New academic research provides significant insight into the impact and resiliency of Community Development Financial Institutions
February 24, 2015
WASHINGTON — The U.S. Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund) today issued two independent reports that provide the first-ever comparative analysis and evaluation of the effectiveness of Community Development Financial Institutions (CDFIs) as compared to mainstream lenders. The findings confirm that CDFIs are resilient and a reliable resource for capital in areas that need it the most.
“The reports released today demonstrate that CDFIs that receive financial assistance from the CDFI Fund are meeting their mission to promote economic growth by providing access to credit, capital, and financial services to underserved populations and distressed communities,” said Annie Donovan, Director of the CDFI Fund. “These reports demonstrate that CDFIs are a vibrant and essential part of the financial services industry and that institutions can successfully and responsibly lend to low-income people and in low-income communities.”
These reports found that CDFIs have no more risk than conventional lenders and that they perform nearly just as well as mainstream financial institutions. The first report, CDFIs Stepping Into the Breach: An Impact Evaluation Summary Report, undertaken by Michael Swack, Eric Hangen and Jack Northrup from the Carsey School of Public Policy at the University of New Hampshire, is an analysis of the impact of financial assistance awards from the CDFI Program on CDFI loan fund recipients. The second report, Introduction to Risk and Efficiency among CDFIs: A Statistical Evaluation using Multiple Methods, conducted by Gregory Fairchild from the Darden School of Business at the University of Virginia and Ruo Jia from the Stanford Graduate School of Business, is an analysis of CDFI banks and credit unions to assess their risk of failure and their operational efficiency relative to mainstream financial institutions.
Key highlights from the Carsey School report include:
- CDFI loan fund lending fills market gaps for key underserved low-income populations;
- CDFI loan funds deliver between roughly two-thirds to over ninety percent of all loan volume to borrowers living in a CDFI Fund-designated Investment Area;
- From 2005 through 2012, CRA reported lending decreased while CDFI loan fund reported lending more than tripled, and during the recession this activity provided a counter-cyclical boost to the economy;
- CDFI loan funds provide borrowers that may not qualify for loans from mainstream sources with loan terms and interest rates that are still comparable to mainstream products; and
- The CDFI Fund is the second largest-source of equity to CDFI loan funds after internally-generated funds.
Key highlights from the Darden School report include:
- CDFI banks and credit unions were found to have no more risk of financial failure than mainstream financial institutions, even after controlling for the CDFIs’ degree of involvement in the mortgage market during the financial crisis; and
- Despite serving predominately low-income markets, CDFI banks and credit unions had virtually the same level of performance as mainstream financial institutions.
Links to Reports:
For more information about the CDFI Fund and its programs, please visit www.cdfifund.gov or view the CDFI Fund’s fact sheet.