What’s Next for Community Development Finance?

This year, a record 2,500 people gathered in Los Angeles, CA, to attend the 40th-anniversary conference of the Opportunity Finance Network (OFN), the leading national community development loan fund trade association

Over the past 40 years, the growth of community development financial institutions—CDFIs for short—has been astonishing. Posters at the conference highlighted that the first OFN conference in 1985 attracted 21 community development loan funds with a combined $27 million in assets under management.

By contrast, according to the US SIF (Sustainable Investment Forum), the CDFI industry (including community development banks and credit unions) had $457.9 billion in assets by 2022. Between 2014 and 2022 alone, assets under management in the CDFI sector expanded more than sevenfold.

In Los Angeles, CDFI leaders assessed this growth and considered how to build for the future. The conference theme, “Made by History. Made for this Moment,” spoke to their goal. In the conversations, it was clear that field leaders face some critical decisions. The conference took place in late October, about two weeks before the national elections; in the wake of those elections, the debates held at the conference became perhaps even more pressing.

How the CDFI Sector Came to Be: A Legislative History

Community development finance is arguably as old as finance itself—after all, the purpose of finance writ large is supposed to be community reinvestment. Formally speaking, the field’s origins can be traced back at least a century. The first US-based credit union was founded in Manchester, NH, back in 1909. However, the term “CDFI” is far more recent, the product of the passage of federal law in 1994 that created the CDFI Fund in the US Department of the Treasury, which provides grant support that has played a major role in the sector’s growth.

Between 2014 and 2022 alone, assets under management in the CDFI sector expanded more than sevenfold.

On a conference panel, Jeannine Jacokes, Cliff Rosenthal, and Mark Pinsky detailed how the CDFI Fund was created. Rosenthal, at the time, led a federation of community development credit unions, now called Inclusiv. In 1988, he wrote a concept paper that called for the creation of a “neighborhood banking corporation” that in six years would become the CDFI Fund. In 1991, then-Arkansas Governor (and later President) Bill Clinton endorsed the concept.

Rosenthal noted that timing was critical in moving the CDFI Fund from policy idea into law. In particular, he said, the April 1992 uprising in Los Angeles that followed the “not guilty” verdict for four police officers who had been filmed beating Rodney King created public pressure to “do something” about urban issues. “We were a solution that many people were looking for at that time,” Rosenthal recalled.

Still, campaign promises are often discarded post-election. Pinsky, who would lead OFN from 1995 to the coalition that advocated for the creation of the fund. Pinsky said he doubted the likelihood of passage until a Saturday Night Live sketch that aired a month after the election prominently mentioned the concept.

Even with public visibility and Democratic Party control of both houses of Congress and the presidency, passage was not easy. According to Jacokes, who worked for the US Senate Finance Committee then, four major challenges stood in the way.

One was to create a broad enough definition of “CDFI” that incorporated low-income community-focused credit unions, loan funds, and banks so that there would be enough qualifying institutions in key districts to garner requisite congressional support. A second challenge was deciding where to house the program;

A third area of dispute concerned the nature of awards. Advocates won big here. The CDFI fund, Jacokes noted, became a rare government program that provides “equity” awards, which can be used “for financing capital, loan loss reserves, capital reserves, or operations”—think of it as the federal government equivalent of philanthropic “operating support”—rather than the federal norm of program-restricted funding.

A fourth point of debate—and advocates lost here—was to allow for a race-conscious focus in lending. Early proposal drafts, Jacokes said, contained the language, “Black, Latino, Native American, Asian populations,” but this was withdrawn due to Republican opposition (Republicans had 45 seats in the Senate at the time—enough to block the legislation by filibuster). Pinsky noted that “the lack of race specificity…had a disproportionately negative effect on the credit unions, which had much more Black control than the loan funds.”

Even once these four issues were ironed out, there were still other challenges. Pinsky shared that there was skepticism among loan fund leaders about the benefits of federal support. “A clear majority of OFN members were opposed to the idea of creating a CDFI Fund. They saw government as bureaucracy, not helpful,” he recalled.

Consumer advocates worried that the CDFI Fund could be used to weaken the Community Reinvestment Act (CRA); the Clinton administration responded by explicitly including provisions to strengthen the CRA in the CDFI Fund bill. Meanwhile, Republicans, in exchange for not blocking the bill in the Senate, extracted several concessions. Jacokes noted that about 80 percent of the bill that led to the CDFI Fund contained nonrelated measures, primarily associated with loosening banking regulations.

There is a throughline from the tensions at the founding of the CDFI Fund three decades ago to today’s debates.

Viewed 30 years later, it is evident that the creation of the CDFI Fund was a milestone that led to rapid growth in the community development finance field. Nonetheless, tensions within the CDFI sector have been present from the beginning. As Rosenthal has detailed, especially in the early years, “Fund leadership favored those that they perceived as providing the greatest impact in order to justify the Fund’s existence as a Clinton Administration start-up in a hostile legislative environment.”

The effect, Rosenthal added, was to systematically favor the “largely White-led nonprofit sector, to the disadvantage of small-scale credit unions with limited staff resources but a record of serving Black, Latinx, and other low-income communities.”

