economic development
projects in distressed communities. projects in distressed communities.
• CDFI Bond Guarantee Program (BGP). The BGP was established in 2010 to The BGP was established in 2010 to
provide CDFIs with access to long-term funding, also known as patient capital, to provide CDFIs with access to long-term funding, also known as patient capital, to
reduce conventional funding risk, which arises when intermediaries acquire reduce conventional funding risk, which arises when intermediaries acquire
funding via sequences of short-term loans and risk greater volatility in short-term funding via sequences of short-term loans and risk greater volatility in short-term
rates.rates.~~103~~105 Treasury was initially given the authority to guarantee up to 10 bonds per Treasury was initially given the authority to guarantee up to 10 bonds per
year, each at a minimum of $100 million with maturities not to exceed 30 years. year, each at a minimum of $100 million with maturities not to exceed 30 years.
Authorized CDFIs (referred to as qualified issuers) would sell the bonds to the Authorized CDFIs (referred to as qualified issuers) would sell the bonds to the
Federal Financing Bank (FFB) in exchange for cash proceeds that would need to Federal Financing Bank (FFB) in exchange for cash proceeds that would need to

~~99 The CDFI Fund publishes a more in-depth account of its BEA application process regularly in the program’s notice~~
~~of funds availability. For example, see Department of the Treasury, “Community Development Financial Institutions~~
~~Fund—Funding Opportunity Title: Notice of Funds Availability (NOFA) Inviting Applications for the Fiscal Year (FY)~~
~~2017 Funding Round of the Bank Enterprise Award Program (BEA Program),” 82 Federal Register 45663-45674,~~
~~September 29, 2017.~~
~~100 A certified CDE is a domestic corporation or partnership that is an intermediary vehicle for the provision of loans,~~
be repaid with interest (to the FFB).106 The authorized CDFIs would subsequently use the cash proceeds to make short-term loans to other CDFIs. Stated differently, the BGP would allow qualified CDFIs issuers to acquire federally guaranteed funds and then provide long-term wholesale funding to other CDFIs. (The CDFI borrower of funds must have collateral to obtain a loan from an authorized CDFI, thus having similarities to a repurchase agreement.) • Small Dollar Loan (SDL) Program. The SDL program, authorized by the Dodd-Frank Act (P.L. 111-203), provides funding for SDLs.107 SDLs are consumer loans with relatively low initial principal amounts (often less than $1,000) with relatively short repayment periods (generally for a small number of weeks or months).108 SDLs funded by grants from the SDL program cannot exceed $2,500, must be repaid in installments, and cannot have any prepayment investments, or financial counseling in low-income communities. CDFIs automatically qualify as CDEs. The NMTC investments, or financial counseling in low-income communities. CDFIs automatically qualify as CDEs. The NMTC
was established as part of the Community Renewal Tax Relief Act of 2000 (P.L. 106-554, Title II, Subtitle C). For was established as part of the Community Renewal Tax Relief Act of 2000 (P.L. 106-554, Title II, Subtitle C). For
information about the application requirements to become a CDE and obtain NMTCs, see https://www.novoco.com/information about the application requirements to become a CDE and obtain NMTCs, see https://www.novoco.com/
new_markets/resource_files/cde/CDE_Q_A_0705.pdf. new_markets/resource_files/cde/CDE_Q_A_0705.pdf.
~~101~~103 As a nonrefundable tax credit, the NMTC can be used to reduce tax liability toward, but not below, zero. By As a nonrefundable tax credit, the NMTC can be used to reduce tax liability toward, but not below, zero. By
contrast, a refundable tax credit can be used to reduce tax liability beyond zero, enabling a taxpayer to receive a refund. contrast, a refundable tax credit can be used to reduce tax liability beyond zero, enabling a taxpayer to receive a refund.
~~102~~104 Investors must retain their interest in qualified equity investments throughout the seven-year period to receive the Investors must retain their interest in qualified equity investments throughout the seven-year period to receive the
full tax credit of 39% or risk forfeiture of such interest. For the first three years of the investment, the taxpayer/investor full tax credit of 39% or risk forfeiture of such interest. For the first three years of the investment, the taxpayer/investor
receives a credit equal to 5% of the total amount paid for the stock or capital interest at the time of purchase. For the receives a credit equal to 5% of the total amount paid for the stock or capital interest at the time of purchase. For the
final four years, the value of the credit is 6% annually. For more information, see CRS Report RL34402, final four years, the value of the credit is 6% annually. For more information, see CRS Report RL34402, New Markets
Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry. , by Donald J. Marples and Sean Lowry.
~~103~~105 The Small Business Jobs Act of 2010 (P.L. 111-240) authorized the BGP on September 27, 2010. The funds must be The Small Business Jobs Act of 2010 (P.L. 111-240) authorized the BGP on September 27, 2010. The funds must be
used to fund lending and basic financial services for community or economic development (e.g., affordable housing for used to fund lending and basic financial services for community or economic development (e.g., affordable housing for
low-income individuals, businesses that provide jobs for low-income people or are owned by low-income individuals). low-income individuals, businesses that provide jobs for low-income people or are owned by low-income individuals).
For more information, see CDFI Fund, “CDFI Bond Guarantee Program,” https://www.cdfifund.gov/programs-For more information, see CDFI Fund, “CDFI Bond Guarantee Program,” https://www.cdfifund.gov/programs-
training/Programs/cdfi-bond/Pages/default.aspx. training/Programs/cdfi-bond/Pages/default.aspx.
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~be repaid with interest (to the FFB).104 The authorized CDFIs would subsequently~~
~~use the cash proceeds to make short-term loans to other CDFIs. Stated~~
~~differently, the BGP would allow qualified CDFIs issuers to acquire federally~~
~~guaranteed funds and then provide long-term wholesale funding to other CDFIs.~~
~~(The CDFI borrower of funds must have collateral to obtain a loan from an~~
~~authorized CDFI, thus having similarities to a repurchase agreement.)~~
~~ Small Dollar Loan (SDL) Program. The SDL program, authorized by the~~
~~Dodd-Frank Act (P.L. 111-203), provides funding for SDLs.105 SDLs are~~
~~consumer loans with relatively low initial principal amounts (often less than~~
~~$1,000) with relatively short repayment periods (generally for a small number of~~
~~weeks or months).106 SDLs funded by grants from the SDL program cannot~~
~~exceed $2,500, must be repaid in installments, and cannot have any prepayment~~
106 The FFB is a U.S. government corporation under the general supervision and direction of Treasury. 107 See CDFI Fund, “Small Dollar Loan Program,” https://www.cdfifund.gov/programs-training/programs/sdlp. 108 See CRS Report R44868, Short-Term, Small-Dollar Lending: Policy Issues and Implications, by Darryl E. Getter. Congressional Research Service 20 Community Development Financial Institutions (CDFIs): Overview and Selected Issues penalties. Furthermore, SDL repayments must be reported to a least one of the penalties. Furthermore, SDL repayments must be reported to a least one of the
consumer reporting agencies that compiles and maintains files on consumers on a consumer reporting agencies that compiles and maintains files on consumers on a
nationwide basis, thus having similarities to payday alternative loans offered by nationwide basis, thus having similarities to payday alternative loans offered by
credit unions.credit unions.~~107~~109 The CDFI Fund also provides CDFIs with funds to defray the The CDFI Fund also provides CDFIs with funds to defray the
cost of establishing an SDL program.cost of establishing an SDL program.~~108~~110
During emergencies, Congress has authorized the CDFI Fund to provide additional financial During emergencies, Congress has authorized the CDFI Fund to provide additional financial
assistance. In response to COVID-19, for example, Treasury provided CDFIs with additional assistance. In response to COVID-19, for example, Treasury provided CDFIs with additional
financial support pursuant to Sections 522 and 523, Division N, of the Consolidated financial support pursuant to Sections 522 and 523, Division N, of the Consolidated
Appropriations Act, 2021 (P.L. 116-260).Appropriations Act, 2021 (P.L. 116-260).
 • Emergency Capital Investment Program (ECIP). Section 522 created the Section 522 created the
ECIP, which authorized Treasury to purchase up to $9 billion of equity shares in ECIP, which authorized Treasury to purchase up to $9 billion of equity shares in
CDFI depository institutions and minority depository institutions (MDIs).CDFI depository institutions and minority depository institutions (MDIs).~~109~~111 The The
ECIP investments would boost the capital buffers held by depositories against ECIP investments would boost the capital buffers held by depositories against
heightened default risks stemming from the pandemic.heightened default risks stemming from the pandemic.~~110~~112 As a result, these As a result, these
depositories would be able to remain in compliance with their prudential depositories would be able to remain in compliance with their prudential
requirements and continue lending. Of the $9 billion, $4 billion is set aside for requirements and continue lending. Of the $9 billion, $4 billion is set aside for
CDFIs and MDIs with less than $2 billion in assets, and of that, at least $2 billion CDFIs and MDIs with less than $2 billion in assets, and of that, at least $2 billion
is set aside for CDFIs and MDIs with less than $500 million in assets.is set aside for CDFIs and MDIs with less than $500 million in assets.~~111~~113 In In
October 2021, Treasury announced that 204 institutions had requested almost October 2021, Treasury announced that 204 institutions had requested almost

