Banker speaks with business owner about loan.
CDFIs can be organized in a variety of different ways, but the one thing they all have in common is the goal of expanding economic opportunity throughout the country. — Getty Images/SDI Productions

A Community Development Financial Institution (CDFI) is a private financial institution with a primary focus on developing low-income and low-wealth communities within the U.S. by providing personal and business lending and investing opportunities.

Because their primary objective focuses on social responsibility rather than monetary gain, CDFIs often receive federal funding from the U.S. Department of the Treasury, though they can also receive funding from the private sector.

CDFIs can be organized in a variety of different ways, but the one thing they all have in common is the goal of expanding economic opportunity throughout the country. Here is everything you need to know about Community Development Financial Institutions.

[Read: 9 Funding Options for Minority-Owned Businesses]

The history of the CDFI Fund

CDFIs can trace their history back to the 1880s when the first minority-owned banks entered the market to service low-income communities. In the 1930s and 1940s, credit unions were created as non-profit financial institutions and were owned by their members. Although credit unions were not solely created to serve distressed communities, and not all can be classified as a CDFI, they did provide affordable lending options for individuals and small businesses, and paved the way for community development organizations.

In the 1970s and 1980s, development corporations and non-profit loan funds emerged to further the goal of serving people and businesses in underserved, economically unstable markets. These types of funds and organizations were the direct predecessor of modern CDFIs.

By 1994, the Community Development Financial Institutions Fund (CDFI Fund) was established through the Riegle Community Development and Regulatory Improvement Act of 1994 to promote economic revitalization. CDFI organizations emerged to develop struggling economies by providing lending and investing opportunities in local communities.

Today, there are over 1,000 certified CDFIs, and they can be found in all 50 states, the District of Columbia, Guam and Puerto Rico. Roughly 18% of all CDFIs are headquartered in persistent poverty counties, which are counties that have experienced over 20% poverty levels for the last 30 years, and about 23% are headquartered in non-metropolitan counties.

Certified CDFIs are eligible to apply for different awards through a variety of programs to better serve their local communities, such as mortgage lending for first-time homebuyers, flexible underwriting for community facilities and commercial loans for businesses in low-income areas.

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Community development banks are for-profit corporations that provide low-income communities with capital.

The four types of CDFIs

Like their private sector counterparts, CDFIs can be structured and managed differently based on the needs of their primary clientele. Regardless of how they are organized, all CDFIs share the common goal of providing economic opportunity for low-income communities. Following are the four types of CDFIs.

Community development banks

Community development banks are for-profit corporations that provide low-income and distressed communities with capital through specific lending and investing activities. Often, they invite community representatives on their board of directors to ensure a community’s economic challenges are being met with sound lending and investing strategies. Community development banks are regulated by a combination of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), The Office of the Controller of the Currency, the Office of Thrift Supervision and banking agencies specific to your state. They are also insured by the FDIC.

Community development credit unions

A community development credit union (CDCUs) is similar to a community development bank, but they are non-profit organizations owned by their members. Because they are non-profit, CDCUs provide affordable credit financial services to low-income individuals and will often provide special community outreach programs to minority communities. Credit unions are regulated by the National Credit Union Administration (NCUA), state-specific agencies or both, and they are insured by the NCUA.

Community development loan funds

A community development loan fund (CDLF) provides both financing and development services to low-income communities, including businesses, organizations and individuals. There are four primary types of community development loan funds: micro-enterprise, small business, housing and community service organizations. Each type is defined by the specific client served, though it’s common for CDLFs to provide multiple types of loan funds to different clients. CDLFs are usually non-profit organizations, like CDCUs, and are governed by boards of directors that include representatives within the community.

Community development venture capital funds

Unlike the other types of CDFIs, community development venture capital (CDVC) funds primarily focus on business financing, rather than personal lending. CDVCs provide economic support to distressed communities by providing equity and debt-with-equity-features for small and medium-sized businesses. CDVCs can be structured as either a for-profit or non-profit organization and often include community representation.

[Read: CO— Blueprint: Starting Up and Starting Over During the Pandemic]

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