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

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

Community Development Financial Institutions September 29, 2023
(CDFIs): Overview and Selected Issues
Darryl E. Getter
The Community Development Financial Institutions (CDFI) Fund was created by the Riegle
Specialist in Financial
Community Development Regulatory Improvement Act of 1994 (P.L. 103-325) to promote
Economics
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)
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
provided by the CDFI Fund that promotes community development in markets comprised of economically distressed people
and places.
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
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
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
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
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
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
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
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
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-
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
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
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
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
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.

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Contents
Introduction ..................................................................................................................................... 1
CDFI Industry: Composition, Size, Product Lines .......................................................................... 2
CDFI Niche Markets ....................................................................................................................... 5
Defining and Reporting of Target Markets ............................................................................... 5
The Higher Costs to Serve and Service Target Markets ............................................................ 8
Evaluating Performance and Effectiveness of CDFIs ................................................................... 10
Evaluating the Financial Performance of CDFIs ..................................................................... 11
Evaluating the Effectiveness of CDFIs ................................................................................... 15
Public and Private Funding Sources .............................................................................................. 17
CDFIs’ Access to Federally Subsidized Funding .................................................................... 18
CDFIs’ Access to Selected Private Funding Sources .............................................................. 23
Funding Sources for CDFI Depositories ........................................................................... 24
The Federal Home Loan Bank (FHLB) System ............................................................... 25
The Farm Credit System (FCS) ........................................................................................ 26
CDFI Securities Offerings ................................................................................................ 26
Crowdfunding on Behalf of Small Businesses ................................................................. 28
Congressional Considerations ....................................................................................................... 29

Tables
Table 1. CDFI Fund’s Minimum and Prudent Standards (MAPS):
Selected Metrics, Definitions, and Key Considerations ............................................................. 14

Contacts
Author Information ........................................................................................................................ 30

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

Introduction
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.
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
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
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
places.3 With the CDFI designation, these institutions are eligible to receive financial awards and
other assistance from the CDFI Fund.4
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
linking borrowers with savers.5 When creating these formal systems, Congress usually
encourages covered financial intermediaries—even if they predominantly serve more
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
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
traditionally underserved populations and markets to affordable financial services and products,
the policy goal generally referred to as financial inclusion.7
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
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)
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,”
http://www.cdfifund.gov/who_we_are/about_us.asp.
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/
resource_centers/cdfi/pdf/cdfi-special-2011.pdf.
3 For more information, see CDFI Fund, “CDFI Certification,” https://www.cdfifund.gov/programs-training/
certification/cdfi.
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-
certification.pdf.
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
Community Development Financial Institutions,” Journal of Law and Policy, vol. 6, no. 2 (1998), pp. 571-651.
6 See CDFI Fund, The CDFI Fund: Empowering Underserved Communities, https://www.cdfifund.gov/sites/cdfi/files/
documents/cdfi_brochure-updated-dec2017.pdf.
7 The term public-private partnership 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,
public-private partnership 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?,”
https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi_infogrpahic_v03aaf.pdf. For more information about financial
inclusion efforts, see CRS Report R45979, Financial Inclusion and Credit Access Policy Issues, by Cheryl R. Cooper;
and CRS In Focus IF11631, Financial Inclusion: Access to Bank Accounts, by Cheryl R. Cooper.
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intermediaries must limit their exposure to above-normal risks and additional costs that could
threaten both their actual and perceived financial well-being.
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
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
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
another funding source to meet cash flow (liquidity) needs typically faced by traditional financial
institutions.
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
is essential when serving nontraditional borrowers, adds ambiguity to the usual interpretations.
Data collection gaps also exist, particularly in regard to the lending activities of small institutions
and small loans with nonstandardized (financial) characteristics.9 Furthermore, greater income
volatility experienced in underserved communities can undermine efforts facilitated by CDFIs
toward financial inclusion.
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,
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
considerations for Congress.
CDFI Industry: Composition, Size, Product Lines
Depository institutions (i.e., for-profit banks and nonprofit credit unions), loan funds, and venture
capital funds may become designated CDFIs.
• Depository institutions provide financial services to savers (via accepting
checking and savings deposits) and borrowers (via providing consumer and
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
loans. Depositories also have prudential government regulators monitoring their
financial safety and soundness practices. For example, depositories must hold
reserves to buffer against financial losses due to borrowers’ defaults. Many CDFI
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
• 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
the Nonprofit Intermediary,” Nonprofit and Voluntary Sector Quarterly, vol. 37, no. 1 (March 2008), pp. 19-38.
9 See CRS In Focus IF11742, Too Small to Collect Big Data: Financial Inclusion Implications, by Darryl E. Getter.
10 A more extensive definition of a community bank incorporates its functions along with asset size. See Federal
Deposit Insurance Corporation (FDIC), FDIC Community Banking Study, December 2012, http://www.fdic.gov/
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.
11 Some loan funds may be referred to as community development loan funds. For more information, see OCC,
(continued...)
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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
private sector investors include pension funds, university endowments, various
types of financial institutions, (philanthropic) foundations, and individuals. Some
of these private sector sources may donate funds. Loan funds also adopt various
types of business models. Revolving loan funds, which rely upon the repayment
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
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
securities to investors (in exchange for cash) that must be repaid with interest,
and some micro loan funds may use crowdfunding.15
• For-profit and nonprofit venture capital funds are non-bank financial entities that
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
a traditional loan obligation. Instead, they have ownership interests (equity
stakes) and receive an unspecified return linked to the fluctuating value of a
specific investment. A CDFI venture capitalist, for example, may invest directly
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
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
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
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
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/
publications-and-resources/publications/community-affairs/community-developments-insights/pub-insights-oct-
2014.pdf.
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).
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.
14 See Charles Tansey et al., Capital Markets, CDFIs, and Organizational Credit Risk (Durham, NH: Carsey Institute,
2010), p. 4, https://www.cdfifund.gov/sites/cdfi/files/documents/capital-markets-cdfis-and-organizational-credit-
risk.pdf.
15 See SEC, “Updated Investor Bulletin: Crowdfunding for Investors,” May 10, 2017, https://www.sec.gov/oiea/
investor-alerts-bulletins/ib_crowdfunding-.html.
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,
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
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-
union-resources-expansion/field-membership-expansion/serving-underserved/expanding-service-underserved-areas-
application.
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.
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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
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
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
banks are defined as having $10 billion or less in assets). Furthermore, if these calculations
included assets held by all depositories and other nondepository financial institutions (without
CDFI designations), then the percentage of CDFI representation in the U.S. financial system
would be less than 1%.
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 consumer finance category
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
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,
CDFIs provide mainstream financial products with longer-term maturities such as residential
mortgages, automobile loans, and student loans. The residential real estate financing category,
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
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
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
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
traditional financial products to meet their needs.
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
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
(e.g., apartment buildings, senior residence facilities and nursing homes) and commercial (e.g.,
medical and healthcare facilities, educational facilities) structures.