~~104 The FFB is a U.S. government corporation under the general supervision and direction of Treasury.~~
~~105 See CDFI Fund, “Small Dollar Loan Program,” https://www.cdfifund.gov/programs-training/programs/sdlp.~~
~~106 See CRS Report R44868, Short-Term, Small-Dollar Lending: Policy Issues and Implications, by Darryl E. Getter.~~
~~107~~$12.9 billion ($3.9 billion more than the program size limit) of ECIP investments.114 • CDFI Rapid Response Program. Section 523 appropriated an additional $3 billion of emergency grant funding for CDFIs to help their communities respond to the economic impact of the COVID-19 pandemic. Pursuant to Section 523, the CDFI Fund opened the first funding round for the CDFI Rapid Response Program in February 2021 to provide $1.25 billion to CDFIs.115 By June 2021, those funds were awarded to 863 CDFIs.116 CDFIs may apply and compete for financial awards provided by other departments in Treasury, other federal agencies, and federally related agencies or incentives. The list below provides examples of federal and federally related funding programs, but it is not all-inclusive. 109 See NCUA, “Payday Alternative Loans,” 84 Federal Register 51942-51952, October 1, 2019; and CRS Report See NCUA, “Payday Alternative Loans,” 84 Federal Register 51942-51952, October 1, 2019; and CRS Report
R46360, R46360, The Credit Union System: Developments in Lending and Prudential Risk Management, by Darryl E. Getter. , by Darryl E. Getter.
~~108~~110 See CDFI Fund, “CDFI Fund Releases Application Demand for FY2021 Round of Small Dollar Loan Program,” See CDFI Fund, “CDFI Fund Releases Application Demand for FY2021 Round of Small Dollar Loan Program,”
July 30, 2021, https://www.cdfifund.gov/news/443. July 30, 2021, https://www.cdfifund.gov/news/443.
~~109~~111 See CDFI Fund, “Treasury to Invest $9 Billion in Community Development Financial Institutions and Minority See CDFI Fund, “Treasury to Invest $9 Billion in Community Development Financial Institutions and Minority
Depository Institutions Through Emergency Capital Investment Program (ECIP),” press release, March 4, 2021, Depository Institutions Through Emergency Capital Investment Program (ECIP),” press release, March 4, 2021,
https://home.treasury.gov/news/press-releases/jy0047. https://home.treasury.gov/news/press-releases/jy0047.
~~110~~112 ECIP is also conceptually similar to the Troubled Asset Relief Program implemented in October 2008. See CRS ECIP is also conceptually similar to the Troubled Asset Relief Program implemented in October 2008. See CRS
Report R41427, Report R41427, Troubled Asset Relief Program (TARP): Implementation and Status, by Baird Webel. , by Baird Webel.
~~111~~113 See CDFI Fund, “Emergency Capital Investment Program,” https://home.treasury.gov/policy-issues/coronavirus/ See CDFI Fund, “Emergency Capital Investment Program,” https://home.treasury.gov/policy-issues/coronavirus/
assistance-for-small-businesses/emergency-capital-investment-program. assistance-for-small-businesses/emergency-capital-investment-program.
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~~$12.9 billion ($3.9 billion more than the program size limit) of ECIP~~
~~investments.112~~
~~ CDFI Rapid Response Program. Section 523 appropriated an additional $3~~
~~billion of emergency grant funding for CDFIs to help their communities respond~~
~~to the economic impact of the COVID-19 pandemic. Pursuant to Section 523, the~~
~~CDFI Fund opened the first funding round for the CDFI~~ 114 See U.S. Department of the Treasury, “Treasury Sees Robust Demand for Emergency Capital Investment,” October 18, 2021, https://home.treasury.gov/system/files/136/ECIP-Demand-Announcement-10-18-2021.pdf. 115 See CDFI Fund, “Treasury’s Community Development Financial Institutions Fund Opens Funding Round for CDFI Rapid Response Program,” press release, February 25, 2021, https://home.treasury.gov/news/press-releases/jy0035. 116 See CDFI Fund, “U.S. Treasury Awards $1.25 Billion to Support Economic Relief in Communities Affected by COVID-19,” June 15, 2021, https://www.cdfifund.gov/news/420. Congressional Research Service 21 Community Development Financial Institutions (CDFIs): Overview and Selected Issues •~~Rapid Response~~
~~Program in February 2021 to provide $1.25 billion to CDFIs.113 By June 2021,~~
~~those funds were awarded to 863 CDFIs.114~~
~~CDFIs may apply and compete for financial awards provided by other departments in Treasury,~~
~~other federal agencies, and federally related agencies or incentives. The list below provides~~
~~examples of federal and federally related funding programs, but it is not all-inclusive.~~
 The State Small Business Credit Initiative (SSBCI), a Treasury program The State Small Business Credit Initiative (SSBCI), a Treasury program
authorized by the Small Business Jobs Act of 2010 (P.L. 111-240), was initially authorized by the Small Business Jobs Act of 2010 (P.L. 111-240), was initially
created to provide assistance to small businesses following the Great Recession created to provide assistance to small businesses following the Great Recession
(2007-2009).(2007-2009).~~115~~117 In response to the pandemic, the American Rescue Plan Act of In response to the pandemic, the American Rescue Plan Act of
2021 (P.L. 117-2) reauthorized the SSBCI, which will provide a combined $10 2021 (P.L. 117-2) reauthorized the SSBCI, which will provide a combined $10
billion to small businesses in the states, the District of Columbia, territories, and billion to small businesses in the states, the District of Columbia, territories, and
tribal governments.tribal governments.~~116~~118 CDFIs can provide loans or investments to small CDFIs can provide loans or investments to small
businesses supported by SSBCI funds.businesses supported by SSBCI funds.~~117~~
119 • The U.S. Department of Agriculture (USDA) has a variety of grant programs that The U.S. Department of Agriculture (USDA) has a variety of grant programs that
CDFIs can apply for and subsequently provide loans in rural communities. CDFIs can apply for and subsequently provide loans in rural communities.~~118~~120 For For
example, the Intermediary Relending Program, the Rural Microentrepreneur example, the Intermediary Relending Program, the Rural Microentrepreneur
Assistance Program, and Value-Added Producer Grants provide loans or grants to Assistance Program, and Value-Added Producer Grants provide loans or grants to
financial intermediaries to support businesses and economic development in rural financial intermediaries to support businesses and economic development in rural
communities.communities.~~119~~
121 • Each Federal Home Loan Bank district has an Affordable Housing Program that Each Federal Home Loan Bank district has an Affordable Housing Program that
provides grants on a competitive basis to membership institutions, which may provides grants on a competitive basis to membership institutions, which may

~~112 See U.S. Department of the Treasury, “Treasury Sees Robust Demand for Emergency Capital Investment,” October~~
~~18, 2021, https://home.treasury.gov/system/files/136/ECIP-Demand-Announcement-10-18-2021.pdf.~~
~~113 See CDFI Fund, “Treasury’s Community Development Financial Institutions Fund Opens Funding Round for CDFI~~
~~Rapid Response Program,” press release, February 25, 2021, https://home.treasury.gov/news/press-releases/jy0035.~~
~~114 See CDFI Fund, “U.S. Treasury Awards $1.25 Billion to Support Economic Relief in Communities Affected by~~
~~COVID-19,” June 15, 2021, https://www.cdfifund.gov/news/420.~~
~~115~~include CDFIs.122 The grants can be used to support the acquisition, construction, or rehabilitation of affordable rental housing and for single-family housing programs for veterans, those with disabilities, or other designated needs.123 • CDFIs may obtain financing from banking firms that are covered by the Community Reinvestment Act (CRA; P.L. 95-128).124 By providing net assets to CDFIs that originate loans (particularly in the locations where they collect deposits), banks may obtain CRA credits that receive consideration when applying for branches, mergers, and acquisitions, among other things. Banks often provide funds to CDFIs through equity equivalent investments (EQ2s), which are debt instruments issued by CDFIs with a continuous rolling (indeterminate) maturity. EQ2s, from a bank’s perspective, are analogous to holding convertible preferred stock with a regularly scheduled repayment.125 117 See CRS Report R42581, See CRS Report R42581, State Small Business Credit Initiative: Implementation and Funding Issues, by Robert Jay , by Robert Jay
Dilger, Grant A. Driessen, and Adam G. Levin. Dilger, Grant A. Driessen, and Adam G. Levin.
~~116~~118 See Department of the Treasury, “State Small Business Credit Initiative (SSBCI),” https://home.treasury.gov/policy- See Department of the Treasury, “State Small Business Credit Initiative (SSBCI),” https://home.treasury.gov/policy-
issues/small-business-programs/state-small-business-credit-initiative-ssbci. issues/small-business-programs/state-small-business-credit-initiative-ssbci.
~~117~~119 See U.S. Congress, House Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital See U.S. Congress, House Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital
Access, Access, Can Opportunity Zones Address Concerns in the Small Business Economy, testimony of Jennifer A. Vasiloff, , testimony of Jennifer A. Vasiloff,
Chief External Affairs Officer, Opportunity Finance Network, 116th Cong., 1st sess., October 17, 2019. Chief External Affairs Officer, Opportunity Finance Network, 116th Cong., 1st sess., October 17, 2019.
~~118~~120 See U.S. Congress, House Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital See U.S. Congress, House Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital
Access, Access, Can Opportunity Zones Address Concerns in the Small Business Economy, testimony of Jennifer A. Vasiloff, , testimony of Jennifer A. Vasiloff,
Chief External Affairs Officer, Opportunity Finance Network, 116th Cong., 1st sess., October 17, 2019. Chief External Affairs Officer, Opportunity Finance Network, 116th Cong., 1st sess., October 17, 2019.
~~119~~121 For more information, see USDA, “Intermediary Relending Program,” https://www.rd.usda.gov/programs-services/ For more information, see USDA, “Intermediary Relending Program,” https://www.rd.usda.gov/programs-services/
business-programs/intermediary-relending-program; USDA, “Rural Microentrepreneur Assistance Program,” business-programs/intermediary-relending-program; USDA, “Rural Microentrepreneur Assistance Program,”
https://www.rd.usda.gov/programs-services/business-programs/rural-microentrepreneur-assistance-program; and https://www.rd.usda.gov/programs-services/business-programs/rural-microentrepreneur-assistance-program; and
USDA, “Value Added Producer Grants,” https://www.rd.usda.gov/programs-services/business-programs/value-added-USDA, “Value Added Producer Grants,” https://www.rd.usda.gov/programs-services/business-programs/value-added-
producer-grants. producer-grants.
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~include CDFIs.120 The grants can be used to support the acquisition, construction,~~
~~or rehabilitation of affordable rental housing and for single-family housing~~
~~programs for veterans, those with disabilities, or other designated needs.121~~
~~ CDFIs may obtain financing from banking firms that are covered by the~~
~~Community Reinvestment Act (CRA; P.L. 95-128).122 By providing net assets to~~
~~CDFIs that originate loans (particularly in the locations where they collect~~
~~deposits), banks may obtain CRA credits that receive consideration when~~
~~applying for branches, mergers, and acquisitions, among other things. Banks~~
~~often provide funds to CDFIs through equity equivalent investments (EQ2s),~~
~~which are debt instruments issued by CDFIs with a continuous rolling~~
~~(indeterminate) maturity. EQ2s, from a bank’s perspective, are analogous to~~
~~holding convertible preferred stock with a regularly scheduled repayment.123~~
122 For more information, see CRS Report R46499, The Federal Home Loan Bank (FHLB) System and Selected Policy Issues, by Darryl E. Getter. 123 For a summary, see FHLBanks, Affordable Housing 2020 Awards: FHLBank 2020 AHP Overview, at https://fhlbanks.com/affordable-housing-2020-awards/. 124 See CRS Report R43661, The Effectiveness of the Community Reinvestment Act, by Darryl E. Getter. 125 When the company is profitable, preferred stockholders receive dividends at regular intervals. If a publicly traded (continued...) Congressional Research Service 22 Community Development Financial Institutions (CDFIs): Overview and Selected Issues • The Community Development Block Grant (CDBG) program, administered by The Community Development Block Grant (CDBG) program, administered by
the Department of Housing and Urban Development (HUD), allocates federal the Department of Housing and Urban Development (HUD), allocates federal
assistance to state and local governments to support neighborhood revitalization assistance to state and local governments to support neighborhood revitalization
and community and economic development efforts.and community and economic development efforts.~~124~~126 CDFIs, particularly loan CDFIs, particularly loan
funds, may be eligible for CDBG funds to carry out activities that would create funds, may be eligible for CDBG funds to carry out activities that would create
or retain jobs in their target market areas or be located within HUD-approved or retain jobs in their target market areas or be located within HUD-approved
neighborhood revitalization strategy areas..~~125~~
127 • Numerous federal government agencies (e.g., HUD, USDA, the Small Business Numerous federal government agencies (e.g., HUD, USDA, the Small Business
Administration) and certain federally related entities guarantee loans for low- and Administration) and certain federally related entities guarantee loans for low- and
moderate-income borrowers or for borrowers who reside or operate businesses in moderate-income borrowers or for borrowers who reside or operate businesses in
underserved locations. Federally insured loans may cover some or all of the underserved locations. Federally insured loans may cover some or all of the
default risk depending upon the specific federal guaranty program. After default risk depending upon the specific federal guaranty program. After
receiving subsidized funds, a CDFI (as well as other traditional financial receiving subsidized funds, a CDFI (as well as other traditional financial
institutions) can originate loans that meet the eligibility requirements for various institutions) can originate loans that meet the eligibility requirements for various
federal guarantees, thus protecting the funds that were lent. federal guarantees, thus protecting the funds that were lent.
CDFIs’ Access to Selected Private Funding Sources
Despite access to public funding, CDFIs still need access to alternative funding sources for the Despite access to public funding, CDFIs still need access to alternative funding sources for the
following reasons. First, many CDFIs have greater funding needs than is available in CDFI grants following reasons. First, many CDFIs have greater funding needs than is available in CDFI grants
and awards, and they must raise private sector funds to even qualify for certain awards.and awards, and they must raise private sector funds to even qualify for certain awards.~~126 Some~~

