New Study Highlights Impact of CDFIs During Great Recession

“During the great recession, when conventional financial institutions pulled back and accumulated cash on their balance sheets, Community Development Financial Institutions (CDFIs) pushed forward. You stepped into the breach and acted as a countercyclical force in hard hit communities. – Annie Donovan, CDFI Fund Director

There’s been no shortage of reports trying to decipher what exactly happened to the availability of credit after the onset of the Great Recession.

Their findings in large part speak to a dramatic decrease in small business lending and theunique vulnerabilities of small businesses in credit-dependent industries unable to access capital, driving greater job losses at small firms as compared with larger ones. Now, headlines signal the rise of alternative online lenders and how large banks, while approving greater numbers of small business applications, are slow to recover their historic lending levels.

A newly released study by the Carsey School of Public Policy at the University of New Hampshire speaks to another key part of the story – how Community Development Financial Institutions (CDFIs) played a critical role in helping expand access to capital when larger institutions chose to pull capital out of local communities across the country.

CDFIs come in all shapes and sizes, with a diversity of missions. From nonprofit loan funds to credit unions to CDFI banks, some help small businesses access capital while others jumpstart new affordable housing projects. With the help of the CDFI Fund, a fund created to promote economic revitalization and community development, what unites the industry is a commitment to create economic opportunity through lending in support of underserved borrowers in underserved geographies.

Debuted at the recent CDFI Coalition Institute conference in Washington, DC, the report examines the impact of the CDFI Fund on the work of CDFIs and the community development landscape. Through interviews and statistical analysis, the report cites a number of major findings:

  • The CDFI industry has grown substantially, leveraging investment and growing its lending activity, even in the face of a recession and cataclysmic changes in the financial environment. However, it remains a tiny sector relative to mainstream financial institutions.
  • CDFIs are delivering the majority of their lending to borrowers from targeted, historically underserved groups such as low-income or minority borrowers.
  • CDFIs are concentrating lending in census tracts with signs of distress such as high poverty or unemployment rates – much more so than conventional lenders.
  • CDFIs are meeting needs for financing with basic products that minimize risks to the borrower. However, they struggle to meet market needs for longer-term loans.

According to the report, as community development lending declined across the country and large institutions cut back on investments in organizations supporting local communities, reporting CDFIs between 2005 and 2012 received $669 million in new awards from the CDFI Fund and made $8.18 billion of loans. From 2009-2012, when businesses saw their credit lines cut and other financing options reduced, reporting CDFIs in the study increased their overall lending by 138 percent.

It stands to reason that the impact of the recession would have been worse had it not been for the efforts of local CDFIs to help fill the gap. Jeannine Jacokes, a former senior policy advisor at the U.S. Senate Committee on Banking, Housing and Urban Affairs intimately familiar with the creation of the CDFI Fund, recalled last October at the 30th Anniversary Opportunity Finance Network conference how CDFIs at the time leveraged a “track record of success” and “stuck to their core principals,” utilizing their strong underwriting practices, as well as their knowledge of borrowers and their markets, to respond to the great challenges of the Great Recession.

Jacokes said the recession shaped the industry, and that the policy response was to drive more capital to CDFIs so they could connect local communities with resources. This report shows how the industry no doubt shaped the recession as well.

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