The agencies intend to tackle two challenges evident during the Covid-years refi boom: higher costs due to appraiser shortages and concerns regarding bias in home valuations.
In their letter, MBA and CBA said that AVMs and technologies like them can alleviate appraiser shortages, reduce transaction costs, and safeguard against individual appraisal bias. Ultimately, a robust regulatory framework continues to be a critical imperative to achieve these outcomes.
However, any regulation should consider the practicalities of model risk management and its potential unintended consequences.
For example, the associations said the proposed rule includes Fannie Mae and Freddie Mac to the new standards, which creates a level playing field in the market. But the trade groups are worried about the impact of quality control standards on the GSEs’ alternative valuation methods, such as desktop appraisal, since these tools are essential in times of high demand.
“MBA and CBA suggest that the agencies consult with the GSEs to ensure that application of the quality control standards would not create adverse effects on the availability of alternative valuation methods,” the letter states.
In addition, regulators should be aware of any unbalanced market effects of AVMs regulations, conflicting interpretations of the legal framework, and the lack of established methodologies in examining systemic bias in the U.S., the trade groups state.
The agencies involved include the Federal Housing Finance Agency; the Consumer Financial Protection Bureau; the National Credit Union Administration; the Federal Deposit Insurance Corporation; the U.S. Department of the Treasury; and the Federal Reserve System.
Per the proposed rules, each institution using AVMs will adopt and maintain its practices, procedures, and control systems, reducing the burden on smaller institutions. But the trade groups request the agencies to include a small lender/servicer exemption from the standards, as these companies are likely to rely on larger outside service providers subject to a thorough review by regulators or larger clients.
Regarding third-party providers, the associations suggest that the CFPB expand its Compliance Bulletin 2016-02, Service Providers to outline expectations and potential recourse “for quality control and fair lending oversight” of third-parties providing AVMs services. In addition, MBA and CBA said that creditors should not be liable for violating nondiscrimination law when relying on third-party AVMs, disagreeing with the agencies’ interpretation of the Fair Housing Act.
The MBA and the CBA requested an adequate implementation timeline of at least 12 months.
The White House supports a new rule for AVMs, which follows goals set out by the president in addressing issues of racial bias that have exacerbated homeownership and wealth gaps. When announcing the proposed rule, Vice President Kamala Harris weighed in.
“Today, I’m proud to announce we are developing a rule that will require that financial institutions ensure that their appraisal algorithms are not biased, for example, that they do not produce lower valuations for homes owned by people of color,” Harris said. “We are also releasing the guidance to make it easier for consumers to appeal what they suspect to be unbiased valuation.”
Another trade group weighed in on the newly proposed rule.
The National Association of Mortgage Brokers (NAMB) said it supports new federal regulatory proposals governing the use of AVMs.
“The reality is the systems and structures are themselves, in some cases, problematic,” said NAMB President Ernest Jones in a statement. “Even when appraisers follow the intended approach, it may result in an outcome that disenfranchises people. They could be doing everything in a way they feel is consistent with the approaches they’ve learned and for which they’re certified, but there are some underlying issues that need to be addressed.”
After years of discussion, the U.S. Treasury Department is expected to propose a rule that would effectively end anonymous luxury home purchases in the coming weeks, according to the Financial Crimes Enforcement Network’s (FinCEN) regulatory agenda.
The rule, which department officials first said they planned to implement in 2021, would require real estate professionals, such as title insurers, to report the identities of beneficial owners buying real estate in cash to FinCEN. The department believes the proposed rule will close a loophole that allows corrupt oligarchs, terrorists and criminals to hide illegally obtained funds in U.S. real estate.
According to a state from Treasury Secretary Janet Yellen in March, as much as $2.3 billion was laundered through U.S. real estate between 2015 and 2020, a trend that she said has been going on for decades.
The new rule would replace FinCEN’s current reporting system known as the Geographic Targeting Orders (GTOs).
The GTOs require title companies to identify the people behind shell companies used in all-cash purchases of residential real estate.
As of mid-August 2023, 34 cities and counties throughout the U.S., including Litchfield and Fairfield Counties in Connecticut; Adams, Arapahoe, Clear Creek, Denver, Douglas, Eagle, Elbert, El Paso, Fremont, Jefferson, Mesa, Pitkin, Pueblo, and Summit counties in Colorado; Boston; Chicago; Dallas-Fort Worth; Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco; Seattle; Washington, D.C.; Northern Virginia and Maryland (DMV) area; the city and county of Baltimore; the Hawaiian Islands of Honolulu, Maui, Hawaii and Kauai; and Houston and Laredo, Texas.