~~120 For more information, see CRS Report R46499,~~ ~~The Federal Home Loan Bank (FHLB) System and Selected Policy~~
~~Issues, by Darryl E. Getter.~~
~~121 For a summary, see FHLBanks, Affordable Housing 2020 Awards: FHLBank 2020 AHP Overview, at~~
~~https://fhlbanks.com/affordable-housing-2020-awards/.~~
~~122 See CRS Report R43661, The Effectiveness of the Community Reinvestment Act, by Darryl E. Getter.~~
~~123 When the company is profitable, preferred stockholders receive dividends at regular intervals. If a publicly traded~~
128 Some awards provided by the CDFI Fund (e.g., financial assistance, technical assistance) require CDFIs to raise private funds, which may lessen a misaligned incentive problem, namely, to engage in lending activities that would require costly loss mitigation. Second, CDFIs tend to request more funding than they typically receive, which is exacerbated when federal programs experience budget cuts or changes in eligibility requirements, as highlighted in the following examples.129 • Contributions to the CMF, which must be made by Fannie Mae and Freddie Mac rather than through appropriations, were initially suspended in 2008 after Fannie and Freddie were placed under conservatorship.130 Furthermore, when applying company is liquidated, its creditors are paid first, followed by its preferred stockholders, and the common stockholders company is liquidated, its creditors are paid first, followed by its preferred stockholders, and the common stockholders
of the firm are paid last with whatever proceeds are left over. Preferred stockholders, therefore, provide of the firm are paid last with whatever proceeds are left over. Preferred stockholders, therefore, provide subordinate or or
mezzanine financing. For specific legal attributes of this financial instrument, see Beth Lipson, “Equity Equivalent financing. For specific legal attributes of this financial instrument, see Beth Lipson, “Equity Equivalent
Investments,” Investments,” Community Investments, vol. 14, no. 1 (March 2002), pp. 10-12. , vol. 14, no. 1 (March 2002), pp. 10-12.
~~124~~126 For more information, see CRS Report R43520, For more information, see CRS Report R43520, Community Development Block Grants and Related Programs: A
Primer, by Joseph V. Jaroscak. , by Joseph V. Jaroscak.
~~125~~127 For more information, see HUD, Community Development Block Grant Program: Guide to National Objectives and For more information, see HUD, Community Development Block Grant Program: Guide to National Objectives and
Eligible Activities for Entitlement Communities, https://www.huduser.gov/portal/oup/files/cdbgguide.pdf. Eligible Activities for Entitlement Communities, https://www.huduser.gov/portal/oup/files/cdbgguide.pdf.
~~126~~128 See Brett Theodos and Eric Hangen, See Brett Theodos and Eric Hangen, Tracking the Unequal Distribution of Community Development Funding in the
U.S., Urban Institute, January 31, 2019, https://www.urban.org/sites/default/files/publication/99704/, Urban Institute, January 31, 2019, https://www.urban.org/sites/default/files/publication/99704/
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~awards provided by the CDFI Fund (e.g., financial assistance, technical assistance) require CDFIs~~
~~to raise private funds, which may lessen a misaligned incentive problem, namely, to engage in~~
~~lending activities that would require costly loss mitigation. Second, CDFIs tend to request more~~
~~funding than they typically receive, which is exacerbated when federal programs experience~~
~~budget cuts or changes in eligibility requirements, as highlighted in the following examples.127~~
~~ Contributions to the CMF, which must be made~~tracking_the_unequal_distribution_of_community_development_funding_in_the_us_2.pdf. 129 See Department of the Treasury, Office of Inspector General, Audit of the Community Development Financial Institutions Fund’s Financial Statements for Fiscal Years 2021 and 2020. 130 See CRS Report R44525, Fannie Mae and Freddie Mac in Conservatorship: Frequently Asked Questions, by Darryl E. Getter. Instead, the Consolidation Appropriations Act, 2010 (P.L. 111-117) appropriated $80 million for the initial funding of the CMF for FY2010. See CDFI Fund, Agency Financial Report FY 2011, November 16, 2011, p. 8, https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi-fund-fy-2011-agency-financial-report-final-11-16-11.pdf. Appropriations for the CMF were discontinued in FY2011. The contribution requirements by Fannie Mae and Freddie by Fannie Mae and Freddie Mac were reinstated in 2014. See FHFA, “FHFA Statement on the Housing Trust Fund and Capital Magnet Fund,” December 11, 2014, http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Statement-on-the-Housing-Trust-Fund-and-Capital-Magnet-Fund.aspx.~~Mac~~
~~rather than through appropriations, were initially suspended in 2008 after~~ Fannie Fannie
~~and Freddie were placed under conservatorship.128 Furthermore, when applying~~
and Freddie contributed $100 million to the CMF in 2015. See FHFA, (continued...) Congressional Research Service 23 Community Development Financial Institutions (CDFIs): Overview and Selected Issues for CMF competitive awards, a CDFI must demonstrate in the application that for CMF competitive awards, a CDFI must demonstrate in the application that
the cost of the eligible activity equals at least 10 times the amount of the potential the cost of the eligible activity equals at least 10 times the amount of the potential
funding award.funding award.~~129~~131
• Appropriations delays resulted in delays implementing the BGP. Congress also Appropriations delays resulted in delays implementing the BGP. Congress also
reduced the program’s potential lending authority of $1 billion annually (for four reduced the program’s potential lending authority of $1 billion annually (for four
years of authorization) to $500 million annually.years of authorization) to $500 million annually.~~130~~132
In short, CDFIs essentially compete with each other for limited subsidized funding awards and, In short, CDFIs essentially compete with each other for limited subsidized funding awards and,
therefore, must also rely upon private funding sources, discussed in this section. therefore, must also rely upon private funding sources, discussed in this section.
Funding Sources for CDFI Depositories
The CDFI depository institutions, representing 54% of all CDFIs in 2020, can collect and pay The CDFI depository institutions, representing 54% of all CDFIs in 2020, can collect and pay
interest on federally insured deposits, which are typically less expensive sources of funds relative interest on federally insured deposits, which are typically less expensive sources of funds relative
to borrowing in the short-term financial money markets. Small depositories, however, collectively to borrowing in the short-term financial money markets. Small depositories, however, collectively

