CDFIs on the Prize: Recent Federal Awards for Community Development Financial Institutions

Introduction

Community Development Financial Institutions (CDFIs) are mission-driven banks, credit unions, loan funds, and venture capital funds that expand financial access to low-and-moderate income (LMI) and underserved populations.

In the past two years, after recognizing CDFIs' ability to reach and serve populations that were hard hit by the pandemic, Congress appropriated a total of $12 billion to the industry through three special programs. The money was allocated to the U.S. Department of the Treasury through the Consolidated Appropriations Act, 2021. The scale of these funds set aside for CDFIs is impressive. For comparison, recent annual appropriations to the CDFI Fund — which manages a certification program, funding, and training for the industry — were between $250 million and $300 million.

This post looks at how this large, targeted investment in CDFIs was distributed to institutions in the Federal Reserve's Fifth District to improve economic conditions for low-income and financially underserved people.

A Look at the Programs

The first program was the CDFI Rapid Response Program (CDFI RRP). It consisted of $1.25 billion and was distributed widely to CDFIs nationwide. This money was intended to be flexible dollars to support the response to the COVID-19 pandemic. The awards to individual institutions ranged from $200,000 to more than $1.8 million and averaged about $1.4 million. This funding could be used to bolster the financial products or services CDFIs offered to their clients and, to a lesser extent, support operations. The funding round was opened in February 2021, and awards were announced four months later.

The Emergency Capital Investment Program (ECIP) was the largest of the three programs, which made up to $9 billion available to depository CDFIs and Minority Depository Institutions (MDIs). It encourages financial institutions to increase their support of small businesses, minority-owned businesses, and consumers in LMI communities. The Treasury announced awards in September 2022. Although a second round of ECIP funding was announced in March 2023, the Fiscal Responsibility Act of 2023 rescinded funds available for that round. Therefore, this post only includes the first round of ECIP awards.

The last program, the Equitable Recovery Program (ERP), set aside $1.75 billion to expand lending, grantmaking, or investment activity in LMI minority communities and to underserved minority communities. On average, ERP provided $2.9 million in grant capital per institution to CDFIs and MDIs. The program also offered technical assistance to awardees. ERP awards can also be used to enhance organizational capacity and acquire staff and tools. The Treasury announced awards in April 2023.

Each of the programs required institutions to apply to receive awards. But unlike the RRP and ERP programs, ECIP is not grant funding. Instead, through ECIP, the Treasury has invested in preferred stock or subordinated debt issued by CDFIs and MDIs. Although some CDFI's ECIP awards may seem outsized in comparison to others (for example, the median award was $26.2 million, but the maximum award was $250 million), award size depended on each institution's interest and ability to issue stock or debt. There is also a rate-reduction incentive for these instruments, which means awardees will pay a lower annual dividend or interest rate on their stock or debt based on the amount of business they do with underserved communities or the types of projects they finance.

Fifth District CDFI Award Recipients

Of the $11.3 billion distributed nationally to date, certified CDFIs headquartered in Fifth District states received $1.4 billion, or 12.4 percent of the total funding. Over one billion came from ECIP. (See chart below.) When the funding rounds for these programs were open, there were 102 certified CDFIs headquartered in the Fifth District (40 of which are depository institutions). Although some programs were available to CDFIs and MDIs, the analysis in this post focuses only on certified CDFIs.

Eighty-three percent of all certified CDFIs received funding from at least one of these programs. The number of CDFIs that applied to and received funding from each program varied based in part on program parameters and eligibility requirements: Among all certified Fifth District CDFIs, 75 percent received funding from RRP and 42 percent from ERP; among certified depository CDFIs, 40 percent received awards from ECIP.

Distribution by Financial Institution Type

The majority of Fifth District CDFIs are loan funds (61 percent at the time of analysis), and the rest are depository institutions — credit unions, banks, and holding companies. Despite the number of loan funds in the district, most Fifth District funding went to credit unions (59 percent) since ECIP was such a large program and only available to deposit taking CDFIs. (See charts below.) The distribution of the other two programs more closely aligned with the proportion of Fifth District CDFIs: Loan funds received the largest proportion of funding from RRP (57 percent) and ERP (49 percent).

Notably, 65 percent of the ECIP funding for credit unions went to two of the largest credit unions in the district: Self-Help Federal Credit Union (awarded $250 million) and the Self-Help Credit Union, (awarded $243 million). Both organizations are a part of the Self-Help family, headquartered in Durham, North Carolina, and each hold more than $1 billion in assets. Aside from these two CDFIs, the majority of the remaining ECIP funding went to depository institution holding companies, followed by other credit unions and banks and thrifts.

Distribution by Asset Size

When we break down federal funding by institution asset size, we see that, on average, total funding increases with assets. Additionally, we see that the award to asset size ratio decreases as asset size increases. For CDFIs with assets up to $50 million (mainly loan funds receiving RRP awards), awards were very significant relative to the CDFIs' size, on average. For example, CDFIs with less than a million dollars in assets were awarded on average over $1.4 million. (See chart below.) On the other hand, the average award amount for larger institutions (mainly credit unions and holding companies receiving ECIP awards), weren't as significant relative to the institutions' size, but the awards were relatively large in terms of dollar amount.

Uses of Funds in the Fifth District

One example of a small CDFI receiving a substantial award amount is the Midlands Housing Trust Fund (MHTF), a regional loan fund in central South Carolina that creates and preserves affordable housing projects for LMI households. MHTF's RRP and ERP awards total nearly $1.6 million (119 percent of their 2020 assets). "RRP was a game changer for us," said Executive Director Jeff Larimore. With more capital, Larimore shared that MHTF was better able to engage developers for larger projects. Funding larger multifamily projects means that MHTF finances more units of housing and in turn becomes more recognized in the local community. As an example, MHTF has earmarked $250,000 of its ERP award to potentially fund 90 new units of senior living in the downtown Columbia, South Carolina market. MHTF was also able to use some funding as operational capital to hire new advisors and improve their office space. Larimore suggested the funding has provided outstanding benefits to MHTF, allowing them to increase their current capacity while also allowing them to plan for the next five years.

A similar sentiment was echoed by the CARes Project, a relatively new loan fund based in Winston-Salem, North Carolina. They provide affordable auto loans and financial education to individuals with low incomes and credit scores. The CARes Project received Treasury awards totaling $700,000 from ERP and RRP — over 400 percent of their 2019 assets. CEO Scott McLaughlin says there is high demand for their product, especially since the COVID-19 pandemic. "Some people are still struggling with the ramifications of unemployment during COVID," he explained. Given the existing need, the large increase in lending capital translated directly to the CARes Project reaching more customers. In the first six months of 2023, they have already made a larger number of loans than they made in all of 2022. "These awards have finally put us in the driver's seat (pun intended) to expand our program and accomplish our mission," he said. Their three-year goal is to make 300 loans to help people obtain affordable transportation.

Looking Ahead

Following the initial wave of COVID-19, Congress created these three programs to help CDFIs, MDIs, and the communities they serve recover from the pandemic. The majority of Fifth District CDFIs received funding from at least one of the programs. As a result, they have already been able to improve their lending capacity, services, and operations. The Richmond Fed will continue to track how awardees are able to expand products and services, in part, through additional analysis of responses to the Fed's 2023 CDFI Survey (key findings forthcoming). "I truly feel that CDFIs could develop into a newer middle market banking sector on par with credit unions and other stand-alone institutions," said Larimore. "These programs have really allowed us to kind of become recognized again."