In all of these GTOs, except for the city and county of Baltimore, which has a threshold of $50,000, all cash purchases of $300,000 or more must reported to FinCEN.
Officials have also been working on implanting a related rule that would force real estate professionals to report the identities of shell company owners who purchase real estate in cash through their shell company. While the American Land Title Association has expressed support of the new rule, it has also stated that its implementation should be delayed until the shell company rule is also complete.
The proposed rule will be open to public and industry feedback once it is announced
The Mortgage Bankers Association (MBA) this week submitted a letter to the Financial Stability Oversight Council (FSOC) in the U.S. Department of the Treasury urging several additional considerations in its plans to classify more non-bank entities as systemically important financial institutions (SIFIs).
One of the points made in the letter, submitted by MBA President Bob Broeksmit, is that a SIFI designation on a nonbank entity could cause material harm to that company attempting to compete in the marketplace.
“In proceeding with a non-bank SIFI designation, FSOC should conduct a deep and thorough analysis, including weighing the cost and benefit of such designation to the U.S. financial system as a whole and the likelihood the financial company in question will experience material financial distress as a result of the designation,” the letter said.
If FSOC is concerned about the core banking activities taking place outside the purview of prudential bank regulation, FSOC’s should “reconsider the regulatory environment” that has caused more traditional depository institutions from competing in the marketplace such nonbanks are attempting to do business in, Broeksmit said.
“As a general matter, FSOC should consider less costly alternatives to designation of a non-bank financial entity – especially where such an entity is already subject to regulation by an FSOC-constituent member and the perceived risk to financial stability associated with that entity can be, or perhaps already has been, adequately addressed through targeted programmatic changes by that regulator,” he said.
FSOC should also consider the potential costs and benefits of designating nonbanks as SIFIs, since the current proposal “eliminates any evaluation of the costs and benefits of non-bank designation and dispenses with assessing the likelihood that a firm would experience material financial distress,” Broeksmit said.
Additionally, since many “core traditional” banking activities are now operating outside of regulatory purview, MBA urges FSOC to “consider and address whether existing regulations are driving core banking activities outside the regulatory perimeter,” the letter said.
“With respect to residential mortgage lending, banks’ share of origination and servicing volume has consistently declined during the fifteen years following the global financial crisis,” Broeksmit said. “Some of the decline may reflect a re-assessment of the economic returns available in mortgage lending and a shifting of resources into business lines that have better prospects.”
But based on conversations with MBA’s bank members, it also reflects “regulations specific to banks which reduce the returns on capital from mortgage lending,” Broeksmit said.
This has led to non-bank servicers becoming more prevalent in the servicing market, leading to increased scrutiny from FHFA and Ginnie Mae.
“This example highlights what is the critical question: if bank regulations are so punitive that they discourage banks from effectively competing in markets for core banking services, shouldn’t FSOC first re-examine the regulatory regime that caused this change?,” the letter said.
Last November, Biden administration officials began a push that would target nonbanks with increased regulatory scrutiny. In an op-ed published by HousingWire, former FHA Commissioner David Stevens said that increased regulation of IMBs was not needed.
“The fact is that the invaluable role that IMBs play is deserving of a counterattack to push back against the ‘throwing the baby out with the bath water’ mentality that could be overtaking Washington,” Stevens wrote in November 2022. “The Mortgage Bankers Association authored a valuable piece on IMBs that should be required reading for all policymakers as they consider trying to fix something that is simply not broken.”
FSOC announced a proposal for tightening regulation of nonbanks in April.
The Homeowners Assistance Fund (HAF) — a program designed to offer financial help to homeowners impacted by the COVID-19 pandemic — has kept more than 300,000 homeowners in their homes by curing defaults and keeping them out of foreclosure, according to data released this week by the U.S. Department of the Treasury.
“As of March 31, HAF programs made roughly $3.7 billion in payments to more than 318,000 homeowners at risk of foreclosure,” the Treasury Department said in an announcement. “In the first quarter of 2023 alone, HAF programs distributed $1.2 billion in assistance to households – a 50% increase over the fourth quarter of 2022 – demonstrating the program is continuing to scale rapidly as designed.”
The data also shows that 14 states and two U.S. territories have expended over 50% of their HAF funds, excluding administrative expenses. In addition, the funding has reached a greater number of economically vulnerable people than it did prior to the federal mortgage relief efforts.