~~tracking_the_unequal_distribution_of_community_development_funding_in_the_us_2.pdf.~~
~~127 See Department of the Treasury, Office of Inspector General,~~ ~~Audit of the Community Development Financial~~
~~Institutions Fund’s Financial Statements for Fiscal Years 2021 and 2020~~.
~~128 See CRS Report R44525, Fannie Mae and Freddie Mac in Conservatorship: Frequently Asked Questions, by Darryl~~
~~E. Getter. Instead, the Consolidation Appropriations Act, 2010 (P.L. 111-117) appropriated $80 million for the initial~~
~~funding of the CMF for FY2010. See CDFI Fund, Agency Financial Report FY 2011, November 16, 2011, p. 8,~~
~~https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi-fund-fy-2011-agency-financial-report-final-11-16-11.pdf.~~
~~Appropriations for the CMF were discontinued in FY2011. The contribution requirements by Fannie Mae and Freddie~~
~~Mac were reinstated in 2014. See FHFA, “FHFA Statement on the Housing Trust Fund and Capital Magnet Fund,”~~
~~December 11, 2014, http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Statement-on-the-Housing-Trust-Fund-~~
~~and-Capital-Magnet-Fund.aspx. Fannie and Freddie contributed $100 million to the CMF in 2015. See FHFA,~~
hold substantially fewer deposits (relative to large banks).133 Furthermore, CDFI depositories that serve predominantly economically distressed markets are likely to collect even fewer deposits relative to comparable small depositories without CDFI designations. Nevertheless, CDFI depositories would collect low-cost deposits.134 As previously stated, 30% of CDFIs are credit unions that collectively hold 61.1% of CDFI industry assets in 2020. The National Credit Union Administration (NCUA), the primary regulator of credit unions, sponsors initiatives to support the mission and liquidity of small credit unions (less than $100 million in assets), eligible low-income designated credit unions, and minority credit unions with various exemptions and grants.135 CDFI credit unions are exempt “Housing Trust Fund,” 80 Federal Register 15885-15887, March 26, 2015; and FHFA, Office of the Inspector General, “Housing Trust Fund,” 80 Federal Register 15885-15887, March 26, 2015; and FHFA, Office of the Inspector General,
Audit of FHFA’s Oversight of the Enterprises’ Affordable Housing Set-Asides and Allocations, September 24, 2018, Audit of FHFA’s Oversight of the Enterprises’ Affordable Housing Set-Asides and Allocations, September 24, 2018,
pp. 11-13, https://www.fhfaoig.gov/Content/Files/AUD-2018-pp. 11-13, https://www.fhfaoig.gov/Content/Files/AUD-2018-
012%20FHFA%20Oversight%20of%20Affordable%20Housing.pdf. 012%20FHFA%20Oversight%20of%20Affordable%20Housing.pdf.
~~129~~131 See CDFI Fund, “Funding Opportunities: Capital Magnet Fund; 2021 Funding Round,” 86 See CDFI Fund, “Funding Opportunities: Capital Magnet Fund; 2021 Funding Round,” 86 Federal Register 50773- 50773-
50789, September 10, 2021. During FY2020, 27 of the total 48 awardees of CMF were certified CDFIs, representing 50789, September 10, 2021. During FY2020, 27 of the total 48 awardees of CMF were certified CDFIs, representing
2% of the CDFI industry. See CDFI Fund, “FY 2020 Capital Magnet Fund (CMF) Application Evaluation Process,” 2% of the CDFI industry. See CDFI Fund, “FY 2020 Capital Magnet Fund (CMF) Application Evaluation Process,”
https://www.cdfifund.gov/sites/cdfi/files/2021-04/https://www.cdfifund.gov/sites/cdfi/files/2021-04/
FY_2020_Capital_Magnet_Fund_Application_Review_Process_0.pdf. FY_2020_Capital_Magnet_Fund_Application_Review_Process_0.pdf.
~~130~~132 Congress reduced the program’s potential lending authority of $4 billion ($1 billion annually for four years of Congress reduced the program’s potential lending authority of $4 billion ($1 billion annually for four years of
authorization) to $1 billion between 2010 and 2014 due to delays in appropriating budget authority for new direct loan authorization) to $1 billion between 2010 and 2014 due to delays in appropriating budget authority for new direct loan
obligations under the program. The Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235), obligations under the program. The Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235),
reauthorized the program and limited the total loan amount supported by the bonds in FY2015 to $750 million. The reauthorized the program and limited the total loan amount supported by the bonds in FY2015 to $750 million. The
Consolidated Appropriations Act, 2016 (P.L. 114-113), extended authority to guarantee bonds in FY2016 to support Consolidated Appropriations Act, 2016 (P.L. 114-113), extended authority to guarantee bonds in FY2016 to support
$750 million in CDFI lending. The Consolidated Appropriations Act, 2017 (P.L. 115-31), limited the CDFI lending $750 million in CDFI lending. The Consolidated Appropriations Act, 2017 (P.L. 115-31), limited the CDFI lending
supported by the bonds issued in FY2017 to $500 million. See CDFI Fund, supported by the bonds issued in FY2017 to $500 million. See CDFI Fund, FY 2021 CDFI Bond Guarantee Program
Application Period Now Open, March 3, 2021, https://www.cdfifund.gov/node/1004796. , March 3, 2021, https://www.cdfifund.gov/node/1004796.
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~hold substantially fewer deposits (relative to large banks).131 Furthermore, CDFI depositories that~~
~~serve predominantly economically distressed markets are likely to collect even fewer deposits~~
~~relative to comparable small depositories without CDFI designations. Nevertheless, CDFI~~
~~depositories would collect low-cost deposits.132~~
~~As previously stated, 30% of CDFIs are credit unions that collectively hold 61.1% of CDFI~~
~~industry assets in 2020. The National Credit Union Administration (NCUA), the primary~~
~~regulator of credit unions, sponsors initiatives to support the mission and liquidity of small credit~~
~~unions (less than $100 million in assets), eligible low-income designated credit unions, and~~
~~minority credit unions with various exemptions and grants.133 CDFI credit unions are exempt~~
~~from the statutory cap on member business lending.134~~133 In 2019, 5,236 credit unions collected $1.22 trillion in deposits in 2019, while 4,381 small community bank collected $964 billion in deposits. By contrast, the remaining 796 banks that reported in 2019 collected $13.57 trillion in deposits. See NCUA, 2019 Annual Report, https://www.ncua.gov/files/annual-reports/annual-report-2019.pdf; and FDIC, Quarterly Banking Profile Fourth Quarter 2019, https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2019dec/qbp.pdf. 134 See Kirsten Moy et al., Approaches to CDFI Sustainability, Aspen Institute, July 2008, p. 10, Table 1, https://www.aspeninstitute.org/wp-content/uploads/files/content/docs/CDFISustainabilityStudy11.08.pdf. 135 See NCUA, Credit Union Resources and Expansion, https://www.ncua.gov/support-services/credit-union-resources-expansion. Congressional Research Service 24 Community Development Financial Institutions (CDFIs): Overview and Selected Issues from the statutory cap on member business lending.136 Credit unions are also eligible for grants Credit unions are also eligible for grants
and low-interest loans from the Community Development Revolving Loan Fund.and low-interest loans from the Community Development Revolving Loan Fund.~~135~~137 In short, In short,
NCUA can provide CDFI credit unions with access to funding at a lower cost relative to other NCUA can provide CDFI credit unions with access to funding at a lower cost relative to other
options outside of the credit union system, which can help alleviate liquidity pressures. options outside of the credit union system, which can help alleviate liquidity pressures.
The Federal Home Loan Bank (FHLB) System
CDFIs can apply to become members of the FHLB system, a government-sponsored enterprise, CDFIs can apply to become members of the FHLB system, a government-sponsored enterprise,
to gain access to short-term funding.to gain access to short-term funding.~~136~~138 Each district FHLB provides its members liquidity in the Each district FHLB provides its members liquidity in the
form of form of advances, which are cash loans. FHLB members may also receive discounted advances , which are cash loans. FHLB members may also receive discounted advances
via the FHLB’s Community Investment Program, which is designed to support residential and via the FHLB’s Community Investment Program, which is designed to support residential and
housing development in areas meeting certain eligibility requirements, as well as via the FHLB’s housing development in areas meeting certain eligibility requirements, as well as via the FHLB’s
Community Investment Cash Advance program, which is designed to support broader community Community Investment Cash Advance program, which is designed to support broader community
and economic development.and economic development.~~137~~139
As of the fourth quarter of 2020, 64 CDFIs were members of the FHLB system, representing 5% As of the fourth quarter of 2020, 64 CDFIs were members of the FHLB system, representing 5%
of all CDFIs in 2020.of all CDFIs in 2020.~~138~~140 Relying on FHLB advances may be a less feasible option for many Relying on FHLB advances may be a less feasible option for many
CDFIs for the following reasons. CDFIs for the following reasons.

