[Watch] How CDFIs are faring – Insights from the Fed’s 2023 CDFI Survey

Community Development Financial Institutions (CDFIs) provide financial products and services to underserved markets where it may be difficult to access what traditional financial institutions offer. Every other year, the Fed conducts a survey of CDFIs to better understand the barriers and opportunities that they face. This year’s survey sought input on various topics ranging from demand for products and product innovation.

This year, 453 institutions responded to the Fed’s 2023 CDFI Survey. On September 7, 2023, speakers from the Federal Reserve Banks of Richmond, Atlanta, and New York hosted a Connecting Communities webinar, sharing key findings from the survey and thoughts about the road ahead for CDFIs.

During the event, speakers discussed the demand for CDFIs’ products and services, challenges to meeting demand—including lending capital—and innovations in products and practices. Speakers also shared Fed Research on CDFIs’ use of secondary markets and explained how the survey results help inform future Fed research initiatives. Keep reading for a full transcript.

Speakers

Transcript

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Whitney Felder

Good afternoon everyone. My name is Whitney Felder, communications specialist with Fed Communities. Welcome to Connecting Communities webinar, How CDFIs Are Faring: Insights from the Fed’s 2023 CDFI Survey.

We are very excited to kick off today’s discussion. If you’re a returning Connecting Communities participant, welcome back. We’re happy to have you. If this is your first Connecting Communities Webinar, you are in for a treat. I think you’ll find the session very insightful.

We have a really great panel lined up for today’s discussion. Before we move into the content for today’s event, I would like to share a few housekeeping items. Today’s session is being recorded and will later be available for viewing on the Fed Communities’ website.

Views expressed during this session are those of the speakers and are intended for informational purposes. They do not necessarily represent the views of Fed Communities or the Federal Reserve System.

All microphones have been muted. Please use the Q&A feature throughout the session to submit your questions. We promise to get to as many of them as possible during the Q&A portion of our presentation today.

And finally, feel free to keep the conversation going and engage with us on social media using the #connectingcommunities and visit fedcommunities.org for a variety of CD articles, resources and data from across our Federal Reserve System.

So now, I will turn it over to Jacob Scott, community development analyst at the Federal Reserve Bank of New York, to get us started. Thank You.

Jacob Scott

Thank you so much, Whitney. As she mentioned, I’m Jacob Scott. I’m a community development analyst here at the Community Development Team at the Federal Reserve Bank of New York. I’m joined today by my colleagues Carmi Recto, who is a community development specialist, and Jonathan Kivell, who is our director of community investments. If you could hit the next slide for me, please. Thank you.

So, before I get started, I do want to give the standard disclaimer that the views expressed here are those of the presenters and do not necessarily represent the Federal Reserve Bank of New York or the Federal Reserve System. And hopefully, that will be the only time I read directly off a slide, but that is an important disclaimer. So, thank you all so much today for taking time out of your busy schedules to listen to us. And thank you to Fed Communities for hosting this webinar, inviting us to speak. We’re going to start today off by sizing the CDFI industry. We want to understand the size and growth of the community development financial institution industry in the last few years. Next slide, please.

So, I’m assuming that many of you on the call right now likely have some familiarity with what CDFIs are, but just so that we’re all on the same page, CDFIs are community-focused nonprofit and for-profit entities that primarily provide financial services to low- and moderate-income households and communities. This might come in the form of traditional loans, but also comes in the form of technical assistance and development services in these communities and for these households. These institutions are certified by the CDFI Fund, which is a sub-agency of the US Department of Treasury. Next slide, please.

So now that we have that background, we understand that these are financial institutions serving low- and moderate-income households and communities certified by the CDFI Fund, we can understand what does the industry look like. To start off, there are almost 1,500 of these institutions across all 50 states, as well as the territories as of May 2023. And this represents a 40% increase since 2019 alone, so this is a growing industry. And collectively, these institutions hold over $450 billion in total assets. And I want to emphasize the over there. We actually don’t include in that count the assets of the handful of venture capital CDFIs or of some bank holding companies or other institutions. So that is a floor estimate. It is likely that the total assets held by these institutions is actually over $450 billion, so this is a large and growing industry. And those numbers, I should mention, are as of Q1 of 2023. Next slide, please.

So when it comes to the institutions that make up this industry, what kind of institutions are they? The plurality are loan funds. Around 40% of CDFIs are loan funds. This is followed closely by credit unions. There’s about 529 credit union CDFIs making up 36% of the industry by count. This is followed by banks at around 13% and then these other institutions that I mentioned, such as venture capital firms and bank holding companies. Next slide, please.

However, despite the fact that loan funds make up a plurality of CDFIs by count, when it comes to total assets, it’s actually credit unions that hold by far the most assets in this industry. Over $300 billion are held by Credit Union CDFIs. This is followed by banks at a little under 120 billion and then loan funds at around 35 billion. So again, despite the fact that loan funds make up almost two-fifths of all CDFIs by count, two-thirds of industry assets are actually held by credit unions. Once again, these percentages are not including venture capital CDFIs or bank holding companies. So that’s a snapshot of the industry. There’s around 1,500 of these institutions. They hold over $450 billion in assets. A lot of those are held by credit unions. I will then say next slide and pass it over to my colleague Carmi to talk about how the industry has grown in the last four or five years.