19 See NCUA, 2019 Annual Report, 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-
quarterly/2021-vol15-1/fdic-v15n1-4q2020.pdf. Because the banking industry is comparably larger than the credit
union industry, a small community bank 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 community bank, this segment of the
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.
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/
ACR_Public_Report_Final_10062021_508Compliant_v2.pdf.
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.
22 See Surekha Carpenter et al., 2021 CDFI Survey Key Findings, Federal Reserve System, August 12, 2021,
https://fedcommunities.org/data/2021-cdfi-survey-key-findings/.
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CDFI Niche Markets
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.
Defining and Reporting of Target Markets
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
CDFI’s financial products (e.g., loans) must be deployed in an approved target market or eligible
market, 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
Title 12, Section 1805.201(b)(3)(ii)(D), of the Code of Federal Regulations and
would have a significant unmet need for loans, equity investments, or other
financial products or services or is wholly located within an Empowerment Zone
currently in effect or Enterprise Community (as designated under Section 1391 of
the Internal Revenue Code of 1986 [26 U.S.C. 1391]).25
• For a specified geographic area, target populations consist of individuals from the
following populations. First, low-income targeted population is defined as
individuals whose family income, adjusted for family size, is not more than (1)
for metropolitan areas, 80% of the area median family income in metropolitan
areas; and (2) for nonmetropolitan areas, the greater of 80% of the area median
family income or 80% of the statewide nonmetropolitan area median family
income. Second, other targeted populations include African Americans,
Hispanics, Native Americans, Native Alaskans residing in Alaska, Native
Hawaiians residing in Hawaii, other Pacific Islanders residing in other Pacific
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
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
concentration in credit card lending.
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, 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/
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,
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/
cdfi/files/2021-02/3.%20FA%20Application%20Guidance%20FY%202021.pdf. The CDFI Fund appears to use the
terms target market and eligible market interchangeably.
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-
equivalent-investments.pdf. For more information about Empowerment Zones and Enterprise Communities, see CRS
Report R41639, Empowerment Zones, Enterprise Communities, and Renewal Communities: Comparative Overview
and Analysis, by Donald J. Marples.
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• 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
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
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
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
• 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
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.
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
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
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 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
food deserts.31 The CDFI Fund provides grants to CDFIs that subsequently target
organizations serving low-income neighborhoods with limited access to
affordable and nutritious food.
• The CDFI Fund initiated a capacity-building program to expand credit and other
financial services to people with disabilities. Disabilities may increase the
difficulty to maintain gainful employment, thus increasing the difficulty to
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).
27 See CDFI Fund, “Bank Enterprise Award Program,” https://www.cdfifund.gov/programs-training/programs/bank-
enterprise-award.
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,”
https://view.officeapps.live.com/op/view.aspx?src=
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_Census
.xlsx.
29 See CDFI Fund, Bank Enterprise Award Program 2020 CIMS User Instructions, https://www.cdfifund.gov/sites/
cdfi/files/documents/7.-fy-2020-bea-program-application-cims-instructions.pdf.
30 See CDFI Fund, Expanding Opportunity: The CDFI Fund’s FY 2019 Year in Review, https://www.cdfifund.gov/
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 the Treasury, Agriculture, and Health and Human
Services.
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.
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• 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
literacy, financial planning, budgeting, saving, and other financial counseling.33
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
eligible markets.34 Any organization—and not just CDFIs—may apply for EMC
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 Reports (ACR).36 The CDFI Fund uses ACRs to ensure that its awards are disbursed to
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
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
introduce the Certification Transaction Level Report, which is designed to standardize and
automate the data collection process.37 Additionally, CIMS, 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 communities.38 On October 1, 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,
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-
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.
Overbay.
34 For more information, see CRS Report R46941, Financial Literacy and Financial Education Policy Issues, by
Cheryl R. Cooper.
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/
cdfi/reporting-step.
37 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
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.
38 See CDFI Fund, “Community Development Financial Institutions Fund Mapping System (CIMS),”
https://www.cdfifund.gov/Pages/mapping-system.aspx.
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.
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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
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.42 The concern that banking deserts may rise increases
with the decline in the number of physical branches.43
Although the demand for physical branch services may have decreased more broadly as online banking services
have grown, a physical CDFI location may stil be useful for the fol owing reasons.44 Banking deserts, particularly
those in rural areas, may lack broadband access.45 Online financial services cannot be provided without broadband
access as well as secure (encrypted) WiFi access. In addition, rather than col ecting traditional financial information
in digital form, CDFIs col ect soft information, which requires detailed elaboration and is normally col ected from
customers in person at physical locations.46 Furthermore, CDFIs may need to stay in close geographical proximity
to their customers to monitor their changing financial circumstances as well as any col ateral (e.g., local real estate)
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.47 Generally speaking, banks
(or other financial institutions) in vulnerable locations tend to be vulnerable themselves to the localized financial
risks faced by their clientele.48
The Higher Costs to Serve and Service Target Markets
Given the target market requirements, certified CDFIs are likely to be principally engaged in risk-
based or subprime lending.49 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
where banks do not have a large concentration of deposits. See OCC, “Community Reinvestment Act Regulations,” 85
Federal Register 34748, June 5, 2020.
42 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-
20c.pdf.
43 See Dahl and Franke, Banking Deserts Become a Concern.
44 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/
03/banking-deserts-branch-closings-and-soft-information/.
45 Broadband access 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), Broadband: FCC
Is Taking Steps to Accurately Map Locations That Lack Access, September 2021, GAO-21-104447,
https://www.gao.gov/assets/720/716822.pdf.
46 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,
and Soft Information.”
47 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-
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.
48 See Dahl and Franke, Banking Deserts Become a Concern; 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,
June 12, 2020, https://www.federalreserve.gov/econres/notes/feds-notes/how-do-rural-and-urban-retail-banking-
customers-differ-20200612.htm.
49 There is no consensus definition of subprime 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
history, whether the borrower received a loan from a lender specializing in lending to borrowers with impaired or
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conduct fewer transactions with traditional depositories.50 Small business startups that lack
comprehensive financial and performance data or sufficient collateral to secure loans may be
considered subprime borrowers.51 Small businesses that operate in distressed communities may
also be considered subprime borrowers that face less predictable revenues streams.52 For
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-
and moderate-income tenants, thus defeating the purpose of building affordable housing.53 A
survey of CDFIs corroborates that income loss was the most significant challenge facing their
clients in 2020 and 2021.54
CDFIs, therefore, rely extensively on relationship lending, which allows lenders to better
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
businesses located in distressed communities—and also incurs more costs. Extensive relationship
lending requires gathering soft information, which contains circumstantial details for borrowers
with less traditional financial information and records.55 By contrast, traditional data—such as
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
convertible to a digital format.56 For CDFIs, originating loans—evaluating lending risks,
providing financial education programs, providing flexible underwriting criteria, offering less
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
generally more costly relative to automated processes that can be more readily adopted for
traditional customers.57

