unlock benefits

The number of Community Development Financial Institution (CDFI) certified organizations has more than doubled since 2020.

An impressive feat in and of itself, but even more so when you consider a years-long hiatus by the CDFI Fund—the body that administers the designation—from approving any new applications.
The delay allowed the CDFI Fund to develop new rules and guidelines which, now approved, offer unique opportunities for financial institutions to access grants, enhance lending capacity, and deepen community engagement.

CDFI expert Shirley Senn, Chief Consulting Officer at CU Strategic Planning, recently spoke on LendKey’s, 22 Minutes in Lending podcast and shares more of her thoughts here.

Understanding CDFI certification

“The CDFI designation signals an institution’s commitment to community development and financial empowerment,” says Senn.

“Unlike the low-income designation, which is based on membership demographics, the CDFI certification hinges on the proportion of loans extended to designated underserved target markets. It’s an opportunity for a credit union to double-down on their mission and say, ‘We recognize these communities are not being served, even by us. We’re going to make the strategic investment to address that.’”

While Senn references credit unions, she’s also quick to point out that the CDFI certification transcends institutional boundaries and is not exclusive to any financial institution classification. The designation encompasses credit unions, banks, venture capital funds, and loan funds.

“Once you’re a CDFI-designated organization, you’ve a lot more in common than you do in competition with any other CDFI,” adds Senn. “You’ve committed to fostering financial development within underserved communities and working with other institutions to do it. It’s a great model.”

The value of CDFI certification

For any financial institution, attaining CDFI certification unlocks a plethora of benefits. Beyond the distinction associated, certified institutions gain access to resources and grant programs offered by the CDFI Fund.

“Financial assistance grants can serve as catalysts for increasing loan loss reserves or capital reserves,” says Senn, whose organization—CU Strategic Planning—has secured almost $1 billion in grant awards for their credit union clients.

“It can also support programmatic work like implementing community development services such as loan management, financial counseling, and coaching. They can even fund the positions needed to run those programs.”

Program development is integral to maximizing the impact of CDFI funds. Whether focusing on ITIN lending, student or education lending, financial counseling, or business development services, credit unions can strategically allocate grant funds to enhance their offerings.

Strategic partnerships and collaborations

CDFI credit unions also gain access to a robust network lending ecosystem. “Central to the success of CDFIs is the spirit of collaboration,” Senn says. “By forging partnerships with other financial institutions, nonprofits, and community stakeholders, credit unions can maximize their impact and reach underserved populations more effectively.”

These partnerships go far beyond conventional competition paradigms, emphasizing a shared commitment to community development. Whether through co-lending initiatives or knowledge-sharing platforms, credit unions can leverage collective, network lending expertise to address systemic financial inequities. These symbiotic relationships amplify the impact, ensuring comprehensive attention and service to every corner of the community.

Underwriting and loan management

While CDFI certification does not directly address the issue, it does at least give credit unions a new vertical for liquidity management but, Senn adds, CDFI institutions must also remain hyper-focused on underwriting and loan management.

“Interest rate restrictions and underwriting loans for underserved populations pose unique challenges,” she says. “Credit unions must deploy innovative approaches to assess creditworthiness effectively while mitigating risks associated with lending in high-need communities.

“While credit unions must adhere to state or federal usury limits, they can utilize CDFI funds to offset risks associated with serving higher-risk populations. Additionally, partnerships with specialized underwriting firms or financial technology companies can enhance credit risk assessment processes.

“The compliance and reporting requirements can’t be underestimated either,” explains Senn. “The operational and strategic changes may be minimal for credit unions already based in underserved communities, but there are reporting obligations and behaviors that can take some getting used to.”

CDFI: A long-term solution for lending through economic uncertainty?

There’s a clear allure for CDFI certification, and its alignment and opposition to the credit union mission is undeniable.

Obtaining the CDFI designation takes a commitment—and retaining it takes work—but it does empower credit unions to deepen their impact on underserved communities, while accessing vital resources for growth and sustainability.

By breaking down traditional barriers between credit unions and other institutions too—including fintech, banks, and even venture funds—this may be an option for many organizations looking for longer-term lending growth.