Approximately $2 billion has flowed into community development organizations and financial institutions since the inception of the Community Development Financial Institution Fund in 1994. But who's getting the lion's share of those funds?
Since its launch, CDFI certification has opened doors to additional resources – and certain regulatory advantages--for financial institutions committed to serving low-income communities. But with its budding popularity, some credit union executives are growing wary.
“The pool of CDFI-certified credit unions is larger but I’m not sure if the pool [of funds] is getting that larger,” said Susie Fair of the Louisiana Credit Union League, who serves as the CCUE SVP of CU support. “My concern is that a lot of these [funds] are getting diluted by bigger players that are really strictly in it for making a huge profit, [such as] money brokers. They’re doing it very lucratively.”
The breakdown of CDFIs show that loan funds, indeed, make up the majority. As of July 2018, 1,105 CDFIs existed, of which 556 were funds and 305 were credit unions. And though the amount of certified banks have increased, their presence still lags behind that of credit unions and loan funds.
One explanation behind this is the flexibility banks naturally hold in raising capital as opposed to the constraints associated with credit unions.
"By comparison, credit union growth is limited to the rate at which it can build net worth through retained earnings," said Terry Ratigan, senior consultant at the National Federation of Community Development Credit Unions. "For credit unions, certification allows them to compete for capital grants that can help them build equity and accelerate growth. There is no comparable source of permanent capital for credit unions, but banks have other alternatives."
In an attempt to increase the amount of CDFI-certified credit unions, then-Treasury Secretary Jacob J, Lew announced the intent to double the number of CDFI-certified credit unions in January 2016. However, given that there were 265 CDFI-certified credit unions at the end of 2015, the 40-count difference over 2.5 years illustrates that the initiative fell short. That being said, this difference doesn't distinguish between institutions that failed to renew their certification and those that obtained certification for the first time.
“Doubling was probably an unrealistic target,” said Cliff Rosenthal, the former CEO Federation. “Increasing the CDFI fund has moved to an [annual re-certification] process and what I think has always been the case is that if you haven’t gotten resources from the fund, your incentive to go through the hoops is somewhat constrained.”
But this initiative has yet to be trumpeted by the banking side, which some attribute to the increased amount of regulators, while others suggest a lack of interest among banks.
Michael Emancipator, who serves as assistant vice president and regulatory counsel at the Independent Community Bankers of America, believes increased regulatory agencies that banks encounter are an additional road block in the CDFI process.
“What makes it difficult on the banking side is that there are three prudential regulators -- [the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Fed] -- whereas on the [credit union] side, there’s less entities that need to be on the same page,” said Emancipator. "Banks may not be aware that they can have this special designation conferred upon them; it’s learning from peers, learning from regulators, and the marketing draw that you get from entering some formal relationship between two formal regulators."
But Rosenthal suggests that "banks are inherently not interested in lower-income, less profitable markets" and instead "seek out more prosperous urban and suburban areas."
In years past, the attempt to increase the amount of CDFIs drew skepticism from those concerned about diluting the CDFI brand with larger credit union players. Other concerns stem from the sustainability between increasing CDFIs and the respective effect on the allocation of funds.
Thanks to the influx of larger credit unions into the CDFI fold these past five years, the target market response has increased compared to what it had been previous been, states Ratigan. "The increase in institutional size, in an observable sense, has not diluted [service towards] the target market. In any community, you’ll have leading players and there will be outliers,” he added.
The CDFI-certification process is now streamlined, meaning that the National Credit Union Administration invokes its data analysis capabilities to examine credit union eligibility for certification. According to Martha Ninichuk, director at NCUA's Office of Credit Union Resources and Expansion, 297 credit unions applied for the 2017-2018 year.
Following the streamlined application, 98 credit unions were approved; however, 48 credit unions did not continue onward with the certification process after receiving initial approval.
The reasons for nearly 50% of the aforementioned credit unions withdrawing remain unknown, but Ninichuk speculates that "there's a number of reasons" for not continuing, ones that she pins onto C-Suite executive decision-making. She also added that the CDFI application is not lengthy.
“To me, the more CDFIs the better, I don’t think there’s any type of dilution at all,” Ninichuk said.
As for the streamlined process, it’s expected that the modality will continue, though applications will not be accepted for 90 days between Aug. 1, 2018 until Oct. 31, 2018
And if Ratigan is correct, there should be a good chance of that happening.
“Based on my analysis, I still believe that there’s a couple hundred credit unions out there, in all probability, highly likely to be eligible for CDFI certification, but they haven’t applied,” Ratigan said.