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:
Current Issues and Future Prospects,” Journal of Urban Affairs, vol. 26, no. 2 (2004), pp. 177-195.
51 See CRS Report R45878, Small Business Credit Markets and Selected Policy Issues, by Darryl E. Getter.
52 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,
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,
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.
53 See CRS Report R46480, Multifamily Housing Finance and Selected Policy Issues, by Darryl E. Getter.
54 See Carpenter et al., 2021 CDFI Survey Key Findings.
55 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-
us-economy/; and Board of Governors of the Federal Reserve System, “Community Development Financial
Institutions.”
56 See CRS Report R44125, Consumer Credit Reporting, Credit Bureaus, Credit Scoring, and Related Policy Issues, by
Cheryl R. Cooper and Darryl E. Getter.
57 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
Financial 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
automated underwriting, see FDIC, 2018 FDIC Small Business Lending Survey, https://www.fdic.gov/bank/historical/
sbls/full-survey.pdf; American Bankers Association, The State of Digital Lending: Results of an American Bankers
(continued...)
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After origination, loans require servicing, 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
interest payments. For a nonperforming loan, meaning that payment is not made in full or behind
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
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.58
In small business lending, prospective clients sometimes lack the eligible collateral to secure a
loan.59 In these cases, lenders may require loan (debt) covenants, which are contractual
requirements to assure that a borrower’s initial financial standing at underwriting remains in place
over the life of a loan.60 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
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
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
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
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-
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
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,
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
and private sector sources. By subsidizing the heightened costs and risks, the public and private
sector funding allows CDFIs to facilitate the transitioning of nontraditional customers into
mainstream financial markets, thus furthering financial inclusion goals. (In this report, the section
entitled “Public and Private Funding Sources” summarizes the various funding awards and
fundraising activities undertaken by CDFIs.) In view of the subsidies, public and private
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.

