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«Lehn Benjamin, Cornell University Julia Sass Rubin, Brown University Sean Zielenbach, Housing Research Foundation INTRODUCTION Low-income communities ...»

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Lehn Benjamin, Cornell University

Julia Sass Rubin, Brown University

Sean Zielenbach, Housing Research Foundation


Low-income communities and individuals have always had limited access to financial

services, affordable credit, and investment capital. The problem has multiple causes, including historical patterns of racial and ethnic discrimination, banks' and thrifts' concerns about profitability, suburbanization and the flight of capital out of the inner city, and the restructuring of 1 the financial services industry. These and other factors have created both a need and an opportunity for financial institutions that specifically target minority and low-income communities.

These “alternative” entities, now referred to as community development financial institutions (CDFIs), include community development banks and credit unions; community development venture capital providers; micro-enterprise funds; and housing, business, and facility loan funds.

Although diverse in scope and structure, all CDFIs have a primary mission of improving economic conditions for low-income individuals and communities by providing financial products and services that usually cannot be obtained from more “mainstream” financial institutions.

They augment this financing with a range of educational services and borrower-specific technical assistance, so as to increase their borrowers’ economic capacities and potential.

Despite a growing interest in CDFIs, we still know very little about these institutions.

This paper begins to address this gap. It outlines the history of the CDFI industry and describes how CDFIs are responding to three specific needs in low-income communities: basic financial services; affordable credit for home purchase, rehabilitation, and maintenance; and capital for business development. We conclude with a discussion of three key quesitons facing the CDFI industry: 1. What are the impacts of CDFIs; 2. What is the role of CDFIs relative to conventional financial institutions; and 3. What does the future hold for the CDFIs industry?

1 There has been a considerable amount written about each of these factors. For example, Oliver and Shapiro (1995) and Squires and O’Connor (2001) have examined patterns of lending discrimination.

Jackson (1995) and Kasarda (1989) have analyzed the effects of suburbanization on urban markets.

Christopherson (1993), Avery et al (1997), and Stegman (1999) have discussed the impact of the modernization and consolidation of the financial services industry. It is beyond the scope of this paper to assess the relative importance of the various factors.



CDFIs are the latest institutional efforts to increase the availability of affordable capital and basic financial services in economically disadvantaged communities. The 1880s witnessed the development of a small number of banks that specifically targeted black communities and were principally owned by African-Americans (W.E.B. Dubois 1907). The 1930s and 1940s saw the emergence of credit unions, many of which were in the rural south and designed to serve African Americans who did not have access to credit. In the late 1960s and early 1970s, a series of multi-purpose community development corporations (CDCs) developed to address the housing and small business needs of many distressed center-city neighborhoods; while a number of federally and state-funded revolving loan funds were created to provide financing to small businesses in these areas.

The 1970s also saw the establishment of the first community development banks, one of whose subsequent success (South Shore Bank) served as the impetus for similar development finance models throughout the country.2 The National Federation of Community Development Credit Unions (NFCDCU) formed in 1974, and has worked tirelessly to promote the CDCU model. In 1978, Congress created the Neighborhood Reinvestment Corporation, which subsequently created a number of local lending institutions that provide affordable mortgage financing to lower-income individuals.

The 1980s witnessed the establishment of several community development intermediaries, which provided a variety of financial and consulting services to CDCs and other community-based institutions.3 The Ford Foundation established the Local Initiatives Support Corporation (LISC) in 1980 as a national vehicle for bringing financial and technical support to the growing cadre of CDCs engaged in real estate development. James Rouse created the similarly oriented Enterprise Foundation a few years later. Also in the early 1980s, the Institute 2 The Bank was begun in 1973. Taub (1988) describes South Shore Bank’s early years.

3 See Liou & Stroh (1998) for a discussion of the history of community development intermediaries.

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housing land trusts, helped create a number of other community development loan funds (Rubin 2002). In 1985 these loan funds came together to form the National Association of Community Development Loan Funds (NACDLF), which subsequently became the National Community Capital Association, or NCCA. Like NFCDCU, NCCA has taken an active role in helping to expand a number of development finance institutions throughout the country.

CDFIs also have drawn upon the work of international organizations. Many micro-loan funds can trace their origins to the Grameen Bank’s develoment finance model, one in which individual entrepreneurs receive very small loans to help capitalize their home-based businesses enterprises The Community Reinvestment Act One of the major factors behind the growth of the CDFI industry has been the federal Community Reinvestment Act (CRA), arguably the chief cause of the increased investment in lower-income markets. Congress passed the Act in 1977 in response to concerted pressure from a national coalition of community activists. Building on the Home Mortgage Disclosure Act (passed in 1975), which required banks to report the geographical locations of their loans, the

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penalties for non-compliance, however. Regulators may factor a bank’s lending record into a decision to approve a merger or a new branch opening, but there have been only a handful of 4 Congress had ostensibly addressed the issue of racial discrimination in lending with passage of the Fair Lending Act of 1968 and the Equal Credit Opportunity Act of 1974. The CRA sought to eliminate the more insidious practice of redlining, in which bankers refused to lend in certain geographic markets because of the high perception of risk in those communities. (The term “redlining” resulted from certain bankers’ demarcation of high-risk neighborhoods by stark red lines on city maps.) Contributing factors to high-risk perceptions included large numbers of racial and ethnic minorities and high poverty and unemployment rates.

