CLEVELAND (7/14/14)--The Community Development Financial Institution (CDFI) Fund is successfully increasing lending in low-income areas, according to a study by the Federal Reserve Bank of Cleveland.
Assessing returns on government projects spending can be difficult, the report states, because of "double bottom lines" found in many programs. These projects are not solely concerned with profits, but also with a socially oriented goal, such as strengthening the economy of a community or improving economic opportunities for a disadvantaged group.
Established by the Riegle Community Development and Regulatory Improvement Act of 1994, the CDFI Fund awards grants to CDFIs operating in low-income areas. Awards are intended to strengthen the institutions and increase the amount of lending to borrowers in those areas. In 2013, the fund awarded more than $172 million to CDFIs.
Credit unions make up 177 of the 811 CDFIs active at the end of 2013, according to a CDFI Fund annual report released earlier this month. According to U.S Treasury Department data, credit unions that receive awards lend more than their similarly sized counterparts over the three years following the award.
"Additionally, CDFIs' net worth ratio is positively correlated with receiving an award. This means that CDFI Fund awards go toward recapitalizing credit unions as well," the report reads. "This will allow credit unions to continue to make loans in the future because credit unions require a 7% capital-to-asset ratio to be able to expand their loan portfolio. On average, credit unions have capital ratios near 10% to 11%, but CDFIs hover around 8% or 9%."
The report goes on to say that the CDFI program seems to work because the awards are direct enough to increase lending in the areas that need it the most. The guidelines that define CDFIs prevent money from being allocated to areas that aren't in need.
"CDFI Fund is increasing lending in low-income areas, thus achieving one of the goals Congress set for it. This is, however, only one part of the double bottom line," the report reads. "But since the technical assistance and financial assistance programs are small, it is difficult to tease out their effects on aggregate employment, incomes, or other indicators of the economic viability of the community, which would reflect the other half of the double bottom line."
Use the resource link below for the full report.