“As of March 2023, 49% of HAF assistance was delivered to very low-income homeowners, defined as homeowners earning less than 50% of the area median income,” the Treasury said. “Demographically, 35% of homeowners assisted self-identified as Black, 23% self-identified as Hispanic/Latino, and 59% self-identified as female.”
The Treasury Department is committed to ensuring that the remainder of the funds will be distributed, according to Wally Adeyemo, deputy secretary of the Treasury.
“The Homeowner Assistance Fund has helped keep hundreds of thousands of families in their homes,” Adeyemo said. “As state programs assess their remaining HAF funds, the Treasury Department will continue working with recipients to ensure these funds are swiftly delivered to homeowners most in need.”
Passed as part of the American Rescue Plan Act in early 2021, the HAF program is designed to help homeowners who have been financially impacted by COVID-19 pay their mortgage or other home expenses. A $10 billion allocation was made for the program, but mortgage servicers previously stated that spreading awareness about the program has been a challenge.
The program is also available for reverse mortgage borrowers. A requirement of a government-sponsored Home Equity Conversion Mortgage (HECM) is that the homeowner keep their home in good repair while paying any applicable property taxes, homeowners insurance and homeowners association (HOA) fees.
Reverse mortgage borrowers who may have fallen behind on such payments are eligible to receive HAF funds to help cover the expenses and keep them out of foreclosure.
As metropolitan areas across the nation continue to grapple with challenges related to housing their homeless populations, the White House announced on Thursday the launch of a new initiative designed to address unsheltered homelessness.
“ALL INside” is part of a larger plan introduced by the Biden administration in December 2022 called “All In: The Federal Strategic Plan to Prevent and End Homelessness,” which has a goal of reducing homelessness in America by 25% by the year 2025. The ALL INside initiative focuses on addressing homelessness issues in both key metropolitan areas and the nation’s most populous state.
“Through the ALL INside initiative, the U.S. Interagency Council on Homelessness (USICH) and its 19 federal member agencies will partner with state and local governments to strengthen and accelerate local efforts to get unsheltered people into homes in six places: Chicago, Dallas, Los Angeles, Phoenix Metro, Seattle, and the State of California,” the White House said in its announcement.
The White House plans to support the initiative by assigning a dedicated federal official in each community to assist in the implementation of locally-designed homelessness strategies. It will also dedicate staff across the federal government to identify areas where regulatory relief would help to spur actions for reducing unsheltered homelessness.
Such staff will also “navigate federal funding streams, and facilitate a peer learning network across the communities,” the White House said.
The White House will also work to connect a network of philanthropists and the private sector to facilitate additional support for the measures.
A number of federal agencies will also play a part in supporting the initiative. The U.S. Department of Housing and Urban Development (HUD) will, for example, work in concert with the U.S. Department of Veterans Affairs (VA), the Social Security Administration (SSA) and the U.S. Department of Health and Human Services (HHS) to address barriers that the unhoused population may encounter when trying to obtain government-issued identification.
HUD will also “help communities troubleshoot barriers to connecting people to rental assistance or housing programs, as well as assist communities to use regulatory flexibilities to speed up the processes enabling residents to move into properties and transition into permanent housing,” the White House said.
Other agencies committed to supporting the new initiative include AmeriCorps, the U.S. Department of Agriculture, the U.S. Department of Justice, as well as the Departments of Energy, Treasury and Transportation. The General Services Administration is also involved, but the specific details regarding how these agencies will contribute were not specified.
A former high-ranking employee at nonbank The Change Company CDFI (TCC) filed a lawsuit in California accusing the company of retaliation after he notified executives of employees “mischaracterizing loans” to apparently skirt federal reporting requirements.
The lawsuit, filed in Orange County, alleges that Adam Levine, the chief of staff to CEO Steven Sugarman, began reporting illegal activity by the company’s employees in February 2023 to Sugarman and other executives and board members.
However, rather than investigating the complaints, the company’s leadership terminated Levine, he claims.
A representative for The Change Company and Levine’s attorneys did not return requests for comment.
Levine, who was an assistant White House Press Secretary under President George W. Bush and a vice president at Goldman Sachs before starting at the lender in 2021, listed several alleged violations related to lending practices.
The list includes potential irregularities regarding the Community Development Financial Institutions (CDFI) regulations, specifically a rule requiring lenders to provide annual documentation attesting that 60% of their loans go to the target markets certified by the U.S. Department of Treasury.
“Plaintiff has documented that TCC falsifies information on its annual certification by mischaracterizing its loans. This includes mischaracterizing the race, ethnicity, and income level of borrowers,” attorneys for Levine wrote in the lawsuit.