~~131 In 2019, 5,236 credit unions collected $1.22 trillion in deposits in 2019, while 4,381 small community bank~~
~~collected $964 billion in deposits. By contrast, the remaining 796 banks that reported in 2019 collected $13.57 trillion~~
~~in deposits. See NCUA, 2019 Annual Report, https://www.ncua.gov/files/annual-reports/annual-report-2019.pdf; and~~
~~FDIC, Quarterly Banking Profile Fourth Quarter 2019, https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/~~
~~2019dec/qbp.pdf.~~
~~132 See Kirsten Moy et al., Approaches to CDFI Sustainability, Aspen Institute, July 2008, p. 10, Table 1,~~
~~https://www.aspeninstitute.org/wp-content/uploads/files/content/docs/CDFISustainabilityStudy11.08.pdf.~~
~~133 See NCUA, Credit Union Resources and Expansion, https://www.ncua.gov/support-services/credit-union-resources-~~
~~expansion.~~
~~134~~ • Member institutions must place a minimum paid-in capital stock investment as a condition to become and remain members of their district FHLB. These capital requirements increase the costs for CDFIs, particular many of the smaller CDFIs that are loan funds, to join the FHLB system.141 Furthermore, joining the FHLB system may be more cost-effective for CDFIs with large asset portfolios but less so for those with much smaller lending portfolios.142 • FHLB advances are collateralized by members’ assets, such as mortgages, mortgage-related assets, and certain small business loans. By contrast, certain loans that may be suitable for underserved markets (e.g., chattel loans) as well as other nonstandard CDFI loans that cannot be quickly liquidated may be considered ineligible collateral for FHLB advances.143 136 For those credit unions exempt from the business lending cap, their overall size may still limit the extent of their For those credit unions exempt from the business lending cap, their overall size may still limit the extent of their
business lending activities. For more information, see CRS Report R46360, business lending activities. For more information, see CRS Report R46360, The Credit Union System: Developments in
Lending and Prudential Risk Management, by Darryl E. Getter. , by Darryl E. Getter.
~~135~~137 See NCUA, “Community Development Revolving Loan Fund Access for Credit Unions,” 86 See NCUA, “Community Development Revolving Loan Fund Access for Credit Unions,” 86 Federal Register
17854-17857, April 6, 2021. 17854-17857, April 6, 2021.
~~136~~138 See CRS Report R46499, See CRS Report R46499, The Federal Home Loan Bank (FHLB) System and Selected Policy Issues, by Darryl E. , by Darryl E.
Getter. Getter.
~~137~~139 For an example of the criteria that would qualify for a discounted advance, see FHLB of Indianapolis, “Community For an example of the criteria that would qualify for a discounted advance, see FHLB of Indianapolis, “Community
Investment Program”, https://www.fhlbi.com/products-services/community-investment-and-housing/community-and-Investment Program”, https://www.fhlbi.com/products-services/community-investment-and-housing/community-and-
economic-development/community-investment-program; and FHLB of Cincinnati, “Community Investment Cash economic-development/community-investment-program; and FHLB of Cincinnati, “Community Investment Cash
Advances,” https://www.fhlbcin.com/housing-programs/community-investment-cash-advances/. Advances,” https://www.fhlbcin.com/housing-programs/community-investment-cash-advances/.
~~138~~140 See Cliff Rosenthal and Daniel Randall, See Cliff Rosenthal and Daniel Randall, The Evolution of CDFIs and Their Growing Partnership Opportunity with
the FHLBNY, FHLB of New York, April 29, 2021, p. 6, https://www.fhlbny.com/wp-content/uploads/2021/04/, FHLB of New York, April 29, 2021, p. 6, https://www.fhlbny.com/wp-content/uploads/2021/04/
FHLBNY-CDFI-Webinar_042921.pdf. FHLBNY-CDFI-Webinar_042921.pdf.
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~ Member institutions must place a minimum paid-in capital stock investment as a~~
~~condition to become and remain members of their district FHLB. These capital~~
~~requirements increase the costs for CDFIs, particular many of the smaller CDFIs~~
~~that are loan funds, to join the FHLB system.139 Furthermore, joining the FHLB~~
~~system may be more cost-effective for CDFIs with large asset portfolios but less~~
~~so for those with much smaller lending portfolios.140~~
~~ FHLB advances are collateralized by members’ assets, such as mortgages,~~
~~mortgage-related assets, and certain small business loans. By contrast, certain~~
~~loans that may be suitable for underserved markets (e.g., chattel loans) as well as~~
~~other non-standard CDFI loans that cannot be quickly liquidated may be~~
~~considered ineligible collateral for FHLB advances.141~~
141 See GAO, Federal Home Loan Banks: Collateral Requirements Discourage Some Community Development Financial Institutions from Seeking Membership, GAO-15-352, April 5, 2015, https://www.gao.gov/products/gao-15-352. 142 See Rosenthal and Randall, The Evolution of CDFIs, p. 6. 143 Chattel loans are used to finance personal property that is not permanently attached to land. If borrowers were to default, the ability of lenders to recover losses on personal property is more difficult. For more information pertaining to manufactured housing chattel loans, see CRS Report R46746, Fannie Mae and Freddie Mac: Recent Administrative Developments, by Darryl E. Getter. Congressional Research Service 25 Community Development Financial Institutions (CDFIs): Overview and Selected Issues • CDFI loan funds may specialize in certain types of lending. For example, while CDFI loan funds may specialize in certain types of lending. For example, while
some CDFIs have a primary focus on underwriting and raising funds for housing, some CDFIs have a primary focus on underwriting and raising funds for housing,
others may focus on community and small businesses. FHLB membership others may focus on community and small businesses. FHLB membership
eligibility, however, requires eligibility, however, requires ~~non-depository~~nondepository institutions to have mortgage-related institutions to have mortgage-related
assets that reflect a commitment to housing finance as determined by the assets that reflect a commitment to housing finance as determined by the
discretion of a FHLB.discretion of a FHLB.~~142 Non-depository~~144 Nondepository CDFIs without a primary housing focus, CDFIs without a primary housing focus,
therefore, may not be granted FHLB membership. Failure of a therefore, may not be granted FHLB membership. Failure of a ~~non-depository~~nondepository
CDFI would likely not have a material financial impact on a regional FHLB.CDFI would likely not have a material financial impact on a regional FHLB.~~143~~145
However, an affected FHLB must incur additional costs if it must sell distressed However, an affected FHLB must incur additional costs if it must sell distressed
assets (i.e., non-housing loans) held by a failed CDFI lacking both a primary assets (i.e., non-housing loans) held by a failed CDFI lacking both a primary
housing focus and a receiver such as the FDIC or NCUA.housing focus and a receiver such as the FDIC or NCUA.~~144~~146
The Farm Credit System (FCS)
The FCS is a nationwide financial cooperative consisting of four district banks and member The FCS is a nationwide financial cooperative consisting of four district banks and member
lending institutions that collectively operate as a government-sponsored enterprise.lending institutions that collectively operate as a government-sponsored enterprise.~~145~~147 After After
raising funds by selling bonds to private investors, the FCS acts as either a direct lender to raising funds by selling bonds to private investors, the FCS acts as either a direct lender to
eligible individuals and businesses (those unable to qualify for commercial loans from a eligible individuals and businesses (those unable to qualify for commercial loans from a
depository) or as a wholesale lender to its member institutions. As a direct lender, the FCS has the depository) or as a wholesale lender to its member institutions. As a direct lender, the FCS has the
authority to make certain agricultural and rural loans that can be used to purchase land, livestock, authority to make certain agricultural and rural loans that can be used to purchase land, livestock,

~~139 See GAO, Federal Home Loan Banks: Collateral Requirements Discourage Some Community Development~~
~~Financial Institutions from Seeking Membership, GAO-15-352, April 5, 2015, https://www.gao.gov/products/gao-15-~~
~~352.~~
~~140 See Rosenthal and Randall, The Evolution of CDFIs, p. 6.~~
~~141 Chattel loans are used to finance personal property that is not permanently attached to land. If borrowers were to~~
~~default, the ability of lenders to recover losses on personal property is more difficult. For more information pertaining~~
~~to manufactured housing chattel loans, see CRS Report R46746,~~ ~~Fannie Mae and Freddie Mac: Recent Administrative~~
~~Developments, by Darryl E. Getter.~~
~~142 See FHFA, “Members of Federal Home Loan Banks,” 81 Federal Register 3281, January 20, 2016.~~
~~143~~equipment, and other supplies as well as to construct buildings or make farm improvements.148 As wholesale lenders, the FCS’s district banks can lend funds to their member financial institutions, which subsequently provide similar agricultural and rural loans. In addition, the FCS provides loans to other financial institutions (OFIs), which are nonmembers that are significantly involved in lending to borrowers eligible to receive loans from the FCS. Some CDFIs—specifically some Native CDFIs, for example—participate as OFIs with the FCS to obtain the low-cost funding available to its member institutions.149 As of December 31, 2020, the FCS reported providing 18 OFIs with loans of $839 million but did not report separately on CDFI-designated OFIs.150 CDFI Securities Offerings Some CDFI loan funds and CDFI venture capital funds may offer debt securities to the private sector in exchange for funding. CDFIs can use these funds to support impact investing—also referred to as environmental, social, and governance (ESG) investing—which involves providing financial support to firms focusing on environmental issues, social issues, and governance (e.g., a 144 See FHFA, “Members of Federal Home Loan Banks,” 81 Federal Register 3281, January 20, 2016. 145 See Federal Housing Finance Board, “Federal Home Loan Bank Membership for Community Development See Federal Housing Finance Board, “Federal Home Loan Bank Membership for Community Development
Financial Institutions,” 75Financial Institutions,” 75 Federal Register 680, January 5, 2010. 680, January 5, 2010.
~~144~~146 See Karan Kaul and Laurie Goodman, See Karan Kaul and Laurie Goodman, Should Nonbank Mortgage Companies Be Permitted to Become Federal
Home Loan Bank Members, Urban Institute, June 2020, https://www.urban.org/sites/default/files/publication/102400/, Urban Institute, June 2020, https://www.urban.org/sites/default/files/publication/102400/
should-nonbank-mortgage-companies-be-permitted-to-become-federal-home-loan-bank-members.pdf. should-nonbank-mortgage-companies-be-permitted-to-become-federal-home-loan-bank-members.pdf.
~~145~~147 See CRS Report RS21278, See CRS Report RS21278, Farm Credit System, by Jim Monke; CRS Report R46914, , by Jim Monke; CRS Report R46914, An Overview of Rural Credit
Markets, coordinated by Andrew P. Scott; and Farm Credit Administration, , coordinated by Andrew P. Scott; and Farm Credit Administration, 2020 Annual Report, https://www.fca.gov/, https://www.fca.gov/
template-fca/about/2020AnnualReport.pdf. template-fca/about/2020AnnualReport.pdf.
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~equipment, and other supplies as well as to construct buildings or make farm improvements.146 As~~
~~wholesale lenders, the FCS’s district banks can lend funds to their member financial institutions,~~
~~which subsequently provide similar agricultural and rural loans. In addition, the FCS provides~~
~~loans to other financial institutions (OFIs), which are non-members that are significantly involved~~
~~in lending to borrowers eligible to receive loans from the FCS. Some CDFIs—specifically some~~
~~Native CDFIs, for example—participate as OFIs with the FCS to obtain the low-cost funding~~
~~available to its member institutions.147 As of December 31, 2020, the FCS reported providing 18~~
~~OFIs with loans of $839 million but did not report separately on CDFI-designated OFIs.148~~
~~CDFI Securities Offerings~~
~~Some CDFI loan funds and CDFI venture capital funds may offer debt securities to the private~~
~~sector in exchange for funding. CDFIs can use these funds to support impact investing—also~~
~~referred to as environmental, social, and governance (ESG) investing—which involves providing~~
~~financial support to firms focusing on environmental issues, social issues, and governance (e.g., a~~
~~firm’s self-governance and integrity when conducting business).149~~148 See USDA, “Grants and Loans,” https://www.usda.gov/topics/farming/grants-and-loans. 149 See GAO, Indian Issues: Agricultural Credit Needs and Barriers to Lending on Tribal Lands, GAO-19-464, May 2019, https://www.gao.gov/assets/700/699447.pdf; and Joe Boomgaard, “Native American Agriculture Fund Spins Off New Financial Institution to Help Native Farmers,” Tribal Business News, December 20, 2021, https://tribalbusinessnews.com/sections/food-agriculture/13742-native-american-agriculture-fund-spins-off-new-financial-institution-to-help-native-farmers. 150 See Farm Credit Administration, 2020 Annual Report, p. 16. Congressional Research Service 26 Community Development Financial Institutions (CDFIs): Overview and Selected Issues firm’s self-governance and integrity when conducting business).151 If ESG or impact investment If ESG or impact investment
opportunities arise in a target market area, some CDFIs may issue either rated or unrated opportunities arise in a target market area, some CDFIs may issue either rated or unrated
securities to meet certain funding requirements: securities to meet certain funding requirements:
• Some CDFIs can issue short-term debt securities and subsequently use the Some CDFIs can issue short-term debt securities and subsequently use the
funding to offer financial support for economic security, health and healthy food, funding to offer financial support for economic security, health and healthy food,
environmental sustainability, women- and minority-owned businesses, and other environmental sustainability, women- and minority-owned businesses, and other
causes.causes.~~150~~152 These CDFIs can raise funds either directly for their borrowers or for These CDFIs can raise funds either directly for their borrowers or for
the benefit of other CDFIs.the benefit of other CDFIs.~~151~~153 Instead of relying on short-term borrowings to fund Instead of relying on short-term borrowings to fund
long-term loans, debt securities may be issued for maturities equal to or even long-term loans, debt securities may be issued for maturities equal to or even
greater than the maturities of customer loans retained in lending portfolios.greater than the maturities of customer loans retained in lending portfolios.~~152~~154
CDFI-issued securities can receive ratings based on the financial strength of a CDFI-issued securities can receive ratings based on the financial strength of a
CDFI issuer to withstand changes in its operating environment. These ratings CDFI issuer to withstand changes in its operating environment. These ratings
may be provided by independent rating agencies that specialize in assessing may be provided by independent rating agencies that specialize in assessing
impact investments.impact investments.~~153~~155 Although CDFIs under most circumstances would pay for ratings, a strong credit rating may increase the attractiveness of these debt issuances to investors and perhaps allow issuers to pay lower yields.156 • Rather than issue investment-grade-rated securities, some CDFIs may choose to issue speculative (e.g., non-investment-grade rated or non-rated) securities that typically trade less frequently than higher-rated bonds. However, they may cost less to issue and be more suitable for small issuers or for financing small projects.157 The Securities and Exchange Commission’s (SEC’s) Regulation D provides an exemption from the normal registration process for entities that want to raise funds using a nonpublic, private placement of (unrated) securities. Regulation D requires no general solicitation under most circumstances, the securities cannot be resold, and the issuance cannot exceed certain dollar amounts subject to specific restrictions.158 Despite lower issuance costs, investors typically expect to be compensated at higher rates of return for agreeing to hold speculative securities. During periods of low interest rates on government securities, however, speculative securities may become more attractive such that investors may be willing to accept relatively lower compensation for holding 151 ~~Although CDFIs under most circumstances would pay for~~