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,” Federal Reserve
Bank of San Francisco Community Investments, 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
Loan Bank Membership for Community Development Financial Institutions,” 75 Federal Register 678-704, January 5,
2010.
59 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.
60 See Ronald J. Mann, “The Role of Secured Credit in Small-Business Lending,” Georgetown Law Journal, vol. 86,
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
resiliency to key financial risks linked to their product lines.61 Tailoring prudential standards for
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
of localized and highly customized loans.62 Despite these challenges, the CDFI Fund has adopted
a set of minimum and prudent standards (MAPS), some described in Table 1 at the end of this
section, similar to the CAMELS composite rating system for prudentially regulated
depositories.63 Because CDFI depositories already have government prudential regulators, the
MAPS are particularly useful to assess nondepository CDFIs such as loan funds that lack
prudential regulators.64
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
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 misaligned incentive problem in public-private
partnerships, in which one partner shifts larger shares of risks and costs to the other partner.65 In
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
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
determining whether and how much financial support to provide CDFI applicants.

61 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
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
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.
62 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-
management.pdf.
63 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
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
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
prudential regulators of depository institutions, 1 is the highest value and 5 is the lowest value for CAMELS ratings.)
64 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
Application Evaluation Process;” Oweesta Corporation, Native CDFI Capital Access Convening 2018, June 12-14,
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
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.
65 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
and Guy-Uriel Charles, “Public Programs, Private Financing,” Law and Contemporary Problems, vol. 81, no. 137
(2018), pp. 137-160.
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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.66 The
Federal Home Loan Bank system requires member depository institutions to have prudential
federal or state regulators; nondepository CDFIs must comply with MAPS to become members.67
MAPS, therefore, may provide CDFI sponsors with some indication of a CDFI’s ability to
manage risk.
Interpreting individual MAPS at face value may provide limited information about the specific
circumstances of an individual CDFI. For example
• The deployment ratio, computed as the gross number of loans outstanding
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
and among individual CDFIs.68 A low deployment ratio may indicate that a CDFI
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
areas pose excessive amounts of financial risk, which could jeopardize future
public and private funding awards. Some CDFIs may lack staffing capacity to
quickly process a volume increase in loan applications. Some CDFIs may face
greater competition with non-CDFI lenders. Some CDFI depositories may not
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
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,
and loan funds were more likely to cite lack of staffing capacity.69 A 2021 CDFI
Survey found that over 75% of surveyed CDFIs cited limited staffing and
funding as preventing them from providing more services.70
• The self-sufficiency ratio, the ratio of earned income to total operating expenses
(over a year), can gauge a CDFI’s need for financial assistance.71 Interpretation
of the self-sufficiency ratio, however, may not be straightforward.72 The self-
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,
portfolio at risk ratio, and change in portfolio at risk ratio—would also require
examining. Nevertheless, CDFIs without prudential regulators would not be
required to write-off nonperforming assets or halt lending following a wave of

66 Specifically, banks are allowed to make investments to CDFIs that are at least adequately capitalized by their safety
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.
67 See CRS Report R46499, The Federal Home Loan Bank (FHLB) System and Selected Policy Issues, by Darryl E.
Getter.
68 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/
deployment_strategies_ta_memo.pdf.
69 See Sereleas, Barber, and Moira Warnement, Deployment Strategies for CDFI Small Business Lenders.
70 See Carpenter et al., 2021 CDFI Survey Key Findings.
71 See Chaney, Community Development Financial Institutions.
72 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.
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defaults.73 Likewise, because CDFIs tend to quickly intervene to mitigate losses
stemming from distressed loans, the efficacy of those outcomes would not
necessarily be captured by those ratios and still require further scrutiny. Lastly,
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
traditional funding.
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
reported that CDFI credit unions had the highest deployment ratios in FY2020.74 In addition, the
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 in Table 1 below. In FY2020, CDFI credit unions also
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
of loss mitigation activities that would have otherwise translated into large losses for traditional
and subprime lenders without CDFI designations.75 In other words, if the subsidies indirectly
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
sponsors rather than abated, then CDFIs may arguably benefit more from the subsidies than their
customers.76 Furthermore, determining the feasibility of expanding target markets arguably
becomes more difficult when financial metrics have contradictory interpretations and information
about CDFI profitability is limited.77
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, CDFI Futures: An Industry at a Crossroads, Opportunity Finance Network, March 2016, p. 10,
https://ofn.org/sites/default/files/resources/PDFs/Publications/NowakPaper_FINAL.pdf.
74 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/
ACR_Public_Report_Final_10062021_508Compliant_v2.pdf.
75 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
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, Expanding Opportunity.
76 Economic theory states that the inelastic 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
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
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
Frank et al., Principles of Microeconomics, 8th ed. (McGraw-Hill, 2022). For more information on the field of
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
zombie 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
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,” American Economic Review, vol.
95, no. 4 (September 2005), pp. 1144-1166; Ricardo J. Caballero, Takeo Hoshi, and Anil K. Kashyap, “Zombie
Lending and Depressed Restructuring in Japan,” American Economic Review, vol. 98, no. 5 (December 2008), pp.
1943-1977; and Viral Acharya, Simone Lenzu, and Olivier Wang, Zombie Lending and Policy Traps, working paper,
October 29, 2021, https://voxeu.org/article/zombie-lending-and-policy-traps.
77 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-
nationwide/. The CDFI Fund does not report the return on average assets for the CDFI industry or by institution type.
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activities, measured either in number or dollar amount of its total activities, occur in at least one
eligible target market.78 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
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.79 For this reason, the CDFI Fund has
proposed lowering the minimum dollar threshold to 50%.80
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
The sum of total loans charged off
Asset quality
Ratio
minus recoveries, divided by total loans
receivable.
Current Ratio
Total current assets divided by current
Liquidity
liabilities.
Target Value = 1.25
Target Value for Native CDFIs > 1.0
Deployment Ratio
The total gross loans outstanding
Liquidity
divided by a CDFI’s total available funds CDFI Fund historical target > 50%
that can be used for lending.
Earnings Ratio (Income
Total revenue divided by total
Earnings
Ratio)
expenses.
Loan Loss (Reserves)
The total amount of loan loss reserves
Asset quality
Ratio
(that can be used to buffer against loan
loss) divided by the total amount of
loans outstanding. This ratio, which has
similarities to certain bank capital-asset
ratios, measures a CDFI’s vulnerability
to anticipated loan defaults.
Net Asset Ratio
Total net assets (equity) divided by
Capital adequacy
total assets. This ratio, which has
CDFI Fund Historical target > 20%
similarities to certain bank capital-asset
ratios, measures a CDFI’s vulnerability
to unanticipated loan defaults.
Net Income

