Three decades of making ‘Main Street America’ great. So why are CDFIs under attack?
Last month, our blog highlighted some of the key Federal sectors under fire from the Trump Administration and the Department of Government Efficiency (DOGE) – and what (if anything) can be done.
Throughout March, more acronyms and agencies have come under attack - including CDFIs. CDFI stands for Community Development Financial Institution - typically a bank, credit union, or loan fund that specializes in providing financial services and capital to underserved communities and individuals.
We believe that all impact-minded folks should know about the role of CDFIs in bolstering “Main Street”, the nature of the current attack, and the advocacy efforts to save the sector.
What are CDFIs and how do they work?
CDFIs foster financial inclusion and democratize access to financial services, credit, and capital. In doing so CDFIs seek to promotes entrepreneurship, asset building, and economic empowerment among populations that face barriers to accessing traditional banking services. As one example, Native American communities experience higher rates of poverty and unemployment than the larger U.S. population, and often lack access to financial services and tools for economic development. Today, there are over 70 Native CDFIs focused on bridging this gap.
CDFIs are overseen by the CDFI Fund - an arm of the Treasury Department established via bipartisan efforts to promote access to capital and local economic growth. The “Fund” oversees CDFI certification and essentially acts as a federal bank for the organizations. To become a certified CDFI, the Treasury Department requires that at least 60% of an organization’s lending occur in low-to-moderate income neighborhoods.
The Fund also administers New Markets Tax Credits which finance a wide range of projects in low-income areas and seek to attract private investment into distressed communities. New Markets Tax Credits have generated $8 of private investment for every $1 of federal funding, created more than 888,200 jobs and protected approximately 125.6 million jobs.
Certified CDFIs are eligible to apply for awards through a variety of programs offered by the CDFI Fund. These awards enable CDFIs to finance activities like: mortgage lending for first-time homebuyers, flexible underwriting for community facilities, and commercial loans for businesses in low-income areas.
Per the 2023 CDFI Fund Report:
“Since its inception in 1994, the CDFI Fund has provided more than $7.4 billion through a variety of monetary award programs, $76.0 billion in tax credits through the New Markets Tax Credit Program, and has guaranteed nearly $2.5 billion in bonds through the CDFI Bond Guarantee Program. During this time, the CDFI Fund has helped build the capacity of nearly 1,500 Certified CDFIs, which are located in all 50 states as well as in the District of Columbia, Guam, and Puerto Rico.”
It’s clear that CDFIs have played a key role in making “Main Street America” great.
Trump claws back
Nonetheless, a March 14th Executive Order seeks to further reduce the elements of the Federal bureaucracy that the President has determined are unnecessary. The list of “unnecessary” federal agencies includes the CDFI Fund. Trump’s executive order gave the CDFI Fund seven days to comply and specified that “non-statutory components and functions of the… governmental entities shall be eliminated to the maximum extent”.
The Executive Order is part of a broader assault on lenders serving low-income communities. Zooming out, the EPA is currently scurrying to recover approximately $20 billion already allocated from Biden’s Greenhouse Gas Reduction Fund (GGRF). The GGRF, established by the Inflation Reduction Act, is a $27 billion initiative aimed at reducing greenhouse gas emissions and supporting clean energy projects —with a focus on low-income and disadvantaged communities.
As part of the claw back on those funds, the FBI has initiated criminal investigations into several CDFIs that were slated to receive and further deploy the $27 billion. In February, Denise Cheung, head of the criminal division at the US Attorney's office in Washington, DC, resigned after being asked to launch this criminal investigation which she believed lacked a valid foundation.
A solid defense
Efforts to defend CDFIs from the Executive Order fall into three broad categories:
CDFIs, and their supporters are citing the “statutory” basis and legislative authority for the Fund, which was recently replenished with $324 million as part of the continuing budget resolution passed by the Republican-controlled Congress.
Advocates are showcasing bipartisan support for CDFIs. Democratic Senator Mark Warner of Virginia and Republican Senator Mike Crapo of Idaho, who led the Senate’s 28-member Community Development Finance Caucus, extolled CDFIs’ record of leveraging public funding to attract significant private capital.
Advocates are leaning into CDFIs broad alignment with the Trump campaign’s promises of economic mobility, and even the policy agenda of the first Trump administration.
For example, Harold Pettigrew, head of Opportunity Finance Network (OFN), an association of CDFIs, said in a statement, “We can’t have America First without putting our communities first” and reminded us that the prior Trump Administration “called upon CDFIs to help preserve jobs, keep businesses open and stabilize communities” during the Covid shutdown.
Similarly, on March 17th, the Defense Credit Union Council (DCUC) sent a letter to the U.S. Treasury Secretary Scott Bessent expressing concern over the executive order:
“I write to express our deep concern regarding the recent executive order signed by President Trump that calls for eliminating the Community Development Financial Institutions (CDFI) Fund. DCUC represents defense-focused credit unions serving more than 40 million members, including service members, veterans, and their families. Many of these credit unions operate in and around military installations and underserved areas, where the CDFI Fund has been a lifeline for expanding access to affordable financial services. Given the Treasury Department’s role in overseeing the CDFI Fund, we urge immediate clarification on the impact of this executive order and the future of the Fund’s programs.”
Unlike other Federal initiatives, the Fund appears to have a good chance of survival, partly because many borrowers and businesses in Republican congressional districts rely on CDFIs as the only bank in town. While the full implications of the Executive Order are unclear, OFN believes the CDFI Fund and the organizations it certifies currently operate under full statutory authority and should not be impacted by this Executive Order.
Setting a precedent
The speed with which CDFI supporters have mobilized has fostered some optimism that the threat could provide an opportunity for CDFIs to survive and potentially even thrive. “The entire movement is rallying to flood the zone on this,” John Holdsclaw IV, a board member of both the CDFI Coalition and OFN recently told ImpactAlpha. Similarly, former directors of the CDFI Fund, Annie Donovan and Donna Gambrell, stated, “This is not the time to be silent. Show your support for the CDFI Fund. Let your voice be heard among our bipartisan congressional supporters.”
The multi-stakeholder advocates for CDFIs are setting a precedent for how to craft a solid defense against the onslaught of Executive Orders seeking to promote “efficiency”. Efforts to defend these institutions must be both urgent and steady. Grounded in the facts and also aspirational.
Become an impact investor: allocate to CDFIs
Impact investing is a confusing term that is subjective, and tailored to the values and goals of the individual investor. Nonetheless, by supporting CDFIs anyone can become an impact investor. Consider supporting CDFIs through direct investments, by making charitable donations, or through intermediaries like Cnote — with no minimums nor accredited status requirements.
OFN has a CDFI Locator tool where you can search for certain types of organizations or focus your search on specific states.
Want to learn more about impact investing or how to best support CDFIs that align with your values? The Humanize Wealth team would love to connect with you.