~~146 See USDA, “Grants and Loans,” https://www.usda.gov/topics/farming/grants-and-loans.~~
~~147 See GAO, Indian Issues: Agricultural Credit Needs and Barriers to Lending on Tribal Lands, GAO-19-464, May~~
~~2019, https://www.gao.gov/assets/700/699447.pdf; and Joe Boomgaard, “Native American Agriculture Fund Spins Off~~
~~New Financial Institution to Help Native Farmers,” Tribal Business News, December 20, 2021,~~
~~https://tribalbusinessnews.com/sections/food-agriculture/13742-native-american-agriculture-fund-spins-off-new-~~
~~financial-institution-to-help-native-farmers.~~
~~148 See Farm Credit Administration, 2020 Annual Report, p. 16.~~
~~149~~ See Rosalie Sheehy Cates and Chris Larson, See Rosalie Sheehy Cates and Chris Larson, Connecting CDFIs to the Socially Responsible Investor Community, ,
Triple Bottom Line Collaborative, October 2010, https://www.cdfifund.gov/sites/cdfi/files/documents/connecting-Triple Bottom Line Collaborative, October 2010, https://www.cdfifund.gov/sites/cdfi/files/documents/connecting-
cdfis-to-the-socially-responsible-investor-commun.pdf; and CRS In Focus IF11716, cdfis-to-the-socially-responsible-investor-commun.pdf; and CRS In Focus IF11716, Introduction to Financial Services:
Environmental, Social, and Governance (ESG) Issues, by Raj Gnanarajah and Gary Shorter. , by Raj Gnanarajah and Gary Shorter.
~~150~~152 See Aeris, “Aeris Announces 14 New CDFI Ratings,” January 7, 2021, https://www.aerisinsight.com/2021/01/07/ See Aeris, “Aeris Announces 14 New CDFI Ratings,” January 7, 2021, https://www.aerisinsight.com/2021/01/07/
aeris-announces-14-new-cdfi-ratings/. aeris-announces-14-new-cdfi-ratings/.
~~151~~153 See CNote, “Offering Circular,” March 4, 2021, https://www.sec.gov/Archives/edgar/data/0001683145/ See CNote, “Offering Circular,” March 4, 2021, https://www.sec.gov/Archives/edgar/data/0001683145/
000121465921002710/r34210253g2.htm. 000121465921002710/r34210253g2.htm.
~~152~~154 See Elise Balboni and Anna Smukowski, See Elise Balboni and Anna Smukowski, CDFIs and the Capital Markets: Tapping into Impact Investors, Local , Local
Initiatives Support Corporation, June 2020, https://www.lisc.org/media/filer_public/01/23/0123a940-dada-4c37-9db2-Initiatives Support Corporation, June 2020, https://www.lisc.org/media/filer_public/01/23/0123a940-dada-4c37-9db2-
12cae1853859/062920_report_cdfis_capital_markets.pdf. 12cae1853859/062920_report_cdfis_capital_markets.pdf.
~~153~~155 See Aeris, “Aeris Announces 14 New CDFI Ratings.” 156 See Capital Institute, “CARS: A Performance Evaluation Tool,” March 27, 2010, https://capitalinstitute.org/blog/cars-performance-evaluation-tool/. 157 See Capital Institute, “CARS: A Performance Evaluation Tool.” 158 For more information, see SEC, Investor Bulletin: Private Placements Under Regulation D, September 24, 2014, https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-31; and Raffi Garnighian, Gonzalo Go, and Anna Pinedo, General Solicitation and General Advertising, Mayer Brown, June 21, 2021, https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2019/08/on-point—general-solicitation.pdf. Congressional Research Service 27 Community Development Financial Institutions (CDFIs): Overview and Selected Issues more risk, resulting in access to cheaper funding for issuers during this particular period.159 ~~See Aeris, “Aeris Announces 14 New CDFI Ratings.”~~
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~ratings, a strong credit rating may increase the attractiveness of these debt~~
~~issuances to investors and perhaps allow issuers to pay lower yields.154~~
~~ Rather than issue investment-grade-rated securities, some CDFIs may choose to~~
~~issue speculative (e.g., non-investment grade rated or non-rated) securities that~~
~~typically trade less frequently than higher-rated bonds. However, they may cost~~
~~less to issue and be more suitable for small issuers or for financing small~~
~~projects.155 The Securities and Exchange Commission’s (SEC’s) Regulation D~~
~~provides an exemption from the normal registration process for entities that want~~
~~to raise funds using a non-public, private placement of (unrated) securities.~~
~~Regulation D requires no general solicitation under most circumstances, the~~
~~securities cannot be resold, and the issuance cannot exceed certain dollar~~
~~amounts subject to specific restrictions.156 Despite lower issuance costs, investors~~
~~typically expect to be compensated at higher rates of return for agreeing to hold~~
~~speculative securities. During periods of low interest rates on government~~
~~securities, however, speculative securities may become more attractive such that~~
~~investors may be willing to accept relatively lower compensation for holding~~
~~more risk, resulting in access to cheaper funding for issuers during this particular~~
~~period.157~~
The Capacity Building Initiative (CBI)
The CDFI Fund provides technical assistance and training to CDFIs via the CBI program. The CBI helps CDFIs The CDFI Fund provides technical assistance and training to CDFIs via the CBI program. The CBI helps CDFIs
develop greater expertise in underwriting and other operating issues. For example, CBI awards may provide develop greater expertise in underwriting and other operating issues. For example, CBI awards may provide
CDFIs with background on securities markets and regulations, thereby increasing their capacity to facilitate small CDFIs with background on securities markets and regulations, thereby increasing their capacity to facilitate small
business lending and ESG investments.business lending and ESG investments.~~158~~160
Crowdfunding on Behalf of Small Businesses
CDFIs may participate in crowdfunding, which refers to use of the internet by small businesses to CDFIs may participate in crowdfunding, which refers to use of the internet by small businesses to
raise funding through limited contributions from a large number of contributors and guided by raise funding through limited contributions from a large number of contributors and guided by
Regulation Crowdfunding.Regulation Crowdfunding.~~159~~161 For example, a CDFI may serve as a crowdfunding platform to raise For example, a CDFI may serve as a crowdfunding platform to raise
funds on behalf of a small business operating in its target market, and the collected proceeds can funds on behalf of a small business operating in its target market, and the collected proceeds can
be used for the Community Advantage program to increase access to loans guaranteed by the be used for the Community Advantage program to increase access to loans guaranteed by the
Small Business Administration (SBA).Small Business Administration (SBA).~~160~~162 CDFIs can register with the SEC as CDFIs can register with the SEC as funding portals, ,