Earnings
Target value >0
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
to the CDFI Fund, which has the right to accept or reject the explanation. See CDFI Fund, “Announcement Type:
Notice and Request for Information,” 82 Federal Register 2251-2254, January 9, 2017.
79 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-
content/uploads/2020/11/Inclusiv-Comments-CDFI-Certification-Application-11-2020.pdf.
80 See CDFI Fund, “Notice of Information Collection and Request for Public Comment,” 85 Federal Register 27275-
27278, May 7, 2020.
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MAPS Metric Name
Definition and Explanation
Considerations and Targets
Portfolio Concentration
The percentage of loans outstanding to
Sensitivity to future market changes and
Risk
a particular industry divided by total
concentration risk
loans in portfolio, which measures the
degree of concentration a CDFI’s
lending portfolio has to risk stemming
from a particular industry.
Portfolio at Risk
The total amount of loans delinquent
Asset quality
by 30+, 60+, or 90+ days divided by the Target values:
total outstanding loans in portfolio.
Affordable Housing (First Lien) ≤ 7%
Affordable Housing (Second Lien) ≤ 7%
Business Loans ≤ 10%
Consumer Loans ≤ 12%
Reliance on Largest
Revenue from largest fund/total
Earnings
Funding Source
revenue.
Self-Sufficiency Ratio
The ratio of earned income to total
Earnings
operating expenses [over a year].
Target for nonprofit CDFIs ≥ 0.40
Target for for-profit CDFIs ≥ 0.70
Troubled Debt
TDRs/total loans receivable.
Asset quality
Restructures (TDR) Ratio
Sources: Oweesta Corporation and the CDFI Fund.
Note: 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.
Evaluating the Effectiveness of CDFIs
The ability to directly link CDFIs’ activities to improvements in financial inclusion is difficult
due to various data collecting and reporting issues.
• Target areas with CDFI depositories might contribute to declines in unbanked or
underbanked households, which can lead to establishing formal credit histories
and transitioning to mainstream financial products. Neither the Federal Deposit
Insurance Corporation (FDIC) survey of unbanked households nor its survey of
household use of banking services, however, ask respondents, who are likely to
lack familiarity with the CDFI Fund, whether they rely upon depositories with
CDFI designations.81 Furthermore, as previously discussed, a ratio of
nontraditional to mainstream financial products that are included in the CDFI
Fund’s 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 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
Banking and Financial Services,” December 17, 2021, https://www.fdic.gov/analysis/household-survey/index.html.
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volume thresholds for reporting open- and closed-ended loans via Regulation C.82
Going forward, the revised thresholds are likely to have the greatest impact on
HMDA data collected from less densely populated areas, although the overall
impact on HMDA reporting may be minimal.83 The specific effect of this change
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
were unable to provide enough traditional mortgages to higher-risk borrowers
under the lower threshold.84 Additionally, lenders that underwrite and make the
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.85
• 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
may be useful for comparing applicant experiences from non-CDFIs that serve
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
Protection Act (P.L. 111-203).86 Section 1071 requires financial institutions to
collect data pertaining to credit applications for women-owned, minority-owned,
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
from FY2019, the CFPB estimates that 340 nondepository CDFIs are engaged in
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 the two preceding calendar years. In addition, reporting financial institutions
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
from stakeholders estimating that compliance with the rule (once finalized) may
take 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
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
Requirements (HMDA),” https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/
hmda-reporting-requirements/.
83 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-
350.pdf.
84 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/
2019/rm_12_19_2019_cdfis.
85 The HMDA data do not provide an indicator for a reporting institution to indicate whether it is also a CDFI.
86 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-
data-collection-under-equal-credit-opportunity-act-regulation-b/; and CFPB, “Small Business Lending Data Collection
Under the Equal Credit Opportunity Act (Regulation B),” 86 Federal Register 56356-56606, October 8, 2021.
87 See Carpenter et al., 2021 CDFI Survey Key Findings.
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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
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
comparison, the textbox below summarizes how traditional intermediaries obtain the funds to
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-
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 lending spread is the difference between yield earned by
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
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
that would subsequently create the lending spreads.)
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
holding some cash reserves, depository intermediaries (i.e., banks and credit unions) can obtain short-term
funding by col ecting federally insured checking and savings deposits and paying interest to their depositors.
Depositories and nondepository intermediaries, which do not have access to federally insured deposits, may
obtain funds from wholesale funding markets, 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
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
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
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 wil receive
timely payments from other financial entities.)
CDFIs—and particularly nondepository 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 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 consist largely of
subsidized and donated funds due to limited access to private funding markets, for the following
reasons.88
• CDFI loan portfolios and particularly CDFI loan fund portfolios, which are
typically comprised of loans with above-normal default risk levels, frequently
lack sufficient comparable historical performance data on loan repayment
patterns (e.g., loan defaults and prepayment rates).89 Payment history lapses and
geographical concentrations, which require manual underwriting of loan
originations (as opposed to automated underwriting that would rely on greater
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.
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financial risks of niche CDFI loans and, therefore, raises questions about the
accuracy of CDFI loan pricing.90 For this reason, wholesale lenders either will
not accept CDFI loans as collateral for short-term borrowings or charge much