The lender claims that since becoming a CDFI in 2018, it has funded over $25 billion in loans to more than 75,000 families.
The lawsuit cites potential securities fraud when investors are induced to purchase the lender’s loans in the secondary market based on the false representations on the borrowers’ profiles. Investors looking to support low-income families would not purchase the lender’s loans if they knew they were provided to wealthy individuals or celebrities, the lawsuit states.
In its seventh securitization on June 14, The Change Company attracted 16 investors to a $306 million offering, including money managers, banks, insurance companies, and private funds. The loans in the pool had a weighted average FICO of 740, LVT of 71.1%, 43 months of reserves, and an 8.72% note rate, the lender said.
Other allegations made by Levine include after-hours parties at the lender’s premises and recordings of private conversations at the company’s Pacific Palisades office. The accusations include Steven Sugarman and his older brother, Jason Sugarman, who founded The Change Company.
Levine claims Steven Sugarman tried to block a lawsuit when he instructed the plaintiff to leak confidential documents to a journalist doing a profile on short-seller Carson Block, with whom Sugarman has civil litigation.
Meanwhile, Jason Sugarman potentially violated Securities and Exchange Commission (SEC) orders by associating with the securities industry – which he has been prohibited from since February based on a consent judgment regarding a scheme to defraud Native American pension funds, the lawsuit contends.
“In light of Jason Sugarman’s known work at TCC, Plaintiff strongly encouraged Steven Sugarman to appoint an outside law firm to certify to regulators, investors, shareholders, and other stakeholders that Jason Sugarman had no material business relationship with TCC,” the lawsuit states. “Steven Sugarman refused to do so and retaliated against Plaintiff by stating that Plaintiff’s business dealings should be investigated.”
Levine claims he brought his concerns to the appropriate regulatory authority on March 5 and his attorney informed the company the following day. The plaintiff claims he was terminated weeks later without bonus wages and equity compensation that he was “rightfully owned.”
A former high-ranking employee at nonbank The Change Company CDFI (TCC) filed a lawsuit in California accusing the company of retaliation after he notified executives of employees “mischaracterizing loans” to apparently skirt federal reporting requirements.
The lawsuit, filed in Orange County, alleges that Adam Levine, the chief of staff to CEO Steven Sugarman, began reporting illegal activity by the company’s employees in February 2023 to Sugarman and other executives and board members.
However, rather than investigating the complaints, the company’s leadership terminated Levine, he claims.
A representative for The Change Company and Levine’s attorneys did not return requests for comment.
Levine, who was an assistant White House Press Secretary under President George W. Bush and a vice president at Goldman Sachs before starting at the lender in 2021, listed several alleged violations related to lending practices.
The list includes potential irregularities regarding the Community Development Financial Institutions (CDFI) regulations, specifically a rule requiring lenders to provide annual documentation attesting that 60% of their loans go to the target markets certified by the U.S. Department of Treasury.
“Plaintiff has documented that TCC falsifies information on its annual certification by mischaracterizing its loans. This includes mischaracterizing the race, ethnicity, and income level of borrowers,” attorneys for Levine wrote in the lawsuit.
The lender claims that since becoming a CDFI in 2018, it has funded over $25 billion in loans to more than 75,000 families.
The lawsuit cites potential securities fraud when investors are induced to purchase the lender’s loans in the secondary market based on the false representations on the borrowers’ profiles. Investors looking to support low-income families would not purchase the lender’s loans if they knew they were provided to wealthy individuals or celebrities, the lawsuit states.
In its seventh securitization on June 14, The Change Company attracted 16 investors to a $306 million offering, including money managers, banks, insurance companies, and private funds. The loans in the pool had a weighted average FICO of 740, LVT of 71.1%, 43 months of reserves, and an 8.72% note rate, the lender said.
Other allegations made by Levine include after-hours parties at the lender’s premises and recordings of private conversations at the company’s Pacific Palisades office. The accusations include Steven Sugarman and his older brother, Jason Sugarman, who founded The Change Company.
Levine claims Steven Sugarman tried to block a lawsuit when he instructed the plaintiff to leak confidential documents to a journalist doing a profile on short-seller Carson Block, with whom Sugarman has civil litigation.
Meanwhile, Jason Sugarman potentially violated Securities and Exchange Commission (SEC) orders by associating with the securities industry – which he has been prohibited from since February based on a consent judgment regarding a scheme to defraud Native American pension funds, the lawsuit contends.