~~154 See Capital Institute, “CARS: A Performance Evaluation Tool,” March 27, 2010, https://capitalinstitute.org/blog/~~
~~cars-performance-evaluation-tool/.~~
~~155 See Capital Institute, “CARS: A Performance Evaluation Tool.”~~
~~156 For more information, see SEC, Investor Bulletin: Private Placements Under Regulation D, September 24, 2014,~~
~~https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-31;~~
~~and Raffi Garnighian, Gonzalo Go, and Anna Pinedo, General Solicitation and General Advertising, Mayer Brown,~~
~~June 21, 2021, https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2019/08/on-point—~~
~~general-solicitation.pdf.~~
~~157~~defined as crowdfunding intermediaries (rather than as brokers).163 Afterwards, a CDFI can provide a crowdfunding platform, which is the internet website that provides the information about the project(s) in need of funding and electronically collects the proceeds contributed by crowdfunding participants. In 2012, the SEC finalized a rule implementing the Jumpstart Our Business Startups Act (JOBS Act; P.L. 112-106), increasing access to low-cost capital by allowing an exemption from the normal (and costly) registration and filing requirements for 159 See Sam Goldfarb, “Search for Yield Leads Bond Buyers to Unrated Debt,” See Sam Goldfarb, “Search for Yield Leads Bond Buyers to Unrated Debt,” Wall Street Journal, September 5, , September 5,
2021, https://www.wsj.com/articles/search-for-yield-leads-bond-buyers-to-unrated-debt-11630834201. 2021, https://www.wsj.com/articles/search-for-yield-leads-bond-buyers-to-unrated-debt-11630834201.
~~158~~160 See CDFI Fund, “Innovations in Small Business Lending,” February 25, 2012, https://www.cdfifund.gov/programs- See CDFI Fund, “Innovations in Small Business Lending,” February 25, 2012, https://www.cdfifund.gov/programs-
training/training-ta/resource-banks/innovations-in-small-business-lending. training/training-ta/resource-banks/innovations-in-small-business-lending.
~~159~~161 See Financial Industry Regulatory Authority, See Financial Industry Regulatory Authority, Crowdfunding and the JOBS Act: What Investors Should Know, ,
https://www.finra.org/investors/alerts/crowdfunding-and-jobs-act. https://www.finra.org/investors/alerts/crowdfunding-and-jobs-act.
~~160~~162 For more information, see CDFI Fund, “New SBA Community Advantage Initiative Opens 7(a) Loan Program to For more information, see CDFI Fund, “New SBA Community Advantage Initiative Opens 7(a) Loan Program to
CDFIs,” December 15, 2010, https://www.cdfifund.gov/news/66. The SBA requires financial intermediaries to deposit CDFIs,” December 15, 2010, https://www.cdfifund.gov/news/66. The SBA requires financial intermediaries to deposit
~~Congressional Research Service~~

28

~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~defined as crowdfunding intermediaries (rather than as brokers).161 Afterwards, a CDFI can~~
~~provide a crowdfunding platform, which is the internet website that provides the information~~
~~about the project(s) in need of funding and electronically collects the proceeds contributed by~~
~~crowdfunding participants. In 2012, the SEC finalized a rule implementing the Jumpstart Our~~
~~Business Startups Act (JOBS Act; P.L. 112-106), increasing access to low-cost capital by~~
~~allowing an exemption from the normal (and costly) registration and filing requirements for~~
~~entities (meeting certain requirements) to make low-dollar security offerings via crowdfunding.162~~
~~On November 2, 2020, the SEC increased the threshold limit from $1 million to $5 million over a~~
~~12-month period, thus allowing crowdfunding to become a more viable low-cost funding option~~
~~for various businesses.163~~
~~Congressional Considerations~~
~~The CDFIs’ target markets are comprised of higher-risk customers that are more costly to serve in~~
~~comparison to prime borrowers. CDFIs rely considerably on public and private grants, awards,~~
~~and donations to obtain the net assets to fund their lending portfolios, which are comprised of~~
~~higher-risk loans. By subsidizing the costs to provide extensive amounts of loss mitigation,~~
~~CDFIs gain a financial advantage over both traditional and subprime lenders that enable them to~~
~~serve higher-risk borrowers and promote financial inclusion.~~
~~Policies to mitigate societal costs that can arise if financial institutions make loans to borrowers~~
~~who are more likely to have repayment problems inadvertently limit making credit available to~~

10% or 15% of the outstanding balance of a guaranteed loan in a microloan revolving fund account or loan loss reserve 10% or 15% of the outstanding balance of a guaranteed loan in a microloan revolving fund account or loan loss reserve
fund account. See SBA, “Operate as an Intermediary,” https://www.sba.gov/partners/lenders/microloan-program/fund account. See SBA, “Operate as an Intermediary,” https://www.sba.gov/partners/lenders/microloan-program/
operate-intermediary; SBA, operate-intermediary; SBA, SBA Microloan Program, Session: Loan Side Basics, https://www.sba.gov/sites/default/, https://www.sba.gov/sites/default/
files/files/Loan%20Side%20Basics.pdf; CRS Report R41057, files/files/Loan%20Side%20Basics.pdf; CRS Report R41057, Small Business Administration Microloan Program, by , by
Robert Jay Dilger and Anthony A. Cilluffo; Stephen Umberger, “U.S. Small Business Administration Loan Funds Robert Jay Dilger and Anthony A. Cilluffo; Stephen Umberger, “U.S. Small Business Administration Loan Funds
Available to Purchase Commercial Real Estate,” SBA, https://www.sba.gov/content/u-s-small-business-administration-Available to Purchase Commercial Real Estate,” SBA, https://www.sba.gov/content/u-s-small-business-administration-
loan-funds-available-purchase-commercial-real-estate; and Frank Altman, President and CEO, Capital Reinvestment loan-funds-available-purchase-commercial-real-estate; and Frank Altman, President and CEO, Capital Reinvestment
Fund, USA, letter to U.S. Securities and Exchange Commission, February 3, 2014, https://www.sec.gov/comments/s7-Fund, USA, letter to U.S. Securities and Exchange Commission, February 3, 2014, https://www.sec.gov/comments/s7-
09-13/s70913-224.pdf. 09-13/s70913-224.pdf.
~~161~~163 Specifically, a funding portal that is a crowdfunding intermediary does not (1) offer investment advice or Specifically, a funding portal that is a crowdfunding intermediary does not (1) offer investment advice or
recommendations; (2) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; recommendations; (2) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal;
(3) compensate employees, agents, or others persons for such solicitation or based on the sale of securities displayed or (3) compensate employees, agents, or others persons for such solicitation or based on the sale of securities displayed or
referenced on its website or portal; (4) hold, manage, possess, or otherwise handle investor funds or securities; or (5) referenced on its website or portal; (4) hold, manage, possess, or otherwise handle investor funds or securities; or (5)
engage in such other activities as the SEC, by rule, determines appropriate. See SEC, “Jumpstart Our Business Startups engage in such other activities as the SEC, by rule, determines appropriate. See SEC, “Jumpstart Our Business Startups
Act Frequently Asked Questions About Crowdfunding Intermediaries,” May 7, 2012, https://www.sec.gov/divisions/Act Frequently Asked Questions About Crowdfunding Intermediaries,” May 7, 2012, https://www.sec.gov/divisions/
marketreg/tmjobsact-crowdfundingintermediariesfaq.htm. For more information, see SEC, “Registration of Funding marketreg/tmjobsact-crowdfundingintermediariesfaq.htm. For more information, see SEC, “Registration of Funding
Portals: A Small Entity Compliance Guide,” https://www.sec.gov/divisions/marketreg/tmcompliance/Portals: A Small Entity Compliance Guide,” https://www.sec.gov/divisions/marketreg/tmcompliance/
fpregistrationguide.htm; John Hamilton, President, City First Enterprises, to U.S. Securities and Exchange fpregistrationguide.htm; John Hamilton, President, City First Enterprises, to U.S. Securities and Exchange
Commission, February 3, 2014, https://www.sec.gov/comments/s7-09-13/s70913-228.pdf; and CRS Report R45221, Commission, February 3, 2014, https://www.sec.gov/comments/s7-09-13/s70913-228.pdf; and CRS Report R45221,
Capital Markets, Securities Offerings, and Related Policy Issues, by Eva Su. , by Eva Su.
~~162~~Congressional Research Service 28 Community Development Financial Institutions (CDFIs): Overview and Selected Issues entities (meeting certain requirements) to make low-dollar security offerings via crowdfunding.164 On November 2, 2020, the SEC increased the threshold limit from $1 million to $5 million over a 12-month period, thus allowing crowdfunding to become a more viable low-cost funding option for various businesses.165 Congressional Considerations The CDFIs’ target markets are comprised of higher-risk customers that are more costly to serve in comparison to prime borrowers. CDFIs rely considerably on public and private grants, awards, and donations to obtain the net assets to fund their lending portfolios, which are comprised of higher-risk loans. By subsidizing the costs to provide extensive amounts of loss mitigation, CDFIs gain a financial advantage over both traditional and subprime lenders that enable them to serve higher-risk borrowers and promote financial inclusion. Policies to mitigate societal costs that can arise if financial institutions make loans to borrowers who are more likely to have repayment problems inadvertently limit making credit available to some borrowers with the potential to become more creditworthy.166 For example, prudential regulations for traditional depository institutions are designed to sustain sufficient liquidity and capital reserves to buffer against default losses, thereby mitigating widespread public pessimism and loss of confidence in the banking and financial system.167 Frequent loan defaults, liquidity disruptions, or declines in asset prices (e.g., market value of loans) that occur more frequently with transactions involving higher-risk populations—those who have with impaired credit histories or face greater income volatility—pose greater costs for prudentially regulated institutions.168 Consequently, policies that support the CDFI industry’s mission may complement policies that promote the stability of financial institutions, particularly if the latter policies, which preclude taking above-normal risks, discourage greater accommodation of higher-risk 164 See SEC, “Crowdfunding,” 80 Federal Register 71387-71680, November 16, 2015; and CRS Report R45308, See SEC, “Crowdfunding,” 80 Federal Register 71387-71680, November 16, 2015; and CRS Report R45308, JOBS
and Investor Confidence Act (House-Amended S. 488): Capital Markets Provisions, coordinated by Eva Su. , coordinated by Eva Su.
~~163~~165 See SEC, “SEC Harmonizes and Improves ‘Patchwork’ Exempt Offering Framework,” November 2, 2020, See SEC, “SEC Harmonizes and Improves ‘Patchwork’ Exempt Offering Framework,” November 2, 2020,
https://www.sec.gov/news/press-release/2020-273; and SEC, “Facilitating Capital Formation and Expanding https://www.sec.gov/news/press-release/2020-273; and SEC, “Facilitating Capital Formation and Expanding
Investment Opportunities by Improving Access to Capital in Private Markets,” 86Investment Opportunities by Improving Access to Capital in Private Markets,” 86 Federal Register 3496-3605, January 3496-3605, January
14, 2021. The final rule also eliminated investment limits for accredited investors and revised the calculation methods 14, 2021. The final rule also eliminated investment limits for accredited investors and revised the calculation methods
used for used for ~~non-accredited~~nonaccredited investors. The SEC defines investors. The SEC defines accredited investor as an individual earning gross income as an individual earning gross income
exceeding $200,000 (or $300,000 with a spouse) in each of the two most recent years with an expectation of earning exceeding $200,000 (or $300,000 with a spouse) in each of the two most recent years with an expectation of earning
the same income in the current year. For a more detailed explanation, see CRS In Focus IF11278, the same income in the current year. For a more detailed explanation, see CRS In Focus IF11278, Accredited Investor
Definition and Private Securities Markets, by Eva Su. 166 Stated differently, policies to correct a negative externality may be regressive. For a discussion on the regressivity of a Pigouvian tax, see Benjamin B. Lockwood and Dmitry Taubinsky, Regressive Sin Taxes, National Bureau of Economic Research, Working Paper no. 23085, March 2017, https://www.nber.org/system/files/ working_papers/w23085/w23085.pdf. 167 See CRS Report R40417, Macroprudential Oversight: Monitoring Systemic Risk in the Financial System, by Darryl E. Getter. 168 See CRS Report R44573, Overview of the Prudential Regulatory Framework for U.S. Banks: Basel III and the Dodd-Frank Act, by Darryl E. Getter. Congressional Research Service 29 Community Development Financial Institutions (CDFIs): Overview and Selected Issues customers.169~~and Private Securities Markets, by Eva Su.~~
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~~Community Development Financial Institutions (CDFIs): Overview and Selected Issues~~