Carmi Recto

Thanks so much, Jake. So, the next few slides look into industry growth from two dimensions. One is by the count of certified CDFIs, and two, by assets held by these CDFIs. This particular slide shows that prior to 2019, the number of certified CDFIs was relatively flat from one year to the next, but since then, has seen a steep 40% growth. Next slide, please.

When we looked more closely into which type of CDFI drove growth the most, it became apparent that it was primarily driven by credit unions acquiring certification. While that trend started in 2019, we see the steepest year-on-year increase in the count of CDFI credit unions from 2021 to 2022. In all, the number of CDFI credit unions was 529 by May 2023, a count that is double, or nearly double that just four years prior. Next slide, please.

This slide looks further into growth at a more granular level, particularly where a good portion of those newly certified CDFI credit unions are located. Of the 239 new credit unions certified as CDFIs between 2019 and 2022, I’m sorry, 2023, 88 are in Puerto Rico, which means that two in every five newly certified CDFI credit unions between that same time period are in Puerto Rico. The steepest increase in the number of local credit unions, commonly known as cooperativas, happened between 2020 and 2022. Now, that growth is remarkable, especially considering that there were no certified CDFIs on the island prior to 2018. It is worth noting that Inclusiv, the trade association for CDFI credit unions launched an outreach and capacity-building effort called the Puerto Rico CDFI Initiative in 2018, in collaboration with several public and private partners. As of Q1 2023, certified CDFI credit unions in Puerto Rico hold $11 billion in assets. Next slide, please.

Now, this chart makes three things apparent about the growth of the industry, as demonstrated by growth in assets held by CDFI banks and credit unions, which are the two types of CDFIs that collectively hold the most assets. The first is that, generally, if you look at the bars on the chart, you can see a steep increase in assets from 2018 to 2023. It grew by about $265 billion. The second takeaway is that there are two drivers to that growth. The first is an increase in the assets held by CDFIs certified before 2018, represented on each bar by the dark gray portion right at the bottom. It went from about 128 billion to $217 billion. But, if you look at the colored portion of the bars, you’ll quickly see that the steep increase in assets is primarily driven by newly certified CDFIs, which combined added $177 billion to total industry assets, and that amount represents 67% of industry asset growth.

The third takeaway is that if you break down that colored portion of the bars even further by certification year, the largest growth happened from 2021 onward. Each color represents the assets of CDFIs that were certified in that given year. And, as you can see, starting with that light blue portion, and all others on top of that representing subsequent years, that CDFIs certified in 2021 onward added more assets to the industry then those certified in prior years starting in 2018. It is worth noting that there are a number of technical and financial supports that were made available to CDFIs during the pandemic, including the Emergency Capital Investment Program, or ECIP, that could have demonstrated the value of CDFI designation for banks and credit unions. That said, the motivations for acquiring certify… I’m sorry, CDFI certification, is not examined in our report, but may be worthy of further research. With that, I’ll pass it back over to Jake, who will provide some insight into the largest CDFIs.

Jacob Scott

Thank you so much, Carmi. Next slide, please. So the last thing we wanted to look at in our research was whether there was some top heaviness in the industry, some concentration, and if so, who were the largest players? Who are the largest CDFIs in the industry? What we found is that there is some degree of concentration. About a fifth of industry assets are held by the top 10 largest CDFIs. We also found that these institutions are quite large. The largest holds almost $17 billion in assets. Even the smallest, the 10th largest, holds almost 5 billion. And so, these are extremely large organizations. Next slide, please.

We also wanted look at how they’ve grown in relation to the industry as a whole. Just by way of background for the chart itself, the gray bars for some of those facets just represent years before that institution was certified. The blue bars is once it was certified as a CDFI. What we found is that, like the industry as a whole, these largest institutions have grown pretty considerably in the last five years. In absolute terms, Suncoast saw the most growth, with almost $8 billion added between 2018 and 2023, and The First Bank saw the most percentage growth, with about 172% growth. Overall, these largest CDFIs grew by about 3.6 billion, or 93% since 2019, on average. Next slide, please.

So that’s what we have for you guys today. We wanted to explain that there’s around 1,500 of these institutions. They hold over $450 billion in assets, and they’ve grown both in count and total assets considerably in the last five years. If you have any questions, please, again, feel free to throw them in the Q&A feature. We’ll answer them towards the end. And if you have anything that we don’t answer or you have further questions, please feel free to email us at any of the email addresses listed there. Thank you again to Fed Communities for hosting this webinar and for inviting us to speak.

And the last thing I’ll say before passing it off is that all of these findings actually come from a report that will be linked on the last slide in the presentation, Sizing the CDFI Industry: Understanding Industry Growth, released by the Federal Reserve Bank of New York on our community development team. So if you want to get more detail on how we calculated the numbers or if you want to see some more insights, I direct you to look at that report. It holds a lot in there. So now, I will turn it over to Surekha to give her presentation. Thank you.