“In light of Jason Sugarman’s known work at TCC, Plaintiff strongly encouraged Steven Sugarman to appoint an outside law firm to certify to regulators, investors, shareholders, and other stakeholders that Jason Sugarman had no material business relationship with TCC,” the lawsuit states. “Steven Sugarman refused to do so and retaliated against Plaintiff by stating that Plaintiff’s business dealings should be investigated.”
Levine claims he brought his concerns to the appropriate regulatory authority on March 5 and his attorney informed the company the following day. The plaintiff claims he was terminated weeks later without bonus wages and equity compensation that he was “rightfully owned.”
California housing officials are urging households to take advantage of Homeowner Assistance Fund resources following recent changes to eligibility, including updated area median-income levels.
The new income thresholds will qualify more mortgage borrowers for up to $80,000 in financial assistance. Funding was originally made available in late 2021 under provisions of the American Rescue Plan Act in order to help households encountering economic distress due to economic impacts of COVID-19.
“Even now, too many homeowners are still struggling to recover from the financial toll of the pandemic. This adjustment could mean that more families will not only save their house, but their home,” said Rebecca Franklin, president of the CalHFA Homeowner Relief Corporation, in a press release.
The Golden State’s Homeowner Assistance Fund already expanded in February this year to make relief available to more borrowers, including reverse mortgage holders. It also opened up to support households who may have already received some form of pandemic-related loss mitigation, such as a partial-claim second mortgage or loan deferral if granted in or after January 2020.
Homeowners can qualify for federal relief if combined income comes in at or below 150% of their area’s median levels, as determined by the U.S. Department of Housing and Urban Development. Qualifying thresholds rose across most California counties from 2022 to 2023, and range from $99,000 to $223,000 for a household with two residents age 18 or older. But eligible income decreased in a few of California’s wealthier markets, including San Francisco and adjacent counties, where the amount shrank from to $223,000 from $223,700.
Los Angeles County saw the eligible-income total increase to $151,350 from $142,950. Meanwhile, the limit in Santa Clara County, which includes San Jose, also grew to $214,100 from $202,200.
Qualifying limits were also published for households of other sizes, with the range for single homeowners running from $96,200 to $195,100. For households with three adult residents, the upper threshold is now between $111,400 and $250,850.
Eligible homeowners may apply for funding online to catch up on late or missed mortgage and property tax payments, or to help pay partial-claim or deferred amounts. Struggling homeowners with reverse mortgages may also apply it to their insurance costs.
Focus on state HAF programs is currently growing as regulators underscore to the lending industry its responsibility to provide means available to help homeowners avoid foreclosure. Some states with remaining funds, which the Department of the Treasury meted out beginning in 2021, have amended their original terms to increase uptake of the programs and protect more borrowers.
Among those changes are extensions of original application deadlines and the addition of reverse liens to the pool of eligible loans. Earlier this month, Hawaii doubled the maximum amount available through its program and stated it could provide assistance for utility payments and selected other charges even to households without an existing home loan.
The Biden Administration made almost $10 billion in Homeowner Assistance Fund aid available nationwide through the American Rescue Plan Act, with $750 million granted to California. Each state took responsibility for their program’s administration, regulations and fund disbursement. CalHFA estimates it will allocate all of its funds by September 2025.
The range of different policies and campaigns are resulting in varied outcomes across the country. While a handful of states have already closed their programs, the majority remain open to new applicants. But some states, such as Pennsylvania, encountered problems with vendors used, leading the Keystone State to put some of its efforts on hold.
With the never-ending changes and challenges affecting the U.S. financial landscape, multiple community development entities are helping to counter some of their adverse effects by fostering community development initiatives.
Some examples include Community Development Financial Institutions (CDFIs) and Community Development (CD) Banks. These play a significant role in promoting economic growth and inclusion for underserved communities.
This article thoroughly explores CDFIs and the institutions that support CDFIs, outlining their significance, objectives, and how they meet capacity building initiative requirements. We also highlight the federal government’s involvement, explaining its role evolution and the numerous related economic development activities available to those who need them.
What is a Community Development Financial Institution (CDFI)?
Community Development Financial Institutions (CDFIs) are a type of financial institution that provides products and services to financially disadvantaged communities for economic development purposes.
They are essential and critical in promoting inclusion and economic growth to marginalized communities in urban and rural communities countrywide. Legislations like the Community Reinvestment Act help encourage these programs. However, the Community Reinvestment Act is not the only reason for their existence.