~~some borrowers with the potential to become more creditworthy.164 For example, prudential~~
~~regulations for traditional depository institutions are designed to sustain sufficient liquidity and~~
~~capital reserves to buffer against default losses, thereby mitigating widespread public pessimism~~
~~and loss of confidence in the banking and financial system.165 Frequent loan defaults, liquidity~~
~~disruptions, or declines in asset prices (e.g., market value of loans) that occur more frequently~~
~~with transactions involving higher-risk populations—those who have with impaired credit~~
~~histories or face greater income volatility—pose greater costs for prudentially regulated~~
~~institutions.166 Consequently, policies that support the CDFI industry’s mission may complement~~
~~policies that promote the stability of financial institutions, particularly if the latter policies, which~~
~~preclude taking above-normal risks, discourage greater accommodation of higher-risk~~
~~customers.167~~ Alternatively, CDFIs may still be considered weak financial institutions that may Alternatively, CDFIs may still be considered weak financial institutions that may
face insolvency in the absence of subsidies, which distort the true costs of the default risks face insolvency in the absence of subsidies, which distort the true costs of the default risks
associated with serving unprofitable borrowers. Hence, subsidies deployed to counterbalance associated with serving unprofitable borrowers. Hence, subsidies deployed to counterbalance
residual effects that stem from various prudential policies may still result in a less productive use residual effects that stem from various prudential policies may still result in a less productive use
of funds.of funds.
Another factor for consideration is the willingness of the private sector to support financial Another factor for consideration is the willingness of the private sector to support financial
inclusion efforts. As a type of public-private partnership, CDFIs are required to raise funds from inclusion efforts. As a type of public-private partnership, CDFIs are required to raise funds from
the private sector to mitigate the risk of a CDFI shifting additional costs and higher financial the private sector to mitigate the risk of a CDFI shifting additional costs and higher financial
default risks to the public sector as well as to supplement the unevenness or decline in available default risks to the public sector as well as to supplement the unevenness or decline in available
public funding. The sustainability of the CDFI industry’s public-private partnership approach, public funding. The sustainability of the CDFI industry’s public-private partnership approach,
therefore, may signal the extent to which private lenders are willing to put their funds at risk to therefore, may signal the extent to which private lenders are willing to put their funds at risk to
support financial inclusion.support financial inclusion.~~168~~170
Various metrics related to the overall performance and effectiveness of CDFIs may demonstrate Various metrics related to the overall performance and effectiveness of CDFIs may demonstrate
the progress they have made toward financial inclusion—but data challenges exist. For example, the progress they have made toward financial inclusion—but data challenges exist. For example,
large amounts of servicing and loss mitigation adds ambiguity to some CDFI performance large amounts of servicing and loss mitigation adds ambiguity to some CDFI performance
metrics. Data collection gaps impede the ability to measure CDFI industry effectiveness. metrics. Data collection gaps impede the ability to measure CDFI industry effectiveness.
Furthermore, the scarcity of comparable data concerning the lending of other small lenders on Furthermore, the scarcity of comparable data concerning the lending of other small lenders on
these populations and areas is scarce, making it difficult to demonstrate that CDFIs have an these populations and areas is scarce, making it difficult to demonstrate that CDFIs have an
impact beyond those provided by other small lenders that do not receive these subsidies. Even if impact beyond those provided by other small lenders that do not receive these subsidies. Even if

~~164 Stated differently, policies to correct a negative externality may be regressive. For a discussion on the regressivity of~~
~~a Pigouvian tax, see Benjamin B. Lockwood and Dmitry Taubinsky, Regressive Sin Taxes, National Bureau of~~
~~Economic Research, Working Paper no. 23085, March 2017, https://www.nber.org/system/files/~~
~~working_papers/w23085/w23085.pdf.~~
165 See CRS Report R40417, Macroprudential Oversight: Monitoring Systemic Risk in the Financial System~~, by~~ better data were available, CDFI customers face greater income volatility, which can still undermine any benefits provided by CDFIs. Author Information Darryl Darryl
~~E. Getter.~~
~~166 See CRS Report R44573,~~ ~~Overview of the Prudential Regulatory Framework for U.S. Banks: Basel III and the~~
~~Dodd-Frank Act, by Darryl E. Getter.~~
~~167~~E. Getter Specialist in Financial Economics 169 In contrast to what economists refer to as a Pigouvian tax, which raises the cost of a practice that arguably imposes a In contrast to what economists refer to as a Pigouvian tax, which raises the cost of a practice that arguably imposes a
societal cost (negative externality) and discourages the practice, a Pigouvian subsidy lowers the cost of a practice that societal cost (negative externality) and discourages the practice, a Pigouvian subsidy lowers the cost of a practice that
arguably increases a societal benefit. For example, capital requirements for depositories discourage excessive risk-arguably increases a societal benefit. For example, capital requirements for depositories discourage excessive risk-
taking, thus resembling a Pigouvian tax designed to reduce a negative externality (e.g., bank runs). (Note that capital taking, thus resembling a Pigouvian tax designed to reduce a negative externality (e.g., bank runs). (Note that capital
requirements are not taxes paid to government. The point here is that the cost of an activity has increased.) Likewise, requirements are not taxes paid to government. The point here is that the cost of an activity has increased.) Likewise,
subsidies to absorb the additional costs to serve higher-risk populations may be considered a Pigouvian correction to subsidies to absorb the additional costs to serve higher-risk populations may be considered a Pigouvian correction to
the extent they lessen the negative externality of financial exclusion, which may arise from prudential regulations. For the extent they lessen the negative externality of financial exclusion, which may arise from prudential regulations. For
examples of Pigouvian subsidy applications, see Nathaniel Hendren, Camille Landais, and Johannnes Spinnewijn, examples of Pigouvian subsidy applications, see Nathaniel Hendren, Camille Landais, and Johannnes Spinnewijn,
Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design, National Bureau of Economic , National Bureau of Economic
Research, Working Paper no. 27842, September 2020, https://www.nber.org/papers/w27842; and Lily L. Batchelder, Research, Working Paper no. 27842, September 2020, https://www.nber.org/papers/w27842; and Lily L. Batchelder,
Fred T. Goldberg Jr., and Peter R. Orszag, “Efficiency and Tax Incentives: The Case for Refundable Tax Credits,” Fred T. Goldberg Jr., and Peter R. Orszag, “Efficiency and Tax Incentives: The Case for Refundable Tax Credits,”
Stanford Law Review, vol. 59, no. 1 (2006), pp. 23-76. , vol. 59, no. 1 (2006), pp. 23-76.
~~168~~170 See Timothy Besley and Maitreesh Ghatak, “Profit with Purpose? A Theory of Social Enterprise,” See Timothy Besley and Maitreesh Ghatak, “Profit with Purpose? A Theory of Social Enterprise,” American
Economic Journal: Economic Policy 2017, vol. 9, no. 3 (August 2017), pp. 19-58. , vol. 9, no. 3 (August 2017), pp. 19-58.
Congressional Research Service Congressional Research Service

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Community Development Financial Institutions (CDFIs): Overview and Selected Issues

~~better data were available, CDFI customers face greater income volatility, which can still~~
~~undermine any benefits provided by CDFIs.~~

~~Author Information~~

~~Darryl E. Getter~~

~~Specialist in Financial Economics~~

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