Surekha Carpenter

Thank you very much, Jake, and Carmi, for setting some really excellent groundwork for me to share more about our CDFI survey. So, hello, my name is Surekha Carpenter. I’m a research analyst at the Federal Reserve Bank of Richmond, and I have been working on this survey all year with my colleagues at the Federal Reserve, so I am very excited to share with you all what we learned. I’m going to be sharing high-level key findings today, but a much more detailed report has recently been published on fedcommunities.org. So if you’re interested in what you hear today, you can go there to read the report and learn more. So, we’ll link that report later in the presentation, just as Jake mentioned.

Before I get into my presentation, I too have to be clear that my views I express here are my own, and they don’t represent the views of the Federal Reserve Bank of Richmond or the Federal Reserve System. And with that, we’ll go ahead and get started, next slide, please, by explaining some of the background of our CDFI survey.

So, as Jake mentioned, the Federal Reserve’s community development function is interested in CDFIs in large part because of their focus, serving individuals with low or moderate income. Our CDFI survey has been fielded over several years, and it helps us better understand how CDFIs are reaching those individuals with low and moderate incomes and others across the country, CDFIs’ impact, and recent industry conditions.

So this is a national survey. All 12 of our regional reserve banks help support it, but we also partner with other industry leaders and organizations. Carmi and Jake mentioned the CDFI Fund, so they’re one of our partners, alongside several CDFI member networks, like the Opportunity Finance Network, or OFN, Inclusiv, as Carmi mentioned, the Community Development Bankers Association, or the Native CDFI Network, just to name a few, because we definitely partner with a lot of organizations. So these partners help us formulate our survey questions, but more importantly, they help us distribute the survey among their networks and reach CDFIs. So the survey is fielded every two years, and this year was our most recent iteration. We fielded it from April 24th to June 2nd this year, and we asked questions about demand for CDFI products, challenges that CDFIs face in meeting demand, how CDFIs are innovating to overcome those challenges, and then, how they track successes.

Okay, so let’s jump into the survey results, and we’re going to start by understanding who we heard from. So on the next slide, we’re going to see that this year, we got responses from 453 CDFIs, which was incredibly exciting to us. That is about 30% of all CDFIs certified by the CDFI Fund, just to give some context to that number. But it is important for me to note that we welcome responses from CDFIs that are not certified too. So although becoming certified provides CDFIs access to financial and technical assistance, some CDFIs may be in differing points in that process, or they may have decided not to pursue certification for one reason or another, but you can see it’s a very small share of our sample. So, out of the 4% of respondents that were not certified, so just that dark wedge in the pie chart, 3%, so almost all, were actively seeking certification at the time of the survey. So, let’s move to the next slide.

And we’re going to look at the types of respondents we heard from. In terms of composition by type, we, again, use the certified CDFI as a benchmark to compare. Our sample was fairly similar to the overall certified industry composition. We did hear from more loan funds and fewer bank holding companies. Actually, this year, we’re trying to not focus our survey efforts on holding companies specifically, but rather their subsidiaries, financial institutions, because we were interested in getting the finest level of detail when it came to demand and challenges and things like that. So, the holding company discrepancy in our sample may be attributable to that. I will also say that although we got responses from 453 CDFIs, we withheld two holding companies from our analysis, exactly because their subsidiary bank also responded to the survey. And just to avoid double counting for them, we excluded them from the Key Findings analysis.

Moving on to the next slide, we will take a look at what our respondent CDFIs primarily finance. So we asked respondents to indicate their primary business line, so that is where they devote most of their resources and staff time. And we heard that 39% of our sample said they provided consumer lending as their main business line. Another 27% said small business finance. And we also know that there are trends in business line for different CDFI types. So, for example, almost all of our credit union respondents primarily offer consumer financing services, as you might imagine. And about half of loan fund respondents provide small business finance. And many bank respondents offered commercial real estate finance, as another example.

So on the next slide, we’re going to get a sense for where our respondent CDFIs work. So on this map, the darker the state, the more survey respondents said they offer services there. So you can see that high population states like California and Texas and New York are darker, but you can also see more coverage in a few different regions, for example, the Southeast. And I will also point out Puerto Rico, which is always a standout in our survey. We have a large number of cooperativas, as Carmi mentioned earlier, answer the survey every year, so we very much appreciate them.

So, separately from a service area perspective, we also asked survey respondents to indicate the scope of their service area, so, “Do you work nationally? Do you serve several states, or just one state, or smaller than that?” And 61% of our respondents served one state or smaller. So maybe they just serve a few counties, for example. So, this gives a really good sense for how locally focused our respondents are. With that, now we’ve gotten a sense for who responded to the survey and what they do and where they offer their services. We’re going to look at what we learned from them. Next slide.