CDFI Certification
To become a CDFI, a financial institution must apply for a CDFI certification. This certification ensures that the institution can receive the right federal assistance resources and allows people to benefit from the CDFI fund’s programs.
How did the concept of CDFIs start?
The roots of Community Development Financial Institutions (CDFIs) extend to the 1880s, when minority-owned banks began serving economically disadvantaged communities. These organizations provided essential financial services to areas that mainstream financial institutions neglected or could not reach.
As the years progressed, new types of mission-driven financial institutions emerged. For example, the development of credit unions in the 1930s and 1940s offered alternatives to the traditional community bank that had limited services.
Moreover, new community development corporations emerged in the 1960s and 1970s, providing additional resources and support for underserved areas. These institutions gradually paved the way for the rise of nonprofit loan funds in the 1980s, establishing the groundwork for today’s modern CDFI model.
The Riegle Community Development and Regulatory Improvement Act of 1994 recognized the need to support the growing community development finance sector. With that in mind, it established the Community Development Financial Institutions Fund (CDFI Fund). This fund aimed to promote economic revitalization and community development in low-income areas by investing in and providing assistance to CDFIs.
Since its inception, the CDFI Fund played a substantial role in the growth and impact of CDFIs, enabling them to serve the financial needs of economically disadvantaged communities and contribute to their overall development and prosperity.
Types of CDFIs
Currently, multiple types of Community Development Financial Institutions (CDFIs) exist, each catering to the unique needs and challenges economically disadvantaged communities face. We explore their types and roles below.
Community Development Banks
Community Development Banks are for-profit, federal government supported and regulated financial institutions. These institutions have a board of directors that includes community representatives. CD banks provide affordable banking services, loans, and other financial products to economically distressed and underserved communities.
Operating in these communities creates jobs, improves infrastructure, and promotes economic growth. They also help increase access to capital for small businesses, including affordable housing projects and community service facilities.
Community Development Credit Unions
Community Development Credit Unions (CDCUs) are nonprofit financial cooperatives owned and controlled by their members. As is the case with traditional credit unions, they provide financial services such as savings accounts, checking accounts, and loans.
CDCUs only cater to low-income and underserved communities, offering affordable rates and financial education programs to promote inclusion and help people build credit and assets. The National Credit Union Administration (NCUA), an independent federal agency, regulates these credit unions.
Community Development Loan Funds
Community Development Loan Funds, or CDLFs, are nonprofit entities that finance community development projects by offering loans and technical assistance to marginalized communities. They facilitate access to affordable housing, promote small businesses, and help establish community service facilities to sustain growth. They also serve as an alternative source of capital for those who cannot access traditional bank financing services by offering flexible terms and underwriting criteria.
Community Development Venture Capital Funds
Community Development Venture Capital Funds offer equity and debt-with-equity investments to small and medium-sized businesses in economically distressed areas. They can be for-profit corporations or nonprofit entities.
By offering long-term capital, they help businesses grow, create jobs, and foster innovation. They also provide technical assistance, mentoring, and business development support to maintain the long-term success of their portfolio companies.
Microenterprise Development Loan Funds
Microenterprise Development Loan Funds are loan funds that provide small-scale loans, or microloans, to entrepreneurs and small businesses that might not qualify for traditional financing. They offer small capital amounts that range from hundreds to a few thousand. These loan funds help low-income people, women, and minority entrepreneurs who need smaller loan amounts and more flexible terms.
Community Development Financial Institution (CDFI) Consortia
CDFI Consortia are collaborative networks of CDFIs that pool resources, experience, and capital to increase their impact on community development services. They can access larger funding opportunities and share best practices to serve their target communities by working together. They can also provide joint technical assistance and support services, helping to strengthen individual CDFIs that are part of the network.
Understanding Community Development Financial Institutions
The main goal of CDFI fund programs is to provide affordable loans, community development banking services, financial help, and technical assistance to low-income communities. They foster economic development and empower small business owners, minorities, and marginalized communities by offering access to investment capital and other resources with fewer demands than traditional finance institutions.
CDFIs differ from traditional financial institutions because they focus on community development and serving minority communities. They also collaborate with religious institutions, community service organizations, and rely on federal funding and agencies to address the needs of their target populations.
What’s the federal government’s role in CDFIs?
The Federal Reserve Bank supports CDFIs through various initiatives, tax credits, and programs. One such program is the CDFI Fund, which the U.S. Department of the Treasury administers. The CDFI Fund provides financial, technical, and other resources to CDFIs, casting a wider net to help low income people and communities access their services.
