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What is a CDFI? A Guide to Community Development Financial Institutions

What is a CDFI? A Guide to Community Development Financial Institutions
Jacqueline DeMarco
Jacqueline DeMarcoUpdated June 2, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’ve ever had trouble opening a bank account or getting approved for an affordable loan, a community development financial institution may be able to help.These mission-based institutions focus on serving people in underserved communities that have historically faced obstacles to obtaining financial services. Instead of looking at traditional criteria (like credit scores and bank account history) to determine who qualifies for a financial product, they typically take a more flexible, holistic, and community-based approach.Here’s a closer look at CDFIs, including how they work, what they offer, and how to find one in your area.

Understanding the Meaning of CDFI

Community development financial institutions, or CDFIs, are specialized financial institutions that provide affordable financial services and investments to low-income individuals, minority populations, and disadvantaged communities.CDFIs must be certified by the U.S. Department of the Treasury’s CDFI Fund. Unlike traditional for-profit banks, CDFIs are typically non-profit or mission-based organizations formed to promote economic development, community revitalization, and financial inclusion. They include banks and credit unions, non-profit loan funds, and venture capital funds that aim to service low-income communities.CDFIs offer a range of financial services, including checking and savings accounts, low-cost mortgages for first-time homebuyers, and loans for small businesses. They typically also help members of the community develop financial literacy, establish saving goals, and build their personal credit.  To find a CDFI in your area, you can use the Opportunity Finance Network’s CDFI locator, which is free to use and lists CDFI-accredited organizations. You can also contact local community development organizations, economic development agencies, or local banks to inquire about CDFIs operating in your area. 

Types of CDFIs

There are several types of CDFIs that cater to different financial needs within underserved communities. These include:
  • Community development banks These are banks that specifically focus on providing banking services to communities that are typically underserved by mainstream financial institutions. They offer a wide range of financial products, such as loans, savings accounts, and checking accounts, tailored to meet the needs of the community.
  • Community development credit unions Credit unions are member-owned financial cooperatives that offer banking services to their members. Community development credit unions are credit unions that are specifically designated as CDFIs and have a mission to serve underserved communities.
  • Community development loan funds These are organizations that provide loans and other financial services to businesses and individuals in underserved areas. They often focus on lending to small businesses, affordable housing projects, and community development initiatives.
  • Community development venture capital funds These funds invest in businesses and projects that have the potential to generate economic and social impact in underserved communities. They provide equity financing and strategic support to help these businesses grow and succeed.
Recommended: Guide to Second-Chance Bank Accounts 

How Is a CDFI Different From a Bank?

CDFIs differ from traditional banks in several ways. Here's a look at some of the major differences.Mission-oriented approach: CDFIs have a primary mission of serving underserved communities and promoting economic and social development. Their activities are driven by their commitment to community impact rather than maximizing profits.Targeted services: CDFIs focus on providing financial services to individuals and businesses in low-income and underserved areas. They offer products and services specifically designed to meet the unique needs of these communities, such as small business loans, affordable housing financing, and financial education programs.Flexible qualification criteria: CDFIs often have more flexible qualification standards compared to traditional banks. They typically consider factors beyond personal credit scores and collateral, taking into account the borrower's character, community impact, and potential for positive change.Localized interest and expertise: CDFIs are usually embedded within the communities they serve and are often involved in local boards and committees. This localized approach allows them to better understand and respond to the unique needs and challenges of the community.Recommended: How do Banks Make Money and Generate a Profit? 

What Are the Downsides of a CDFI?

While CDFIs can provide valuable resources to individuals and businesses in underserved and disadvantaged communities, there are some downsides associated with working with a CDFI worth being aware of. 
  • Limited geographic coverage CDFIs are often focused on specific geographic areas or regions, which means their services aren’t available everywhere.
  • Resource constraints CDFIs may face resource constraints due to their nonprofit or mission-based status. This can limit their capacity to scale operations, offer a comprehensive range of financial products, or compete with larger financial institutions in terms of interest rates and fees.
  • Access to capital CDFIs rely on a mix of funding sources, including grants, government programs, and private investments, which aren’t always reliable.
  • Limited technological advancements Due to resource constraints, some CDFIs may have limited access to advanced technology and digital banking capabilities. This can result in a less convenient and efficient banking experience compared to mainstream financial institutions.

The Takeaway

CDFIs can be a great support system for individuals and businesses in low-income communities that have struggled to access traditional banking resources. These mission-focused institutions offer a range of financial services, including mortgages, personal loans, auto loans, and different types of bank accounts.On the downside, CDFIs aren’t available in all communities, and may not offer the most competitive interest rates. Annual percentage rates (APRs) on loans may be higher, while annual percentage yields (APYs) on savings accounts may be lower, than what you could find at a for-profit financial institution.If your goal is to find the best return on your savings, Lantern by SoFi can be a helpful resource. With our online banking marketplace, it’s fast and easy to compare high-yield savings accounts based on APY, fees, and balance minimums. Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

What is the role of CDFIs in promoting financial inclusion?
How can I find a CDFI in my community?
What types of financial services do CDFIs offer?
How can I support CDFIs and their mission?
Photo credit: iStock/Artphoto13

About the Author

Jacqueline DeMarco

Jacqueline DeMarco

Jacqueline DeMarco is a personal finance writer and editor based in Southern California. While she spends the bulk of her time writing about complex financial issues, she also tackles a variety of subjects ranging from food to fashion to travel. Her work can be found across dozens of publications such as Credit Karma, LendingTree, Northwestern Mutual, The Everygirl, and Apartment Therapy.
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