So first, we understand that demand for CDFI products is strong, and I say remains strong on the slide because this continues a trend. Our survey respondents have indicated demand is rising in every survey since 2019. But this year, we also learned that CDFIs are mostly meeting this demand. But top inhibitors to CDFIs meeting that demand varies across CDFI types. So, there were different trends and challenges for loan funds versus credit unions, for example. CDFIs have continued to innovate to address challenges, and they shared those innovations with us. But being able to demonstrate those and other successes is important for how CDFIs operate. And in this survey, CDFIs expressed an interest in expanding how they measure their successes and impact.

Okay. So, we’re going to dive into these key takeaways one at a time, starting on the next slide. So, respondents indicated that demand for their products has increased over the last year. The three different bars in this chart show how demand has changed for CDFI businesses overall, that’s that top bar, and then just for products offered in their primary business line, which is the second bar, and then just for products in their secondary business line. So about three quarters indicate that demand is increasing overall and for their primary business focus, but a change in demand ended up looking different across different business lines and CDFI types.

So as an example, 80% of respondents who finance residential real estate said they saw an increase in demand over the last year, and mostly, loan funds were financing residential real estate. So you can really see how there can be quite a difference between some business lines and some CDFI types. So, as a note, we have those charts that show the different demand for business lines and the Key Findings Report. And so there, you can see how small business finance changed and demand compared to residential real estate compared to consumer finance, for example.

So, you might be interested in checking out that nuance, but this is kind of just giving a high-level overview. And now that we’ve seen that demand is increasing over the last year, we’re going to move to the next slide, and we are going to look at if respondent CDFIs were able to meet that demand. And you can see, generally, yes, they were. So the dark green bars in this chart show respondents that report being able to fully meet demand, and the light green is mostly being able to meet demand. So the chart shows this broken out by institution type, but overall, for the whole sample, 40% were able to fully meet demand. That’s pretty good, but it certainly leaves some room for growth and improvement in the industry. And so, for our respondents who indicated they weren’t able to fully meet demand, so every color in the chart except the dark green, we actually wanted to know more detail about what was inhibiting them.

On the next slide, we’re going to look into that question. And in total, 78% of our sample indicated that lending capital challenges was limiting their ability to fully meet demand. So that was most frequently reported and also had a relatively high share saying that it was a significant limiting factor, which is indicated by the dark blue portion of the bar. 77% said staffing challenges were limiting their ability to meet demand, so very close to that top challenge of lending capital. And that has been a top reported challenge year after year in our survey too. Then, 72% also said operational funding challenges, which, as I understand it, has also been a longer-standing issue for the industry.

So this chart shows challenges for the whole sample, but what I mentioned earlier is that some trends emerged for different institution types, which we are going to look at more closely on the next slide, please. So we’re just going to take loan funds and credit unions, because it’s made up most of our respondents. But you can see that loan funds are reporting lending capital as the top issue, and more are saying that it’s a more severe factor. Close behind is operational funding. But for credit unions, they’re being more limited by staffing challenges, the qualifications of their borrowers and technology challenges. So, we have more to uncover about those differences, but certainly, some of the difference is attributable to how these two different institution types fund their lending and operations. Credit unions take deposits, for example, where loan funds do not. So they might have differing important top factors.

So, wanting more detail about each individual issue listed here, so, for staffing, borrower qualifications or lending capital, we actually asked follow-up questions for each to better understand the specific pain points for CDFIs. So we’ll look at the top challenges in more detail, and for this, we’re going to zoom out to look at the whole sample. So, on the next slide, we’re going to look at detailed lending capital challenges. So here, 67% of our total respondents indicated that cost of capital was a challenge, and 54% said insufficient equity capital, so that’s capital free of debt. More than a third of the sample said insufficient debt capital or that lending capital was actually restricted to specific uses, and that was causing some challenge.

With regards to staffing, on the next slide, another 67% of respondents indicated that a lack of qualified candidates was limiting their ability to more fully meet demand. And then, more than 50% of respondents indicated a difficulty offering competitive compensation for new hires, and then also, current staff leaving for higher-paid positions. So, often, CDFIs are competing with other financial institutions or nonprofit organizations for staff. And so, we can see these resource constraints and competition for talent in this CDFI industry is really becoming a problem. So like I mentioned, we asked this kind of detailed follow-up question for the other challenge categories, including operational funding, technology, borrower qualifications, and challenges in offering development services. And we provide this breakout level of detail more in the Key Findings Report.

Now that we’ve looked a little bit more into the challenges, but of course, CDFIs across the industry are adapting and constantly innovating to help ease these challenges and other problems that they experience. So on the next slide, I have a couple of examples of what respondents shared with us about how they have innovated over the last years.

So, this was an open-ended question, and we wanted CDFIs to tell us what was important to them. We put some of the themes that emerged on this slide. So CDFIs mentioned that their rapid deployment of COVID-19 relief funding, like the CDFI Rapid Response Program or the Emergency Capital Investment Program, ECIP, were innovations for them. And that’s because, for many institutions, this was a significant influx of funds, and they were often aiming to deploy these dollars very quickly to their communities. And in some cases, they were learning how to do all of this virtually by employing or developing new online solutions, so a lot of new and really fast. So, we heard a lot of respondents mention this. So, respondents also talked about offering new nonpredatory products or employing nontraditional underwriting approaches to more fully reach financially underserved clients and customers.