In addition to the CDFI Fund, the Federal Reserve Bank supports CDFIs through programs and training initiatives such as:
Bank Enterprise Award Program
Capital Magnet Fund
CDFI Bond Guarantee Program
CDFI Equitable Recovery Program
CDFI Program
Rapid Response Program
Native Initiatives
New Markets Tax Credit Program
Small Dollar Loan Program
These initiatives by the Federal Reserve Bank provide financial incentives and resources for CDFIs and community development entities to invest in eligible community projects, promote economic growth, and create jobs.
How has that federal role changed over time?
The federal government’s role in supporting the CDFI industry changes over time to respond to the changing needs of disadvantaged communities and the growing recognition of the importance of financial inclusion.
Early efforts, for example, provided seed capital and technical assistance to establish and grow CDFIs. With the maturation and evolution of the industry, the government started focusing on building capacity, collaboration, and supporting innovative endeavors.
Recent changes emphasize leveraging private sector investments, regulatory relief, and encouraging partnerships between the CDFI industry and other financial institutions. Examples include minority depository institutions (MDIs) and mainstream banks.
CDFIs’ Role in Financial Inclusion
Financial inclusion is an essential part of CDFI initiatives. Access to affordable financial products and services helps bridge the gap between poor communities and mainstream financial institutions. CDFIs also promote financial knowledge, support small businesses, finance affordable housing activities, and facilitate economic development initiatives.
CDFIs also ensure that economically distressed communities can access essential community services facilities like healthcare centers, schools, and childcare. Their work helps contribute to these communities’ overall well-being and stability. It creates a solid foundation for long-term economic growth.
Business Model
CDFI business models are unique in combining traditional financial services with a strong emphasis on developing and positively impacting the communities they cater to.
They generate revenue by collecting interest and fees on loans, investments, and other financial products. However, they also rely on grants, donations, and especially government funding like the CDFI fund to support their operations.
CDFIs collaborate with organizations like government agencies, nonprofits, and private sector partners to attain their goals. Additionally, they leverage tax credits, guarantees, and other financial tools to attract more investment capital and support their lending activities.
CDFIs Provide Opportunity for All
CDFIs provide real opportunities by addressing the financial needs of underserved communities to help them succeed and promote their economic growth. To do this, they offer access to affordable financial products and services to communities that experienced systematic lockouts from these programs.
By emphasizing their needs and giving them more accessible and affordable ways to prosper, low-income individuals and businesses have access to essential financial tools. These tools were traditionally out of reach for mainstream financial institutions.
Moreover, CDFIs support small businesses owned by women, minorities, and individuals in economically distressed communities. By offering tailored financing solutions, technical assistance, and business planning resources, CDFIs help these entrepreneurs overcome barriers to entry, create jobs, and contribute to local economies.
Another significant aspect of CDFIs’ work is their focus on affordable housing and community development projects. They finance the construction and rehabilitation of affordable housing units and invest in community facilities like schools, healthcare facilities, and childcare. These are essential to the well-being and stability of low-income communities and help them worry less about factors beyond their control or that are too expensive to access otherwise.
CDFIs also promote financial education and empowerment by providing resources and training to help people develop financial literacy skills, manage their finances, and build assets. These initiatives contribute to breaking the cycle of poverty and promoting economic self-sufficiency.
By partnering with various stakeholders, such as government agencies, nonprofit organizations, and private sector partners, CDFIs leverage resources and expertise to maximize their impact. This creates a ripple effect that extends beyond the immediate recipients, fostering inclusive and resilient communities.
Types of CDFIs
Many community development financial institutions focus on addressing the needs of economically disadvantaged communities. These include community development banks, credit unions, loan funds, and venture capital funds.
Federal agencies like the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) regulate community development banks and credit unions. They offer various banking services, from deposit accounts to loans, catering to low-income communities.
Loan funds make affordable housing possible, support small businesses, and help community facilities. On the other hand, venture capital funds offer equity investments that support small businesses and startups in underserved communities.
“Newer” CDFI Resources
As community development financial institutions evolve, multiple resources and programs are emerging to support their growth and impact. Examples include:
CDFIs as Capital Plus Institutions
Sometimes, community development financial institutions are called “Capital Plus” institutions. This is because they provide investment capital, development services, technical assistance, and financial education to support the long-term success of their clients.
This approach allows community development financial institutions to significantly impact low-income and economically distressed communities, promoting economic opportunity and inclusion.