Finding a Balance Between “Movement” and “Industry”

There is a throughline from the tensions at the founding of the CDFI Fund three decades ago to today’s debates. In one conference panel, two CEOs of CDFIs—John Holdsclaw IV of Rochdale Capital and Matthew Roth of the Community Reinvestment Fund—structured their conversation as a debate, with Holdsclaw taking the “movement” side while Roth argued the “industry” side.

The debate was a bit of an artifice. Indeed, Aisha Benson, CEO of Nonprofit Finance Fund, spoke near the end of the session to emphasize the obvious: The sector had aspects of both.

As Holdsclaw noted, the movement–industry debate is not new. Holdsclaw cited a 2013 article by community land trust advocate John Emmeus Davis in Shelterforce on the topic—and, as Davis writes in that article, the debate was already old then.

Citing some of Davis’s points, Holdsclaw noted that industry tends to focus on setting standards and boundaries, favors uniformity, and seeks to accommodate the powers that be. By contrast, a movement is more values-based, is more inclusive and diverse, and tends to be feisty and combative. Holdsclaw argued that CDFIs must remain feisty and must “take on completely the violence of poverty.”

Roth, for his part, acknowledged that CDFIs are “rooted in movement” but argued for the “need to position ourselves as an industry” to “allow us to scale and grow and have more collective impact.” In other words, Roth contended that CDFIs, by orienting themselves as an industry, can attract significantly greater amounts of investment capital from both banks and governments—and, therefore, have a greater impact.

Fundamentally, a central question is where CDFI leaders focus their attention. Is it at the community level or with banks and the government? CDFI leaders must care for both ends, but the relative level of attention on each end matters.

In the early days of the CDFI Fund, for instance, as both Pinsky and Rosenthal detailed, a decision was made to focus on establishing field legitimacy, even at the expense of reducing funding availability for BIPOC-led CDFIs. Arguably, that decision was necessary to prevent Congress from eliminating a fledging CDFI Fund.

These days, the situation is different. At the 2024 conference, the argument for an industry focus is not about survival but rather, as Roth’s remarks emphasized, to achieve further rapid growth.

The fact that CDFIs are growing is not in dispute. CDFIs emerged from the COVID-19 pandemic with new prestige, as they were often able to get critical Paycheck Protection Program dollars to BIPOC-owned businesses at a time when conventional banks failed. In response, Congress provided CDFIs with an unprecedented infusion of $12 billion in funding.

A central question is where CDFI leaders focus their attention. Is it at the community level or with banks and the government?

However, whether CDFIs fully meet their mission of providing finance to those who need it most is complicated, even though the OFN conference often avoided this challenge.

Many CDFIs do remarkable things. But not all of them. Writing in NPQ, Bill Bynum and Ed Sivak noted that while their own Mississippi-based CDFI originated over 80 percent of its mortgages to people of color, “a 2021 analysis showed that the rate of mortgage lending to Black borrowers by CDFI banks in Mississippi is less than 13 percent, lower than the 17 percent rate of all mortgage lenders that report Home Mortgage Disclosure Act data—in a state where the Black population is nearly 40 percent.”

Similarly, writing in Shelterforce last year, Bulbul Gupta, CEO of Pacific Community Ventures, a California-based CDFI, wrote, “With the growing number of CDFIs across the country, the racial wealth gap should be closing, especially if these lenders are actively fulfilling their mission of providing capital to underinvested and unbanked communities of color. But it’s not—the gap has actually worsened since the creation of CDFIs.” One reason, Gupta notes, is federal regulatory restrictions, but CDFIs themselves can do more on their own, too.

A Third Wave of CDFI Development?

In his keynote address, Harold Pettigrew, CEO of OFN, argued that CDFIs are entering a third wave of development. The first wave, he said, corresponded to the first decade of the CDFI Fund. The second wave of the last two decades, he added, focused on “performance and industry growth.” The third wave, Pettigrew argued, would involve “unprecedented opportunities and unthinkable challenges.”

One challenge will be managing the $6 billion in federal funds being invested in the Clean Communities Investment Accelerator program. This program is part of the 2022 Inflation Reduction Act (climate bill) that seeks to expand green economy investment capacity in low-income and disadvantaged communities.

The amount involved, Pettigrew noted, is equal to “nearly the entire amount of funding deployed from the CDFI Fund through its Financial Assistance awards over its 30-year history.” Because the funds were awarded to five CDFI groups (including OFN) in the summer of 2024, the money is already “out the door,” and funding should be secure.

But as Oswaldo Acosta, the CEO of City First Enterprises—a CDFI based in Washington, DC—indicated in a conference plenary session, a broader challenge awaits. The money, he warned, won’t “be transformational if we don’t change our business models.”

Typically, he noted, “a lender is a reactive player. We need to be the ones convening people at the local community. We need to be the rainmakers, the project stewards—otherwise, it will not happen.” He added, “We need to make sure that that new economy looks like the rest of America, not the rest of corporate America.”

Of course, the 2024 US election results offer an additional challenge. Traditionally, CDFIs have enjoyed bipartisan support. A US Senate “CDFI Caucus” website lists 13 Republican and 13 Democratic members. Nonetheless, funding cuts are likely. OFN has already released a statement indicating that it anticipates “operating in a stricter funding environment.” Meanwhile, the broader challenge of balancing movement energy and industry acumen persists. Feistiness, in fact, may be required.