higher rates.91 The pricing issues also limit the ability of CDFIs to sell loans in
secondary loan markets. Thus, when providing funds to CDFIs, wholesale
lenders must generally be willing to accept lower returns or longer investment
horizons, which better suits the CDFIs’ business model by alleviating the
recurrent need to repay shorter-term loans.92
• Small financial institutions typically lack loan portfolios sufficiently large
enough to justify the expense to acquire funding from wholesale market lenders,
where many large financial entities borrow cash funds from each other.
Consequently, the higher costs typically incurred with equity funding may still be
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
federally related sources, for-profit banks, and philanthropy.93 The low- and no-cost funding
allows CDFIs to better absorb the heightened loss mitigation costs that can reduce bad outcomes
for borrowers.94 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
competing in this market.
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 Capital Markets, CDFIs, and
Organizational Credit Risk (Durham, NH: Carsey Institute, 2010), p. 222, https://www.cdfifund.gov/sites/cdfi/files/
documents/capital-markets-cdfis-and-organizational-credit-risk.pdf.
91 For more information on how CDFIs typically fund loans, see Swack, Northrup, and Hangen, CDFI Industry
Analysis.
92 See GAO, Community Development Capital Initiative: Status of the Program Investments and Participants, GAO-
15-542, May 2015, p. 17, https://www.gao.gov/assets/gao-15-542.pdf.
93 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/
insights/library/philanthropy/why-philanthropies-should-re-turn-to-cdfis.
94 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
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-
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/
documents/the-role-of-cdfis-in-addressing-the-subprime-mortgage-market-a-case-analysis-of-new-england.pdf.
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.
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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
affiliate) cannot receive more than $5 million in awards within a three-year
period. However, these restrictions may vary with congressional actions. For
example, P.L. 111-5 waived the dollar-for-dollar matching requirement in
FY2009, FY2010, and FY2011. The requirement was reinstated for FY2012. The
CFDI Fund may specify other requirements in the applicable notice of funds
availability.97
• Native American CDFI Assistance (NACA) Program. Native American CDFIs
may receive funding awards via the NACA component of the CDFI program.
Native American CDFIs primarily serve (defined at 50% or more of an
applicant’s activities) Native Communities (defined as Native American, Alaska
Native, and Native Hawaiian communities). The CDFI Fund certifies new Native
CDFIs and issues financial assistance and technical assistance monetary awards
to facilitate capital access in Native Communities via its authority.98
• Bank Enterprise Award (BEA). CDFIs whose deposits are insured by the FDIC
may apply for the CDFI Fund’s BEA program.99 The BEA provides formula-
based grants to banks, including CDFI-designated banks, to provide loans, equity
investments, grants, and technical assistance to CDFIs.100 The CDFI Fund
measures increases in an applicant’s lending, investment, and service activities
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
proposed future projects, BEA awards are retrospective, meaning that applicants
receive 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
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, The Report of the Native American Lending Study,
November 2001, http://www.cdfifund.gov/docs/2001_nacta_lending_study.pdf.
99 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.
100 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 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
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,
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competitively awarded nonrefundable tax credit intended to encourage qualified
investors to support CDEs that operate in eligible low-income communities.103
Once awarded an allocation of NMTCs, CDEs that are CDFIs may award
NMTCs to taxpaying entities in exchange for equity investments.104 (A bank, for
example, that makes equity investments in CDFIs can reduce its tax liabilities via
obtaining NMTCs.)
• Capital Magnet Fund (CMF). The CMF was established by the Housing and
Economic Recovery Act of 2008 (P.L. 110-289) to competitively award grants to
CDFIs and other nonprofit housing organizations for the development,
rehabilitation, and purchase of affordable housing and economic development
projects in distressed communities.
• CDFI Bond Guarantee Program (BGP). The BGP was established in 2010 to
provide CDFIs with access to long-term funding, also known as patient capital, to
reduce conventional funding risk, which arises when intermediaries acquire
funding via sequences of short-term loans and risk greater volatility in short-term
rates.105 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.
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
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
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/
new_markets/resource_files/cde/CDE_Q_A_0705.pdf.
103 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.
104 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
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, New Markets
Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry.
105 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
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-
training/Programs/cdfi-bond/Pages/default.aspx.
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.
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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
nationwide basis, thus having similarities to payday alternative loans offered by
credit unions.109 The CDFI Fund also provides CDFIs with funds to defray the
cost of establishing an SDL program.110
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
financial support pursuant to Sections 522 and 523, Division N, of the Consolidated
Appropriations Act, 2021 (P.L. 116-260).
• Emergency Capital Investment Program (ECIP). Section 522 created the
ECIP, which authorized Treasury to purchase up to $9 billion of equity shares in
CDFI depository institutions and minority depository institutions (MDIs).111 The
ECIP investments would boost the capital buffers held by depositories against
heightened default risks stemming from the pandemic.112 As a result, these
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
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.113 In
October 2021, Treasury announced that 204 institutions had requested almost
$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
R46360, The Credit Union System: Developments in Lending and Prudential Risk Management, by Darryl E. Getter.
110 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.
111 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,
https://home.treasury.gov/news/press-releases/jy0047.