Emergency Capital Investment Program (ECIP)
The Emergency Capital Investment Program (ECIP) is a federal initiative that provides capital to CDFIs and MDIs to support their lending activities after the economic challenges caused by COVID-19. This program helps ensure that these institutions have the resources to continue providing essential financial services to underserved communities, small businesses, and minority-owned businesses during times of crisis.
Paycheck Protection Program Liquidity Facility (PPPLF)
The Paycheck Protection Program Liquidity Facility (PPPLF) is another federal initiative that supports the lending activities of CDFIs and other financial institutions participating in the Small Business Administration (SBA) Paycheck Protection Program (PPP). By providing liquidity to these institutions, the PPPLF enables them to continue offering loans to small businesses needing financial assistance during challenging economic times.
CDFI Rapid Response Program
The Rapid Response Program from the CDFI Fund provides immediate financial assistance during crises or natural disasters. CDFIs can quickly access funds for disaster recovery, emergency relief efforts, and other needs, serving as “financial first responders” for the communities they support.
These newer resources and programs demonstrate how the federal government, private sector, and other stakeholders support the work of CDFIs and promote financial inclusion and economic opportunity. By leveraging these resources, CDFIs can better address the needs of low-income communities nationwide and foster economic development in urban and rural communities.
Bose George, managing director at Keefe, Bruyette & Woods, said the banking crisis will still have meaningful impacts on the mortgage industry.
In the agency MBS space, where banks have roughly 30% market share, spreads have “widened a little further” and will continue “structurally” going forward.
“It seems like banks will be less active in the space,” George said.
Banks will also reduce their appetite for jumbo loans. They usually offer jumbo loans at lower rates to attract borrowers for other products. But now deposits are more scarce, George said.
And what does it mean for the rest of the market? “The least it means is higher rates.”
George also said the banking crisis impacts commercial real estate, a market already under pressure due to the hybrid work and work-from-home trends.
“Now, with what’s happening with the banks, certainly, there will be less capital in the space. Probably it exacerbates the downturn in commercial real estate.”
Overall, the analyst said he’s assuming the banks’ role in the mortgage market will decline, which seems “inevitable.” In turn, there will be a growing role for nonbanks. Over the next few years, George also sees a significant need for capital, including through equity.
What are the impacts of the debt limit impasse?
Isaac Boltansky, director of policy research at BTIG, said he is “concerned, as of this Monday morning, where we are” on the debt ceiling discussions.
According to Boltansky, there’s a “narrow pathway” to the due date of June 1. That’s the date the U.S. Department of the Treasurycommunicated it will potentially no longer be able to satisfy its obligations if Congress has not acted to raise or suspend the debt limit.
Meanwhile, the debt limit impasse between the Republican-controlled House of Representatives and President Joe Biden’s White House continues to cause uncertainties within the market.
According to Boltansky, it’s smart to remember what happened in 2011, when the S&P downgraded the U.S. long-term credit rating because of an “unsustainable fiscal” path and a “broken political system.”
“We still got both of those. And then, on top of that, what’s different from 2011? That our total debt has gone from $14 trillion to $30 trillion,” Boltansky said.
The executive mentioned that any political deal on the debt limit doesn’t solve the problem. “We’re starting with the real drivers of long-term debt not even being discussed.”
Is a recession on the way?
Mike Fratantoni, chief economist and senior vice president of research and industry technology at MBA, said the “financial conditions are tightening,” reinforcing the forecast for a recession in the U.S. this year.
“When we met in October for our annual convention down in Nashville, we kind of forecast that in 2023 the U.S. was going to be in a recession,” Frantatoni said. “Given what we just went through, we’re holding on to that forecast.”
However, according to Fratantioni, the recession will probably be “a little bit later” and “deeper,” as the credit tightening might put more pressure to the U.S. economy.
According to Fratantoni, inflation is still twice the Federal Reserve‘s (Fed) target at around 4.5%, and the jobs market is still strong. It’s difficult to “try to tease out a consistent message from the Fed officials,” but they “are not going to be in any hurry to drop rates now.”
Amid the debt ceiling impasse, the MBA’s baseline scenario does not include the U.S. government defaulting on its debt. However, the “biggest risk is downgrading.”
Fratantoni said mortgage rates peaked in the third quarter of last year and are volatile right now. Refis “left the center of the picture,” and purchases are running 30% to 35% behind where we were in terms of units in 2022.
“Given the decline in volume, particularly the decline in units, we thought we need to take about 30% of capacity out of the industry. We’re even sort of 19% to 20% down so far. Still, a very challenging environment,” Frantantoni said. “The good news continues to be that people are paying on their mortgages.”