Another important way that CDFI’s reach and assist customers is through development services, like technical assistance. And we can understand from the last slide that staff capacity limits CDFI’s ability to deliver these services. So, some respondents actually found ways to scale their development service offerings and address community needs, often through partnerships. As an example, we had two CDFIs that leveraged their relationship to join forces, and they actually ended up delivering an accelerator training program to beauty salons and barbershops in their communities. We had another example too of a CDFI that leveraged their professional relationship to bring development practitioners and stakeholders together and discuss best practices, lessons learned, and new approaches for delivering their development services to their clients, so just trying to improve that by bringing folks to the table.

So, these innovations are successes, and CDFIs, for many reasons, need to demonstrate these successes and the impact that they’re having on their communities. So we asked a series of questions about impact metrics, what impact metrics respondents are tracking, what prevents them from tracking more or different types of information that they would like to. So on the next slide, we’re going to see that a majority of respondents are tracking what we can call output metrics, that’s in dark blue, because this is the output of what CDFIs offer. So this could be the number of clients that CDFI serves or the dollar value of their deployed products, which are the things that we asked about in the survey.

Outcome metrics, on the… Sorry, outcome metrics, on the other hand, the green bars, those illustrate the outcome of CDFI intervention. So, if A CDFI provided a loan to a small business, how many jobs were then created as a result of that investment? That’s just an example. Sometimes, the best way to share an outcome is through stories or more information like that, rather than hard data or numbers or a figure. So, it can be a little challenging to collect.

So this chart that is on the slide is showing the share of respondents that are tracking each listed metric that they’re interested in tracking, that are interested in tracking each metric, sorry. So, for example, you can see that 367 respondents are interested in tracking client, customer, or community stories, that first green bar. 82% of them are already collecting those stories, but then, the remaining 18% want to track that. Or, as another example, at the very bottom, 166 respondents want to track job quality, but only 37% of them are able to currently do so.

So I’m sure many of you on the call are familiar, but if you don’t know already, as I mentioned, outcome metrics are going to be much harder and more resource-intensive to collect. And indeed, our survey results indicated that top impediments to tracking these impact metrics are staff lacking time to collect data. After CDFI products close, like a loan closes, it’s actually hard to collect that data for other reasons. And then, lastly, that clients are actually reluctant to share their data, often.

But, overall, I do think that there are a lot of positives in this chart. So, a good portion of our respondent CDFIs are already tracking lots of information. There is still lots of room for growth, though. And even some of the challenges that we mentioned earlier around staffing or funding may help CDFIs provide the level of information that they’re seeing as important.

So that takes us to our next slide and the end of our survey findings presentation, where we’re going to look ahead. Our respondents indicated that they anticipate further increases in demand, but they are optimistic about meeting that demand. They provided some clear information on what would help them to better meet that demand, though, and try and alleviate some of the challenges they’re experiencing, on funding, additional lending capital, and capital that is set aside for operation-specific uses, like paying staff or rent, for example, and additional resources for hiring and training staff. And that doesn’t necessarily just mean funding. It could be technical assistance, for example. So, if you want to read more about these three things, or anything that I showed in the slides today, you can absolutely do that by checking out the full report. Next slide.

And, with that, I will just thank you all again for your interest, for joining us today. Thanks again to Fed Communities for hosting us and the CDFI Key Findings Report. If you have questions on the survey, you can drop your questions in the chat. As Jake mentioned earlier, if you make it clear it’s about the survey, it’ll be easier for us, and then I’ll do my best to answer them during Q&A. And, at that point, I’m going to pass the virtual mic over to Charly.

Charly van Dijk

Hi, everyone. Thank you for joining today. Next slide. For those of you who do not know me, I am Charly van Dijk, and I am a senior advisor at the Federal Reserve Bank of Atlanta, and I work from our Miami branch. Next slide, please. Thank you. If you don’t know me, I previously worked at a CDFI. I underwrote CDFIs for the CDFI Fund, under the leadership of the great Annie Donovan and Donna Gambrell. And, for me, right now, in my role here at Atlanta, I look at community development finance capacity-building opportunities for the industry, particularly across the Southeast. And for this webinar and my section, I’m going to talk a little bit about how this research that my colleagues just presented can be applied. Before I do that, I will give the standard Fed disclaimer that views express are my own and not that of the Federal Reserve Bank of Atlanta or the Federal Reserve System. And further, I am not giving any financial or investment advice from my presentations today. Next slide, please.

Many leaders across the Federal Reserve System have spoken about the importance of CDFIs at one time or another. This is my bank president, Raphael Bostic, and this quote just highlights the importance that CDFIs play in helping increase access to credit and capital for underserved communities. We hope that our analysis at the Fed helps CDFIs do more of what they do well, effectively, efficiently, and reach deeper into underserved markets. Next slide, please.

In Atlanta, community and economic development works at the intersection of research and engagement to help promote economic mobility and resilience across the South. And, like I said, this webinar is an example of that research and engagement in action. So, by sharing this research with you, we hope that we can connect and identify new research questions that will help contribute to the discourse around CDFIs and the roles that they play. Next slide.

