What Is a Community Development Financial Institution?

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Community development financial institutions (CDFIs) are organizations focused on expanding access to financial services and economic opportunities to those who are disadvantaged financially. They serve communities with the goal of ensuring all people have access to financial services and products. CDFIs generate jobs, increase housing opportunities, promote small business development and work to strengthen local economies.

CDFIs exist because financial institutions have historically underserved minority and low-income communities. Those communities faced discrimination based on race and class as financial institutions offered financial products that weren't in their best interest—or denied them services entirely. Because they couldn't access basic financial services to help them establish credit or get small loans to start businesses, people in these communities were locked out of economic opportunities.

As a response, the first CDFIs were created in the early 1970s to help correct this issue and fill the gap left by traditional financial institutions. They helped people in underserved neighborhoods gain access to financial services like getting business loans or applying for credit. In 1977, Congress stepped in to pass the Community Reinvestment Act, which encouraged financial institutions to meet the needs of all people in their communities, not just wealthier people. Today, there are over 1,200 certified CDFIs located across the country, so chances are there's one close to you.

The Different Types of CDFIs

A CDFI could be a bank, a credit union, or even a provider of loans, microloans or venture capital. There are four main components of the CDFI industry:

  1. Community Development Banks: Community banks are for-profit companies that offer different types of financial services just like a traditional bank, but they mostly focus on serving low- to moderate-income communities through lending or investing services. They're regulated by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and other agencies.
  2. Community Development Credit Unions (CDCUs): CDCUs specialize in serving people with little or no access to safe, reasonably priced financial services. They provide the full spectrum of financial products including loans, savings and credit, and they're usually more affordable compared with banks and other institutions. The biggest difference between CDCUs and traditional banks is that CDCUs are not-for-profit cooperatives owned by their members. When searching for a credit union, make sure it's regulated by the National Credit Union Administration (NCUA), an independent federal agency.
  3. Community Development Loan Funds (CDLFs): CDLFs provide loans to businesses, organizations and people living in low-income neighborhoods. They also provide other types of services to borrowers, such as assistance for starting a business, education for new homebuyers and financial literacy resources. There are four types of CDLFs: small business, housing, microenterprise and community service organizations. Each type of loan fund is different because they help different types of clients. CDLFs are also usually nonprofits.
  4. Community Development Venture Capital Funds (CDVC): CDVC funds provide funding to promising small and medium-sized businesses in under-resourced communities. CDVC funds have a "double bottom line," which means they aim not only for financial returns on their investment, but for social returns like job growth or better education in local communities as well. They may or may not have community members represented on their board of directors to help make decisions and they can be either for-profit or nonprofit.

How Do CDFIs Work?

The services that CDFIs provide to local communities are diverse, but they generally offer many of the types of services and products traditional financial institutions do, like business loans, home loans, savings accounts and checking accounts. CDFI products and programs tend to be more affordable, flexible and accessible to those in low- and moderate-income communities. For example, you might be eligible for a business loan at a CDFI that you may not have been able to get elsewhere due to your business credit or lack of startup funding, despite a solid business plan. Whereas traditional banks might prefer to lend to established businesses, a CDFI could offer you a leg up to get started.

You can find almost any type of basic financial service or product at a CDFI, but the biggest differences between CDFIs and traditional financial institutions come down to mission, values and goals. Unlike traditional financial institutions, CDFIs are focused on community development, committed to affordable and responsible lending, and driven by goals beyond just making a profit.

How a CDFI Can Help You

CDFIs can provide a lot of value in many different ways. And because they're aimed at helping under-resourced communities in particular, they offer some programs and services outside the range of what traditional financial institutions typically offer. Those services include:

  • Retail banking services: CDFIs usually offer low- or no-fee checking, savings and money market accounts.
  • Business loans: CDFIs typically offer lower interest rates with a higher likelihood of approval.
  • Financial literacy workshops and courses: CDFIs may offer workshops and courses to help you learn the basics of managing, protecting and growing your money.
  • Housing counseling: The homebuying process can be daunting, and CDFIs can help you prepare for and navigate the process.
  • Technical assistance for small businesses: Traditional banks usually don't offer much support for small businesses, but CDFIs can offer education and mentoring around topics like marketing, cash flow and human resources.
  • Financial or credit counseling: CDFIs can help you understand your financial picture by offering credit counseling, a service that helps you do things like get and understand your credit report, create a budget and make a plan to pay down or manage your debts. Credit counseling could be a valuable resource for rebuilding or improving your credit.

CDFIs are known for investing in their local neighborhoods in ways that truly benefit the community, including offering programs for small business lending, job training and affordable housing. Whether you need help understanding money, technical assistance for a new business, or support navigating the thorny mortgage process, CDFIs could be a great option for your needs.

How to Find a CDFI

There are over 1,200 CDFIs in the U.S., which likely means there's one near you. The easiest way to find a CDFI is through the Opportunity Finance Network. Thanks to CDFIs, more people in diverse communities can own homes, start new businesses and access safe places to manage, grow and learn about money no matter how much they make or where they're from.