Why the Growth of CDFIs Is Good—and Why it Should Give Us Pause
NCUA and the Department of the Treasury have announced a plan to double the number of CDFI-designated credit unions. Credit unions should welcome this.
But though this is something I worked toward for many years, there are implications of this that give me pause, even as I offer a hearty congratulations to my successor at the National Federation of Community Development CUs, Cathie Mahon, and everyone else who helped make this happen.
First, a little history behind this initiative from someone who spent more than 30 years helping to shape the CDFI movement.
In 1984, as banks were closing branches throughout low-income neighborhoods, I crafted model legislation for the creation of a New York State "Corporation for Community Banking" to help CUs and other community-based lenders fill the gaps. Eventually, the Federation expanded this vision nationally, proposing the creation of a federal entity that we tentatively called "National Neighborhood Banking Corporation." Our efforts lined up with then-presidential candidate Bill Clinton, and two years after his election, we celebrated when the Community Development Financial Institutions Fund under the Treasury Department was signed into law.
The CDFI Fund has weathered changes in administration to enjoy great growth and has invested more than $1.5 billion in CDFIs. And the CDFI designation has become a badge of credibility and honor, a gateway not only to the CDFI Fund but also to other programs.
It's a great success story, but I, and some other longtime allies in the CDFI movement, do ask whether there is a cost to this success.
One concern for CUs is that they make up such a small number of CDFIs and, in turn, receive but a small chunk of CDFI funding.
Year after year, non-regulated loan funds have received the lion's share of funding—typically 70%. CUs obtain perhaps 15%.
This is not a knock on the loan funds. Many do amazing work. But the disproportionate share for loan funds was not what many of us envisioned back in the early 90s.
It is ironic and frustrating for us in the CDCU movement that CUs have been marginalized by the Fund, obtaining only a small portion of the available funds. From my experience wrestling with the CDFI Fund, I have heard a number of rationales for this.
"Credit unions don't write good proposals," we've been told. And this is often the case. The CDFI Fund essentially runs a grant competition, and the CU culture is not one of grant-seeking, unlike nonprofits.
"Credit unions don't produce the kind of impacts the Fund is looking for." To the degree that the Fund (and legislators) focus on numbers of jobs or housing units created, CUs are disadvantaged by these metrics.
"There are many more loan fund applicants than credit unions. We at the CDFI Fund support a similar percentage of all types of institutions," we have been told.
This last point is what makes the current policy initiative so important. As of the end of 2015, there were 265 credit unions certified as CDFIs, out of a total of 977 certified institutions—about 27%; two years earlier, there were only 173 CDFI credit unions out of a total of 804. What would the landscape look like if the CU percentage doubled—would that not make the case for a larger share of CDFI Fund resources going to credit unions?
This is precisely what the NCUA/Treasury initiative will test. Poring through early Clinton Administration documents and draft legislation, there is language recognizing the need to provide basic financial services to underserved communities. The CDFI Fund has done much good, but it has not yet fulfilled its potential to address the problems of equitable financial access. The new initiative by NCUA and Treasury could help.
I believe increased CDFI Fund support for CUs will do much to encourage the development of sustainable, self-sufficient institutions, which do not depend on repeated federal subsidies and would attract non-federal matching support.
Apart from sustainability, scale is (or should be) a major strategic goal of the CDFI Fund. Size matters. Notwithstanding the great work of many non-regulated CDFIs, they are all but invisible to the general population. Credit unions have more than 100 million members, achieving scale and visibility.
Over the last several years, the Federation has made notable progress in bringing large CUs into the CDFI world. There are now multi-billion-dollar CUs with both CDFI certification and low-income designation. These institutions dwarf almost all other certified CDFIs, whether loan funds or even banks. Most importantly: they serve hundreds of thousands of members.
CUs have the potential to elevate, broaden, and transform the CDFI movement more than any other approach, bringing sustainability, scale, and—importantly—far broader political reach. So, yes, expanding the CDFI universe through credit unions is an exciting initiative, filled with potential to be a game-changer. Why, then, am I concerned?
I worry about the potential for dilution of the brand, and with it, decreased credibility and political support for CDFIs.