For me, what’s fascinating about the research that you just heard is how it gets applied so that communities can deploy the capital that they need for the most pressing needs that they identified. That’s essentially the premise of what is called the capital absorption framework, which is what is in front of you in the center of the circle. If you aren’t familiar with capital absorption, it is a concept that was developed by the brilliant minds of Robin Hacke and Marian Urquilla as well as others at Harvard and Kresge. And now, the Center for Community Investment carries the banner of this capital absorption framework. I’m constantly thinking about capital absorption and community development across the six states in the Atlanta Fed’s district, which are Florida, Alabama, Georgia, parts of Mississippi, Louisiana, and Tennessee. And the key areas that are really important to the capital absorption framework are having shared strategic priorities, a pipeline of investible deals, and a conducive enabling environment for those investments. So that’s in the middle of that circle that you see there.

But there are opportunities all along this continuum in the diagram to potentially work together with philanthropy, with CDFI coalitions, with nonprofits, and banks to make sure that capital gets to the communities that need it most. And so, if you look on the left side of this chart, the first element that’s here on the high CDFI control part of the chart is get money. And this is the most fundamental part of this continuum of the community development finance ecosystem, because without money, there aren’t loans to provide to low- and moderate-income communities in the ecosystem. And from what we heard from Surekha’s survey, lending capital and the cost of capital were actually key challenges to meeting the demand for everyone in that ecosystem.

So, what if I told you that actually, a significant portion of CDFIs might be sitting on money for their lending activities as of today? Next slide. I think you probably want to learn more. And there’s a delay, so I can’t tell if my slide moved forward. Thank you. So, for CDFIs, net assets are the key to raising additional debt financing that’s going to help expand and grow a portfolio. Of course, a prudent CDFI is going to pay attention to other factors beyond net assets, like asset liability management, operations, underwriting quality, et cetera. But at the core of what CDFIs do is managing this key ratio. And so, net assets work as a lever to aggregate additional capital to go into that capital absorption model. Next slide.

And when leverage is done right, CDFIs can take money from funders like the CDFI Fund or a bank and leverage it as much as 10 times the amount that they originally received. This is because more loans to clients show up as more assets on balance sheets, and then you can potentially unlock more debt capital to make more loans. And this is what the largest and most successful CDFIs do really well.

That said, there’s a reason why everyone is not striving to achieve 10% impact as a CDFI. Next slide. And the reason is that when leverage is done wrong, you run the risk of becoming like the sad, overleveraged, and bankrupt pigeon, which nobody wants. The reality is that overleverage is a risk, and that’s why regulators and CDFI lenders are always going to be asking what net asset ratios are, and they’re going to be looking at that information closely. Next slide.

So what is an appropriate amount of leverage for CDFIs? The answer is, it depends. So, for CDFI banks and credit unions, those ratios are determined by the Basel Accords for banks and financial regulators, same thing for credit unions, NCUA. And these standards help ensure that there’s safety and soundness in the financial system. Nonregulated or not-for-profit and for-profit loan funds and venture capital funds don’t have the same mechanisms in place for regulation, at a national level, which means that they have a different way of measuring these assets and a different standard for CDFIs that are loan funds. So, the national sort of typical industry standard is around 20% of a net asset ratio. And your lenders, or the CDFI Fund, will look at this ratio if you’re a loan fund and see where you fall. Next slide, please.

To see this information across the industry as a whole is challenging, and there are some ways to do it. This is because of the lack of availability of standard data across CDFI loan funds. That is not the case necessarily for banks and credit unions, because they are regulated, and they have call reports. So for CDFI loan funds, this is the best information that we have. It’s what New York presented on my colleague’s report that they produced. It’s information from the CDFI Fund certification process, and it’s surveys like the one that Surekha ran that looks at information from across the industry. Now, if you’ll remember, I said 20% net assets was the industry standard for loan funds. And if we look at this chart from the CDFI Fund, loan funds, overall, this sample of 473 CDFI loan funds, have a net asset ratio of 0.5, or 50%, which potentially could indicate that there may be underleverage at an industry level, but we don’t know for sure, right, because this is just a sample of the CDFIs. It doesn’t represent the close to 2,000 CDFIs. On the next slide, please.

But, we snuck in a sneaky question in Surekha’s survey, which was asking CDFIs to respond about what percent of their balance sheet is debt. And so, for CDFIs to be looking at what percent of their balance sheet is debt, we can triangulate here and look at this information and see that it aligns with that industry slide from the CDFI Fund. You’ll see here in the box that is circled with the dotted line that about 75% of the CDFIs surveyed, or three quarters, have a net asset ratio, or, well, they didn’t talk about their asset ratio, but they have a percentage of debt that is less than that 0.5 industry standard. And so, what that indicates to me as a researcher is that this is an area that I might want to look into, particularly across different regions, to see if there is a reason why certain places or certain organizations are not leveraging their balance sheets.

