During this time of extreme economic shock, community development financial institutions — commonly known as CDFIs — have demonstrated their ability to deliver capital to underserved communities, many of which are reported to be taking the brunt of the coronavirus pandemic’s impacts. Many CDFIs acted early in infusing much-needed capital to address financing gaps resulting from the pandemic, and their expertise could help ease the tension between timely delivery of capital and accountability to ensure responsible lending. They would benefit from a broad set of partners to continue in that role.
CDFIs as Early Capital Providers in a Pandemic
Federal and state governments have taken sweeping measures to support the economy since the crisis began, yet many potential beneficiaries have reportedly been unable to access relief funds. Many small businesses report difficulty utilizing the programs for various reasons, including a lack of prior relationships with designated lenders or mismatches in business needs and prescribed use of program funds. Of course, small businesses are also most vulnerable to the loss in revenue. A recent New York Fed brief looking at how small businesses might weather the pandemic said that smaller, younger, and black- and Latino-owned firms were more likely to be classified as “at risk” or “distressed” (based on results from late 2019, when the economy was still strong).
To bridge financing shortfalls, CDFIs have provided smaller-dollar financing, including business loans ranging from $2,000 to $10,000 — amounts far below the average loan size of about $239,000 from the Paycheck Protection Program under the CARES Act.
In addition to establishing relief funds for local businesses and individuals experiencing loss of income, CDFIs have offered loan deferments, forbearances, and modifications with flexible terms to address the immediate needs of their borrowers. They also provide technical assistance and financial coaching to support borrowers.
Meanwhile, community development credit unions (CDCUs) have set up express emergency loans to help families and individuals, including those in low-income communities of color, cover expenses for financial hardship. Workers in industries expected to be hardest hit by the pandemic are disproportionately people of color. CDCUs have also waived transaction fees for savings accounts and have utilized local partnerships to help unbanked households access their Economic Impact Payments.
CDFIs Face Significant Challenges in Meeting Demand
While CDFIs are filling financing gaps, they are quickly running out of financial and operational capacity. Expenses related to the assistance they have extended to the communities they serve are mounting. In late March, the New York Fed collaborated with the New York State CDFI Coalition to roll out a rapid response convenience survey that documented the response of local CDFIs to the economic effects of the pandemic. Respondents reported significant concern about CDFIs’ ability to absorb the high volume of loans, given anticipated delinquencies and defaults. Other national associations, such as Inclusiv, have raised similar concerns. According to the Federal Reserve 2019 National CDFI Survey, a majority of CDFIs have total assets less than $500 million. Of those, only about half hold more than $25 million. For smaller financial institutions especially, an increase in expenses associated with a riskier lending portfolio can be hard on the balance sheet. There is also concern that higher delinquency and default rates could lead to tighter underwriting standards for new loans.
CDFIs also say they are working at or above their operational capacity given the high volume of requests for financial and technical assistance. While many have encouraged customers to use their digital platforms, creating or maintaining such functionality also entails higher operational expenses.
In some communities, social distancing has made it harder for CDFIs to maintain operations. In Puerto Rico, for example, financial cooperatives — widely acknowledged as local community development credit unions — often lack digital platforms that would allow fully remote loan originations.
The majority of respondents to the New York State (NYS) CDFI Coalition Survey reported that, as of late March, they had not received any financial assistance to help with additional costs related to temporary relief measures and emergency lending. Earned income and funding from federal, state, or local government are two of the top sources of funding for CDFIs, and the economic shock has narrowed those funding streams. Additional costs associated with providing early assistance have significantly reduced earned income, and public funding is further limited given the increase in demand.
In response, CDFIs have focused on gaining access to new sources of public dollars. CDFI networks are calling for access to the Paycheck Protection Program (PPP) as designated additional lenders, as well as asking that nonprofit community development loan funds be considered eligible borrowers. As of the time of this article’s publication, the interim emergency bill passed by the Senate to expand the PPP sets aside $60 billion for small, midsize, and community lenders.
CDFIs also continue to advocate for additional appropriations for the CDFI Fund in the next phase of the federal stimulus and relief package. That program, administered by the Treasury Department, provides financing to CDFIs to promote economic revitalization and community development.
CDFIs as Potential Partners in Mitigating Economic Challenges of the Pandemic
CDFIs are trusted financing entities and proven providers of affordable financial services to underserved communities. To receive assistance under the CDFI Fund, eligible and certified CDFIs are required to prove that they can effectively distribute capital to their target markets, and are therefore held accountable to their mission of primarily serving economically distressed communities. Moreover, several larger CDFIs in recent years have broken down barriers to access private capital markets, signaling the industry’s strong interest and level of sophistication in diversifying funding streams.
Various stakeholders recognize CDFIs as reliable partners in investments that fit the specific needs of local communities. In New York, the NYS CDFI Coalition and its members are working with the Empire State Development Corporation to discuss reallocating resources from some ESDC programs to support borrowers. In New Jersey, the NJ Economic Development Authority has included loan and grant assistance in its financial support programs to bolster local CDFI balance sheets. Google has established the Grow with Google Small Business Fund with the Opportunity Finance Network to provide low-cost, long-term loans to CDFIs supporting small businesses. And large banks have recognized the critical role of CDFIs and have committed funds to support their lending ability and operational capacity.
Despite these ongoing partnerships, CDFIs report that they need more support in order to continue extending financial and technical assistance to their customers.
Envisioning a New Community Development Ecosystem and the Role of the Federal Reserve
The pandemic has laid bare the urgency of expanding the network of support for institutions that provide financing for historically underserved communities. The unprecedented scale of the crisis means now is the time to reimagine the community development finance ecosystem. Building a bigger tent would allow new participants to contribute to the coordinated and integrated economic planning the pandemic response requires.
What role can the Federal Reserve play in support of efforts to continue responsible and affordable lending to communities in need? This will be the central question explored in “The Fed and Main Street During the Coronavirus Pandemic,” a virtual forum taking place on Thursday, April 23, from 2:00–3:15 p.m. We invite readers to listen in for a discussion of the needs of underserved communities and the Fed’s role in building equitable economic resiliency.
We are grateful to the New York State CDFI Coalition, Inclusiv, Asociación de Ejecutivos de Cooperativas de Ahorro y Crédito de Puerto Rico, Cooperativa La Sagrada Familia, New Jersey Community Capital, and the New Jersey Economic Development Authority for their invaluable time and insights.
This article was originally published by the New York Fed on Medium.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.