Community Development Financial Institutions – Opportunities for Managers of Loan Funds and Venture Capital Funds

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Community Development Financial Institution (CDFI) certification is awarded to “community-based organizations that seek to expand economic opportunity in low-income communities and provide financial products and services to individuals and businesses often underserved by traditional financial institutions. The CDFI Fund, which oversees the certification process, provides technical and financial assistance to empower qualified organizations that are providing disadvantaged communities with financial products and services. Particularly, as the focus of this OnPoint, the CDFI Fund provides a variety of unique benefits to privately-managed loan funds and venture capital funds seeking to assist communities that historically have lacked access to traditional financial services. These benefits may be appealing to banks, bank holding companies and other financial service providers that can serve as investors in these for-profit CDFI-eligible investment funds. The program has garnered recent attention in the wake of COVID-19 with participation by a number of large firms.

Overview of CDFI Program

The CDFI Fund was formed as an agency of the Department of the Treasury in 1994 to oversee the CDFI certification program. Once certified, CDFIs are qualified to apply for technical and financial assistance awards (i.e. grants and low-cost credit), as well as operational support and training through the CDFI Fund’s Capacity Building Initiative. CDFI certification is based upon whether the CDFI entity: has a primary mission of promoting community development; primarily serves one or more target markets; and maintains accountability to the defined target market(s). Government benefits and incentives are available for traditional lenders to invest in CDFIs, which, in turn, support communities that traditionally have been overlooked by financial services providers. It has been reported that a 2018 survey conducted by the Opportunity Finance Network estimated that “58% of the clients served by its roughly 300 CDFI members are people of color, 85% are low-income and 48% are women. Certification Process CDFI certification is a designation conferred by the CDFI Fund. Obtaining CDFI certification is a formal acknowledgement by the CDFI Fund that a financial institution meets certain community-development finance criteria. To be eligible for CDFI certification, an organization must be a legal entity and:

• Have a primary mission of promoting community development;
• Be a financing entity (i.e., an entity whose predominant business activity is the provision, in arms-length transactions, of financial products and/or services);
• Serve one or more target markets
• Provide development services in conjunction with its financing activities;
• Maintain accountability to a defined market (typically through representation on its governing board and/or advisory board(s); and
• Be a non-governmental entity (other than a Tribal government) at the time of application.

Conclusion

CDFI loan funds and venture capital funds are options worth considering by fund managers in order to attract new capital in pursuit of community-driven investment opportunities. Renewed government support, as well as growing interest from the private sector, make this an excellent time for innovative private funds, which are interested in acting as a catalyst for investments in underserved communities, to seek CDFI certification.

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