And so, given recent research from the Urban Institute that actually looked at southern-based community organizations, organizations in the Southeast tend to have smaller balance sheet and less debt compared to other geographical regions. I want to look at why that is the case and how to make sure that CDFIs across the South and the country as a whole are able to access the capital that they need. And so, taking New York and Richmond’s research, we can put all of this information into action and potentially come up with applied uses across the industry to see how this information is relevant. On the next slide, please.

Now remember how I said I was not providing financial advice. I do not want anyone to walk away from this webinar saying that, “Charly told me to go lever my balance sheet.” Please do not do that. If you have questions about how leverage works or about net asset ratios and CDFI capitalization, there are some really great resources from the CDFI Fund. This is on their Capacity Building Initiative Resource Bank page. And the CDFI Capitalization Resource Bank is a fantastic tool, but there are all of these other ones available too that help look at CDFI operations, outcome tracking, all sorts of things that people might be interested in. So, hopefully, if you take anything away from this webinar and you’re a CDFI that is doing the good work in the field, you’ll go visit the CDFI Fund’s Capacity Building Initiative Resource Bank and take a look at the materials.

And so, if you are interested in having a conversation about CDFI leverage or about your CDFI, I would love to chat to you, especially if you are in the Southeast. And I just want to thank my colleagues for their incredible work, because it helps inspire me and my research and that of others. So, thank you so much. And with that, we’re going to transition into the question segment of the presentation.

Great, everyone is going to be on screen. Thank you. And let’s kick it off. You all had some great questions in the chat, by the way, so thank you so much everyone for your active participation. The first question that we have I think is for our New York colleagues, which is, “Is the CDFI data that you presented available on a state-by-state basis?”

Jacob Scott

Thank you, Charly. And the answer to that question is yes, it is. If you look at the report that’s linked on the screen right now, and you can get access to it there, the count is available by state, as are the total asset numbers by state. There are some nuances. They’re addressed in the report. And we’re happy to answer questions. But the short answer is yes, state-by-state data’s available.

Charly van Dijk

Fantastic. Okay, question two is also for the New York Fed, “How do you estimate the size of the loan funds, particularly for-profit loan funds?”

Jacob Scott

I’ll take that one as well. That’s a great question. Again, in the report, there’s a bit more detail, but we primarily sampled Form 990s, which is for the nonprofit loan funds. That’s how we got our estimate. We took a random sample of Form 990s, and we scaled it up. But again, in the appendix of the report, there’s more data on that, or more information on that.

Charly van Dijk

Thanks, Jake. People also want to know if there’s data on how the demographics of CDFI loan customers are similar or differ from that of non-CDFI customers.

Carmi Recto

I will take that one. Thank you very much for that question. That was outside the scope of our research, so I’m not sure to the answer to that, but I may call a friend, and that friend is Charly. I’m not sure if you have any additional feedback on that.

Charly van Dijk

Aw, thanks, Carmi. So, for me, the way that I look at this is, CDFIs that are loan funds can and do collect information about their demographics. It wasn’t included in New York’s research. It’s not publicly available information, unless it’s on the CDFI Fund’s website. For banks and credit unions, it’s a little more complicated, because of fair lending rules. And so, the best way to look at demographic information is by using ZIP codes and geographies as a proxy for getting at this information. And so, while it wasn’t in our research that we presented, per se, there is a way to look at that question. And, like I said, we are always thinking about new research questions. So thank you so much for whoever asked that question. And onto the next one, which is for the New York Fed, if you’re ready. So, for question that is next, “Does your analysis of growth consider mergers and acquisitions versus organic growth?”

Carmi Recto

So, we capture both organic growth and mergers and acquisitions in the data, as we tracked the number of certified CDFIs and the total assets of those entities. If an entity remains certified post-merger, we would still consider them in that count.

Jacob Scott

And I will actually jump in very quickly, just to add, again, in the data appendix of the report, we do address that issue a little bit of what happens if companies become acquired or merged. So, there is more detail there.

Charly van Dijk

Thanks. The next question is about the growth in CDFI assets at credit unions. So, someone wants to know, is that due to the services that they provide versus what traditional banks provide? And I believe this is a New York question.

Carmi Recto

But that’s a really good question. We didn’t really look into that in our research, but that might be a question for further research for the research community. I said research a lot.

Charly van Dijk

It is a webinar about CDFI research, so that’s quite all right.

Carmi Recto

Exactly.

Charly van Dijk

Okay. So the next question we have, I think this one is for Surekha, and this is, “How do you define mostly meeting demand? That was one of the elements in one of your slides. Is it the percentage of borrowers that ultimately get approved loans? What does that element mean when you’re talking about mostly meeting demand?”

Surekha Carpenter

So, the answer is no, it actually does not have a specific definition. We actually left that open to the respondent to determine, and it really is to give a pulse, more of a pulse feeling of how CDFIs are, just in terms of feeling how they are able to meet the strong demand that they’re seeing. So we didn’t define it in the survey, and it was just based on how CDFIs felt themselves.

Charly van Dijk

Thanks for that clarification. The next question’s actually three questions. Someone snuck extra questions in, so thank you. And I think this is for Surekha, but have any of the surveyed CDFIs provided loans to worker co-ops? And I’m not sure you would know that, but feel free to go ahead.