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continued persistence of discriminatory lending practices. These findings spurred renewed pressure by community groups against discriminatory banks and their regulators, particularly in the public comment period associated with banks’ merger applications. Unwilling to risk a CRArelated denial and/or bad publicity, an increasing number of banks negotiated reinvestment agreements with the protesters. CRA proponents also benefited from the support of Bill Clinton, who in both his candidacy and his presidency remained a strong backer of the legislation. In 1995, President Clinton signed legislation that revised CRA regulations, placing more emphasis on a bank’s lending and investment performance instead of its marketing and outreach efforts.

His veto threats effectively killed subsequent attempts to weaken or eradicate CRA requirements. Such heightened federal attention to the CRA forced banks to comply with the law’s provisions, and was a major cause of the substantial growth in bank lending in low-income markets in the 1990s (see Belsky, Schill, & Yezer 2001).

The Establishment of the Community Development Financial Institutions Fund The federal government’s role in community development finance has varied considerably in the past few decades. The federal Office of Economic Opportunity (OEO) and related War on Poverty agencies contributed significantly to the creation of many CDCs and low-income credit unions in the 1960s and early 1970s (see Abt 1973 and Immergluck & Gilson 1993). Most of this support disappeared in the 1980s, however, with the Reagan 5 The Atlanta Journal-Constitution’s “Color of Money” series in 1988 highlighted the tremendous disparities in mortgage lending between Atlanta’s primarily black and predominantly white neighborhoods.

Pogge, Hoyt, & Revere’s 1986 study showed similar trends in Chicago. The Boston Federal Reserve

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funding for low-income housing initiatives. The pendulum swung back a bit in the 1990s, as part of Clinton’s economic strategy involved increasing access to credit and capital for those individuals and communities that had historically been unable to obtain such necessary resources.

Increasing enforcement of the CRA was one approach to increasing capital access;

expanding the community development banking model was another. Hillary Clinton had been a longtime friend of Mary Houghton, who had been instrumental in the development of the South Shore Bank in Chicago. Ron Grzywinski and others had purchased the bank in the early 1980s to save it from being closed and had committed to turning it into an institution geared toward meeting the financial service and development needs of the declining South Shore community.

The bank’s success attracted the attention of then-Governor Bill Clinton, who met with Grzywinski and sought to create a similar institution in Arkansas. South Shore Bank’s consulting affiliate was instrumental in helping to create this entity: the Southern Development Bancorporation, a CDFI designed to help accelerate economic activity in a 32-county area of southwestern Arkansas.

Not surprisingly, one of candidate Clinton’s proposals was the establishment of 100 similar development banks throughout the country. While the idea generated considerable bipartisan support, the specific bank model encountered resistance from supporters of existing community development financial institutions, who believed that their organizations should also be included in the program.6 Negotiations resulted in a more inclusive approach, reflected in the Bank reported that black mortgage applicants in Boston were rejected 60% more often than similarly qualified white applicants (Munnell et. al. 1992).

6 In January 1993, the Association for Enterprise Opportunity (a trade association for micro-enterprise funds), the Center for Community Self Help, Community Capital Bank, First Nations Development Institute, the National Association of Community Development Loan Funds, the National Federation of Community Development Credit Unions, and the Woodstock Institute distributed a response to President Clinton’s 100 bank idea. Rather than setting up 100 new banks, they advocated that the administration support the many different types of existing institutions that had been doing community development finance work for decades.

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The Fund operates a number of programs designed to increase capital access and availability in traditionally under-served markets. Its largest (“Core”) program has historically been one that provides a range of grants, loans, and equity investments to CDFIs to help them build their lending capacities. One-third of the Fund’s dollars go to the Bank Enterprise Award (BEA) program, which rewards banks for increasing their lending and investing activity in economically distressed markets and/or in CDFIs. Most recently, the Fund has been charged with administering the New Markets Tax Credit program. Enacted in the waning moments of the Clinton Administration, the program provides tax credits to certified community development entities (many of which are CDFIs), to assist them in raising private capital for investment in businesses located in economically distressed communities.

In addition to its financial support, the Fund plays somewhat of a gatekeeper role for the industry by certifying organizations as CDFIs. While certification is no indication of an organization’s quality, it is a prerequisite for receiving financial support from the Fund, from 7 The legislation allows for a wide variety of institutional forms to be certified as CDFIs and receive financial assistance from the CDFI Fund, although it does give some statutory preference to insured depository institutions. For a discussion of the politics associated with the Fund’s creation, see Santiago, Holyoke, & Levi (1998).

8 There was some discussion about placing the Fund within HUD, but there were concerns about HUD’s future in the mid-1990s. Treasury was a logical choice because of the Fund’s focus on financial institutions, and because other bank regulatory agencies (the OTS and OCC) were already in the Department.

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has provided a total of more than $400 million in direct funding to over 250 CDFIs. Through its BEA program, it has helped generate over $1 billion in additional CDFI-related investments from conventional banks and thrifts.

The list of certified CDFIs highlights the variety that exists in the industry. The 615 groups include 69 banks, thrifts, and bank holding companies; 114 credit unions; 411 loan funds (including Fund-defined intermediaries (CDFIs that lend primarily to other CDFIs); micro-loan

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provide more detail on the ways in which different CDFIs address the financial needs in their communities, the issues they have encountered, and the impact they have tried to achieve.

9 In order to be certified by the Fund, an organization must 1) have a primary mission of community development, 2) principally serve an eligible low-income or under-served population or geographic area,

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