Understanding Community Development Financial Institutiond (CDFIs)
Financially underserved communities can benefit from Community Development Financial Institutions (CDFIs). Often times the financial needs of low-income, rural and urban working class communities are ignored by traditional big banks.
CDFI-designated banks and credit unions focus on serving the needs of underserved communities with the goal of helping people become more financially self-sufficient.
What are CDFIs
Community development financial institutions (CDFIs) are private financial institutions that are dedicated to providing affordable lending to underserved communities. These institutions are designated by the federal government.
CDFI's can be categorized in four sectors:
Community development banks
Community development credit unions
Community development loan funds
Community development venture capital
Each of these CDFIs share a common goal to improve economic opportunity in underserved, low-income communities by providing access to financial products to local residents and small businesses. CDFIs inject new sources of capital into neighborhoods that lack access to financing.
How CDFIs work
Congress created Community Development Banking in 1994 to address the needs of people who aren’t served by the traditional banking system. CDFIs get funding from U.S. Treasury grants which enables them to offer low-cost mortgages and small business loans for first-time home buyers and small business owners.
Since 1994, the grants have provided over $2 billion in funds that CDFIs have used to foster economic opportunity and revitalize neighborhoods. But what's unique about this government-backed program is that it's based on a leverage model.
CDFI-designated institutions must raise their own funds, then the CDFI Fund matches the money they raise dollar-for-dollar.
Why CDFIs are vital to low-income communities
Banks and credit unions that are CDFI-designated often have financial products designed for people that lack good credit. Some offer credit-builder loans to help consumers rebuild their credit and even second chance checking accounts that help rebuild banking history.
Credit-builder loans hold the amount borrowed in a savings account while you make payments. Those payments are reported to the major credit bureaus. One-time monthly payments help build a positive credit history. You get the money, typically with a small interest earning, when the loan is paid off.
Second chance checking accounts are the life-blood to many underserved communities. Without a safe place to transact daily expenses and save money, low-income communities can fall into a poverty trap. Check cashing stores, money orders and prepaid debit cards are laced with fees.
Community development banks put the community first, not the shareholder. These institutions are woven into a community’s financial landscape. CDFI-designated banks offer a more personable, community-oriented banking atmosphere than big corporate banks.
Some banks and credit unions support local non-profits, encourage bank employees to volunteer and offer meeting places for local organizations. One United Bank is a CDFI-designated institution that offers a community room that local organizations can use for monthly meetings, events and workshops -- at no cost.
That’s due to the requirements of becoming a CDFI because the institution has to be focused primarily on uplifting underserved and low-income communities. In 1997, One United Bank became certified as a CDFI and was awarded $750,000. Since then, the CDFI Fund has awarded One United Bank between $227,282 and $1.5 million every year to assist residents of low-income communities as well as small business owners.
One United Bank is also one of the largest black owned banks with over $670-million in assets and one of the most prominent bank CDFIs, offering nationwide financial products through online banking and at their branch locations in California, Florida and Massachusetts.
CDFIs in your community
CDFIs continue to grow in size and impact, and to support community transformation.
Today, there are 1,000 CDFIs operating nationwide. CDFIs continue to be a little-known source that drives economic opportunity in low-income communities.
Another great benefit of a CDFI bank or credit union is that you don't have to be considered a minority or low-income yourself in order to work with a CDFI. People of all races and economic backgrounds are welcome to bank at their local CDFI-designated bank.
To locate a CDFI in your area check the CDFI Fund website.