Surekha Carpenter

I personally don’t know that. It’s possible that that is some information that CDFIs shared in some of the open-ended questions that they asked. And we actually have some follow-up reports coming out later this year. One of them will look more deeply into those open-ended responses that we got, a little bit of qualitative analysis. So, look forward to that is the best I can say, is the best answer to that. Look forward to that report, and you might find your answer there.

Charly van Dijk

Thanks. And one of the other additional snuck-in questions within a question, or the metaquestions, is around how CDFIs are measuring impact. So, how do CDFIs measure impact?

Surekha Carpenter

Okay, so this, it has come to my attention, is the question, in terms of impact measurement, not just for CDFIs, but for nonprofits and a lot of other organizations who are concerned with this. It is an open question. It is particularly challenging in the CDFI industry because of the huge amount of diversity of just who CDFIs serve, what they offer. The answer is, it looks different to everybody. It looks different to all sorts of different CDFIs. That’s what makes it challenging.

We tried to quantify a little bit of that with the questions that we asked on output and outcome metrics this year. That was really just to get a sense for what folks are measuring. We did receive some comments in terms of other stats that folks are collecting besides what we asked about in the survey. But the answer is very broad in general. It’s a challenging question to answer. And I will also say that we are hoping to also put out a report on impact measurement to look a little bit more deeply at this and explain it a little bit more, again, later this year. So, that’s another report to look forward to.

Charly van Dijk

Thanks. I can’t wait to read that one. The next question is also for you, Surekha. People are just peppering you with questions. People want to know, was lending capital a significant challenge for depository institutions? And I’m going to guess that they meant perhaps banks, but banks and credit unions both take deposits. So how do you want to choose to answer that question?

Surekha Carpenter

Yeah, we did see, though, for credit unions, on that one slide where I broke out loan funds versus credit unions, we did see credit unions kind of said a lot of challenges were fairly significant. And so, to say lending capital was not a challenge for credit unions is not right. They did report it, just less of a challenge, at least in this survey. And that heavily impacts too who did we hear from. They just said it was a little bit less of a challenge for them than staffing and other things.

Charly van Dijk

Thanks. We just got so many questions that people were interested in this research, which is exciting, and we don’t have enough time to answer them all, unfortunately. So, thank you for your questions. We really appreciate it. We’re going to do one more, and then we are going to pivot from other panelists. Is there a burning question here that you really want to answer? Okay, no takers. So, one of the questions here that I think is important is, “How recent is the data from your surveys, and do you track concerns that CDFIs may face now?” And I think this is a question that New York and Surekha can answer, even though New York did not field the survey.

Jacob Scott

You want to go first, Surekha?

Surekha Carpenter

Yeah. So, this year’s survey, we fielded it between April and June. A lot of the questions, we asked CDFIs to reference the last year. So, for the demand questions, we asked folks to look back over the last 12 months and provide us the information on that. We also had some forward-looking questions, and for those, we asked, “Can you consider the next 12 months, what might happen in the next 12 months?” So it’s pretty recent data this year and gives us some sense for a little bit of time surrounding the fielding period in spring.

Jacob Scott

Yeah. And then, to jump in and answer, the timing for us, it depends on what data you’re looking at in our report, but for the count numbers, that is as of May of this year, from the CDFI Fund. The asset numbers are of Q1 of 2023 for banks and credit unions. And then, the Form 990s were 2020 Form 990s, for the nonprofit loan funds.

Charly van Dijk

Thanks, Jake.

Jacob Scott

No problem.

Charly van Dijk

Okay. So if people didn’t get their questions answered, you are welcome to reach out to us. Our contact information is available in this deck, as well as, I believe, on the Fed Communities website. Please go ahead and follow up with us. We are all very passionate about this topic, so we are pleased to have further conversations. And with that, we’ll hand it over to Whitney to close us out. And thank you so much, everyone.

Whitney Felder

Thank you, Charly. Thank you, speakers. Thank you, attendees. Thank you, everyone, for joining and spending your valuable time with us today.

Before we end the session, I do have a few small requests. Please complete the survey that will be sent to you immediately after the event so we can improve and continue to bring you timely and relevant topics.

Today’s session will also be available on YouTube and the Connecting Communities website via that communities in about two weeks. We encourage you to visit Fed Communities at fedcommunities.org to access additional articles, resources, and data about community development across the Federal Reserve System.

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This session, including the slides, will be available and featured in our next newsletter and on our website. So keep an eye out for that. We encourage you to follow us on social media. We are on LinkedIn, Twitter, Instagram and Facebook.

And finally, if you are interested in more information on CDFIs, I invite you to attend a virtual event hosted by the San Francisco Fed called Increasing Equitable Access to Affordable Housing Finance: Early Learnings from CDFI Programs for Housing Developers of Color on September 21. It’s a virtual event, and there are more details on the Fed Communities event calendar and website.

Thank you for joining Connecting Communities with real people for real conversations about real topics and research. We’ll see you at the next Connecting Communities event on October 12th. Have a great afternoon.