112 ECIP is also conceptually similar to the Troubled Asset Relief Program implemented in October 2008. See CRS
Report R41427, Troubled Asset Relief Program (TARP): Implementation and Status, by Baird Webel.
113 See CDFI Fund, “Emergency Capital Investment Program,” https://home.treasury.gov/policy-issues/coronavirus/
assistance-for-small-businesses/emergency-capital-investment-program.
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.
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• 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
created to provide assistance to small businesses following the Great Recession
(2007-2009).117 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
billion to small businesses in the states, the District of Columbia, territories, and
tribal governments.118 CDFIs can provide loans or investments to small
businesses supported by SSBCI funds.119
• 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.120 For
example, the Intermediary Relending Program, the Rural Microentrepreneur
Assistance Program, and Value-Added Producer Grants provide loans or grants to
financial intermediaries to support businesses and economic development in rural
communities.121
• Each Federal Home Loan Bank district has an Affordable Housing Program that
provides grants on a competitive basis to membership institutions, which may
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, State Small Business Credit Initiative: Implementation and Funding Issues, by Robert Jay
Dilger, Grant A. Driessen, and Adam G. Levin.
118 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.
119 See U.S. Congress, House Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital
Access, Can Opportunity Zones Address Concerns in the Small Business Economy, testimony of Jennifer A. Vasiloff,
Chief External Affairs Officer, Opportunity Finance Network, 116th Cong., 1st sess., October 17, 2019.
120 See U.S. Congress, House Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital
Access, Can Opportunity Zones Address Concerns in the Small Business Economy, testimony of Jennifer A. Vasiloff,
Chief External Affairs Officer, Opportunity Finance Network, 116th Cong., 1st sess., October 17, 2019.
121 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,”
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-
producer-grants.
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
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• The Community Development Block Grant (CDBG) program, administered by
the Department of Housing and Urban Development (HUD), allocates federal
assistance to state and local governments to support neighborhood revitalization
and community and economic development efforts.126 CDFIs, particularly loan
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
neighborhood revitalization strategy areas.127
• Numerous federal government agencies (e.g., HUD, USDA, the Small Business
Administration) and certain federally related entities guarantee loans for low- and
moderate-income borrowers or for borrowers who reside or operate businesses in
underserved locations. Federally insured loans may cover some or all of the
default risk depending upon the specific federal guaranty program. After
receiving subsidized funds, a CDFI (as well as other traditional financial
institutions) can originate loans that meet the eligibility requirements for various
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
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.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
of the firm are paid last with whatever proceeds are left over. Preferred stockholders, therefore, provide subordinate or
mezzanine financing. For specific legal attributes of this financial instrument, see Beth Lipson, “Equity Equivalent
Investments,” Community Investments, vol. 14, no. 1 (March 2002), pp. 10-12.
126 For more information, see CRS Report R43520, Community Development Block Grants and Related Programs: A
Primer, by Joseph V. Jaroscak.
127 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.
128 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/
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
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,
(continued...)
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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
funding award.131
• Appropriations delays resulted in delays implementing the BGP. Congress also
reduced the program’s potential lending authority of $1 billion annually (for four
years of authorization) to $500 million annually.132
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.
Funding Sources for CDFI Depositories
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
to borrowing in the short-term financial money markets. Small depositories, however, collectively
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,
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-
012%20FHFA%20Oversight%20of%20Affordable%20Housing.pdf.
131 See CDFI Fund, “Funding Opportunities: Capital Magnet Fund; 2021 Funding Round,” 86 Federal Register 50773-
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,”
https://www.cdfifund.gov/sites/cdfi/files/2021-04/
FY_2020_Capital_Magnet_Fund_Application_Review_Process_0.pdf.
132 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
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
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
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.
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.
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from the statutory cap on member business lending.136 Credit unions are also eligible for grants
and low-interest loans from the Community Development Revolving Loan Fund.137 In short,
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.
The Federal Home Loan Bank (FHLB) System
CDFIs can apply to become members of the FHLB system, a government-sponsored enterprise,
to gain access to short-term funding.138 Each district FHLB provides its members liquidity in the
form of 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
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
and economic development.139
As of the fourth quarter of 2020, 64 CDFIs were members of the FHLB system, representing 5%
of all CDFIs in 2020.140 Relying on FHLB advances may be a less feasible option for many
CDFIs for the following reasons.
• 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
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.
137 See NCUA, “Community Development Revolving Loan Fund Access for Credit Unions,” 86 Federal Register
17854-17857, April 6, 2021.
138 See CRS Report R46499, The Federal Home Loan Bank (FHLB) System and Selected Policy Issues, by Darryl E.
Getter.
139 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-
economic-development/community-investment-program; and FHLB of Cincinnati, “Community Investment Cash
Advances,” https://www.fhlbcin.com/housing-programs/community-investment-cash-advances/.
140 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/
FHLBNY-CDFI-Webinar_042921.pdf.
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.
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• 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,