The first generation of CDFIs, regardless of type, were unquestionably "mission-driven," motivated by a commitment to serve the people and communities left behind. Many were shaped by the civil rights and anti-poverty movements, by religious faith, by campaigns against redlining. Becoming a CDFI meant support for the mission.
Since 2010, CDFI designation has also brought some tangible benefits. In 2010, the Federation and our allies won access to federal TARP funds, in the form of the Treasury Department's Community Development Capital Initiative (CDCI). Eligible CDFI depositories were able to obtain millions of dollars in low-cost, equity-like subordinated debt. After an arduous application ordeal, 48 CDFI credit unions obtained $69.9 million in funding of the total of $570 million invested in 84 CDFIs; CDFI banks received the rest.
For some CUs, after the corporate CU disaster and the Great Recession, the money was virtually a lifesaver. Credit unions that had never heard of "CDFI" before were able to get resources. I believe that all or the great majority of CUs were sincere in their focus on serving underserved communities.
But, many banks that had never heard of CDFIS also came to the table. An enterprising lawyer had shepherded a number of these institutions into the CDFI world without regard to what it meant beyond more legal fees and cheaper capital for his clients. The banks checked the boxes, applied, and got cheap capital without an understanding of the mission focus so deeply ingrained in the spirit and intent of the program.
Another major benefit: CDFIs were exempted from the ability to repay requirement of the Consumer Financial Protection Bureau's Qualified Mortgage rule.
Will these newly certified CDFIs rise to embrace a mission focus, and become proactive advocates for underserved communities? Or, will they simply take cheap capital, regulatory exemptions, and other precious resources to do what they have always done? Some will do the right thing. Some won't.
So, "CDFI" has become not merely a badge of honor, but for some, a flag of convenience and opportunity. For me, the burning question is this: will the expansion of the CDFI universe signal greater commitment to the underserved, or will it be simply a way to provide comfort to the bottom line and avoid compliance burdens?
It's not just about CDFI designation, either. Over the last few years, NCUA has dramatically expanded the ranks of low-income CUs. Today, there are well more than 2,000 LICUs. This represents more than a third of all federally insured CUs—a far cry from the early 1990s, when there were about 150 LICUs out of more than 12,000 credit unions.
Like CDFI certification, the LICU designation brings tangible benefits, including access to secondary capital and relief from member business lending limitations. Gone are the days when mainstream CUs and regulators alike looked upon LICUs with scorn. There are billion-dollar, highly respected credit unions that are now LICUs.
It is understandable that institutions pursue these designations for the benefits they bring. But the policy justification for awarding CDFI certification and low-income designation is to address the problems of financial disempowerment and exclusion. This demands hard questions and rigorous answers. When institutions "rebrand" themselves to take advantage of CDFI certification and low-income designation, are they truly pursuing the mission that justifies these benefits and privileges? Will new entrants to the field simply keep doing what they were doing before, or will they refocus, reframe, and expand their work to revitalize and empower low-income communities and individuals?
The record is incomplete. Hundreds of CUs have received large "underserved" expansions or LICU designation. I am unaware of any research that documents the service they provide. I know there is quiet grumbling about whether recent entrants to the field are truly serving those they should be.
Despite my qualms, I remain optimistic about the growth of CDFI CUs. Over the last several months, I've visited with several multi-billion-dollar CUs that have recently become CDFIs. They had never been CDCUs or LICUs; they were much larger and seemingly more "mainstream" than the stalwarts of the CDCU movement. But they talked powerfully about their missions, services, and programs, and what they could do with the resources CDFI certification could provide.
I came away convinced, and excited. As the number of CUs steadily erodes and the compliance burden weighs ever more heavily, my visits to these large, sophisticated institutions provided me with a generous dose of the optimism.
So, congratulations to NCUA, to Treasury and the CDFI Fund, to the National Federation of CDCUs. The work doesn't end here. But it's an important start.
Cliff Rosenthal retired from the Consumer Financial Protection Bureau but is best known to CUs as the CEO of the National Federation of Community Development Credit Unions. He can be reached at Cdfihist1@gmail.com.