Expanding Their Reach: New Products and Services CDFIs Want to Provide

Introduction

Community development financial institutions (CDFIs) are financial institutions with a mission to serve low- and moderate-income (LMI) individuals and communities. Since 2019, the Federal Reserve has fielded the national CDFI Survey to learn more about these institutions and how they are faring and evolving. This spring, we fielded the 2023 CDFI Survey and received responses from over 450 CDFIs nationwide. Survey results have shown that demand for CDFIs' products and services has continually grown for years. As a result, many institutions are looking to expand what they offer to their clients. This post explores how CDFI respondents in the Fifth District want to expand their product offerings.

Demographic/Respondent Breakdown of Fifth District Survey Results

Of the CDFIs across the country that responded to the survey, 38 are headquartered in the Fifth District.¹ This year, the response rate among certified CDFIs in the district was 31 percent, two percentage points higher than the national response rate among certified CDFIs. By state, the response rate ranged from 14 percent to 48 percent. (See table below.)

Both respondents in the Fifth District and nationally had similar distributions by institution type and primary business line: More than half identified as loan funds (55 percent), followed by credit unions (21 percent), and community development banks/thrifts (11 percent). Fifty percent of district survey respondents reported small business finance as a primary or secondary line of business. Thirty-four percent of respondents reported residential real estate finance, followed by commercial real estate finance (29 percent), consumer finance (24 percent), and home purchase/improvement (21 percent). (See charts below.)

What Types of Products and Services Do CDFIs Wish They Could Provide?

Over 70 percent of this year's Fifth District respondents indicated that there are products or services that they would like to offer but cannot currently provide on a sustained basis. Respondents who answered "yes" to wanting to expand their products or services were then asked in an open-ended question to describe up to three examples. Among all the products and services mentioned, about half referred to new financial products or services within current business lines. In addition, a little more than a quarter discussed business line expansion outside of their primary or secondary business lines. Another quarter referred to expansion of development services. (See chart below.)

New Products Within Business Lines

Most respondents who want to offer new products aim to expand their core business lines. Because CDFIs operate across different business lines, the products they would like to offer and the associated challenges vary. For example, in commercial and residential real estate finance, green energy products are gaining interest. Anna Smukowski, a senior director at Enterprise Community Loan Fund in Columbia, Maryland, explains that they would like to expand their portfolio to offer new types of loans such as green energy retrofit and decarbonization loans. "There's a lot of interest, but developing new lending products that work for developers remains a challenge given the rate environment." Attracting private capital for lending is also tough. "With rising interest rates, it has been difficult to find low-cost, long-term capital over seven years," says Smukowski. On the other hand, CDFIs' expansion into green lending will be bolstered by a historic amount of federal funds. CDFIs are positioned to be an important channel for the $27 billion Greenhouse Gas Reduction Fund, especially in distributing that money into historically disinvested communities. Applications for grant funding closed in September and October, but awards have not been decided yet.

In the home purchasing/improvement space, CDFIs described wanting to expand offerings of low-income home loans or down payment assistance. However, challenges within the housing market are preventing some from being able to provide these products. Margaret Hersh, the associate vice president of community and business development for DuPont Community Credit Union (DCCU) in Waynesboro, Virginia, describes being ineligible for a grant through the CDFI Fund for a low-income mortgage program because there wasn't enough housing inventory available for that market (homes under $200,000). "Lack of affordable housing remains an issue locally, regionally, and nationally, and one that we all need work toward finding impactful solutions," she says.

Expansion of Business Lines

Over a quarter of the responses from Fifth District CDFIs described wanting to offer products outside of their main business lines. Several CDFIs mentioned wanting to offer microloans, in addition to existing products. One CDFI that would like to offer microloans is Piedmont Housing Alliance (PHA), a nonprofit organization that creates affordable multifamily housing in Charlotteville, Virginia. "I would love to see us do [microlending] within our own areas of service and communities," says Michael Eaton, the director of real estate development. "I've seen it change people's lives in a big qualitative way, but with quantitatively small amounts of funding." He describes how many people in the Charlottesville area operate informal businesses such as selling homemade brisket or canned fruit or offering services like hairstyling. Through their partnership with Piedmont Community Land Trust, they would like to offer microloans as a "soft second" to people when they purchase homes. "Being able to do microlending would be meaningful to our mission, but more importantly, meaningful to individuals and our community."

In addition to microlending, Eaton also talks about wanting PHA to participate in green energy/sustainability lending. "We would love to be able to offer lending that supports retrofitting of energy efficient appliances and also lending to support the capital investment necessary for solar energy," he says. PHA would like to be able to offer lending to support the capital investment necessary for solar energy installations. However, these products are not currently available due to financial and personnel resources.

Development Services

Development services are pivotal in the CDFI business model to address borrower qualification challenges and help borrowers use their credit and capital effectively. "Sometimes what people need is financial management, marketing, or other services to expand their businesses," Watchen Bruce, CEO of Baltimore Community Lending (BCL), a nonprofit loan fund. She describes how BCL has acquired a building in downtown Baltimore that will become a business and development resource center for Maryland businesses. "It'll be a one-stop shop for technical assistance, capacity building, training, legal services, accounting, banking, or any other wrap-around service that a business needs to grow," she says.

For many CDFIs, limited staffing resources make it difficult to provide the desired quality or quantity of development services. Bruce explains that although BCL is very excited to have recently launched a new program to support and provide technical assistance to real estate developers of color, the program won't be sustainable if they can't raise additional funds. "We want to be able to hire instructors who can help us, because we don't have the in-house capacity to run it ourselves," she says. One way that CDFIs are combatting this staffing issue is by partnering with other organizations that specialize in these services to clients. One example is DCCU partnering with GreenPath, an organization that provides confidential, one-on-one certified counseling services to DCCU members. Partnering with an external organization allows them to focus on expanding other products and services for members. In the future, DCCU may also like to offer these services in-house.

Conclusion

Analysis from the sample of Fifth District respondents to the 2023 CDFI Survey shows that a majority of CDFIs would like to expand their products and services. The types of products and services they would like to offer vary by CDFI type and business lines, but some common constraints emerge — namely lending capital and staffing. As demand for CDFIs' products and services continues to grow, their ability to increase their capacity will be crucial to more fully serving their clients and communities.