others may focus on community and small businesses. FHLB membership
eligibility, however, requires nondepository institutions to have mortgage-related
assets that reflect a commitment to housing finance as determined by the
discretion of a FHLB.144 Nondepository CDFIs without a primary housing focus,
therefore, may not be granted FHLB membership. Failure of a nondepository
CDFI would likely not have a material financial impact on a regional FHLB.145
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
housing focus and a receiver such as the FDIC or NCUA.146
The Farm Credit System (FCS)
The FCS is a nationwide financial cooperative consisting of four district banks and member
lending institutions that collectively operate as a government-sponsored enterprise.147 After
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
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,
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
Financial Institutions,” 75 Federal Register 680, January 5, 2010.
146 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/
should-nonbank-mortgage-companies-be-permitted-to-become-federal-home-loan-bank-members.pdf.
147 See CRS Report RS21278, Farm Credit System, by Jim Monke; CRS Report R46914, An Overview of Rural Credit
Markets, coordinated by Andrew P. Scott; and Farm Credit Administration, 2020 Annual Report, https://www.fca.gov/
template-fca/about/2020AnnualReport.pdf.
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.
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firm’s self-governance and integrity when conducting business).151 If ESG or impact investment
opportunities arise in a target market area, some CDFIs may issue either rated or unrated
securities to meet certain funding requirements:
• Some CDFIs can issue short-term debt securities and subsequently use the
funding to offer financial support for economic security, health and healthy food,
environmental sustainability, women- and minority-owned businesses, and other
causes.152 These CDFIs can raise funds either directly for their borrowers or for
the benefit of other CDFIs.153 Instead of relying on short-term borrowings to fund
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.154
CDFI-issued securities can receive ratings based on the financial strength of a
CDFI issuer to withstand changes in its operating environment. These ratings
may be provided by independent rating agencies that specialize in assessing
impact investments.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 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-
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.
152 See Aeris, “Aeris Announces 14 New CDFI Ratings,” January 7, 2021, https://www.aerisinsight.com/2021/01/07/
aeris-announces-14-new-cdfi-ratings/.
153 See CNote, “Offering Circular,” March 4, 2021, https://www.sec.gov/Archives/edgar/data/0001683145/
000121465921002710/r34210253g2.htm.
154 See Elise Balboni and Anna Smukowski, CDFIs and the Capital Markets: Tapping into Impact Investors, Local
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.
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.
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more risk, resulting in access to cheaper funding for issuers during this particular
period.159
The Capacity Building Initiative (CBI)
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
CDFIs with background on securities markets and regulations, thereby increasing their capacity to facilitate small
business lending and ESG investments.160
Crowdfunding on Behalf of Small Businesses
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
Regulation Crowdfunding.161 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
be used for the Community Advantage program to increase access to loans guaranteed by the
Small Business Administration (SBA).162 CDFIs can register with the SEC as funding portals,
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,” Wall Street Journal, September 5,
2021, https://www.wsj.com/articles/search-for-yield-leads-bond-buyers-to-unrated-debt-11630834201.
160 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.
161 See Financial Industry Regulatory Authority, Crowdfunding and the JOBS Act: What Investors Should Know,
https://www.finra.org/investors/alerts/crowdfunding-and-jobs-act.
162 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
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/
operate-intermediary; SBA, SBA Microloan Program, Session: Loan Side Basics, https://www.sba.gov/sites/default/
files/files/Loan%20Side%20Basics.pdf; CRS Report R41057, Small Business Administration Microloan Program, by
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-
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-
09-13/s70913-224.pdf.
163 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;
(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)
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/
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/
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,
Capital Markets, Securities Offerings, and Related Policy Issues, by Eva Su.
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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, JOBS
and Investor Confidence Act (House-Amended S. 488): Capital Markets Provisions, coordinated by Eva Su.
165 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
Investment Opportunities by Improving Access to Capital in Private Markets,” 86 Federal Register 3496-3605, January
14, 2021. The final rule also eliminated investment limits for accredited investors and revised the calculation methods
used for nonaccredited investors. The SEC defines accredited investor 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 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.
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customers.169 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
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
of funds.
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
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
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
support financial inclusion.170
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,
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.
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
impact beyond those provided by other small lenders that do not receive these subsidies. Even if
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

169 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
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
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
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,
Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design, National Bureau of Economic
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,”
Stanford Law Review, vol. 59, no. 1 (2006), pp. 23-76.
170 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.
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Community Development Financial Institutions (CDFIs): Overview and Selected Issues

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Congressional Research Service
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