CDFIs: Catalysts for Equitable Growth
Adrian Franco, Director of Community Development Finance, Communications and Outreach
Adrian Franco, the New York Fed’s director of community development finance, delivered a keynote address at the annual conference of the New York State CDFI Coalition in Albany, New York, on May 7. In his remarks, which are published below, he emphasizes how the New York Fed’s community development initiatives can complement the work of community development financial institutions (CDFIs) in promoting equitable growth, and he calls on members of the industry to complete the Federal Reserve’s 2019 CDFI Survey. The survey, which closes on May 31, assesses the condition of CDFIs in the United States in terms of capitalization, financial products, development services, and demand and capacity; it is available here.
CDFIs: Catalysts for Equitable Growth
Good afternoon. Thanks to the organizing committee for your invitation to speak at this conference. It is great to see so many friends in the room, and it is an honor to be part of this timely and relevant conversation about the present and future of community development financial institutions.
Today I want to address the role that the Federal Reserve Bank of New York can play in supporting your work. Your institutions have historically been potent catalysts of equitable growth in your communities, and I want to reiterate our commitment to collaborate closely with you to achieve this goal.
Before I continue, I will give the usual Fed disclaimer. These are my views and do not necessarily reflect those of the Federal Reserve Bank of New York or anyone else in the Federal Reserve System.*
The New York Fed’s Commitment to Community Development, Outreach, and Education
While the Federal Reserve is best known for its monetary policy and regulatory responsibilities, we also have a deep commitment to community development, outreach, and education. Reserve Banks across the country have teams dedicated to community-based work. The New York Fed is responsible for advancing this work in New York State, as well as parts of New Jersey and Connecticut, Puerto Rico, and the U.S. Virgin Islands.
Our focus on community development began with the enactment of the Community Reinvestment Act (CRA). As one of the regulators of the CRA, we are keenly interested in understanding how financial institutions meet the credit needs of low- and moderate-income communities and the opportunities for investment in community development projects. Over the years, this mandate evolved to include community development and engagement programs, applied research, and the creation of resources and tools to advance the economic resilience and mobility of undeserved individuals and communities.
The New York Fed achieves this goal in different ways. We connect community organizations to resources, bring stakeholders together, and serve as catalysts for action. Let me offer some examples. We just launched a new Regional Economy website that offers interactive access to regional data and analysis. By visiting our website, you will be able to access economic indicators and reports for 16 metro areas of New York State. In this website, you can also find an analysis of credit conditions — including credit inclusion and distress — in cities such as Rochester and New York City, as well as the whole of Long Island. These reports were designed to be relevant and useful in practice to organizations advancing financial inclusion like the ones the Coalition represents.
The Bank is also responsible for the Small Business Credit Survey, an annual national survey that gathers information on the financing needs and experiences of small businesses. Given the role of CDFIs in financing successful start-ups and small businesses, you are well aware that timely information on their financing conditions and decisions is limited. The Small Business Credit Survey seeks to help address this knowledge gap for CDFIs and other stakeholders.
The New York Fed, along with our colleagues in other districts, launched the initiative Investing in America’s Workforce because we believe that our communities can reach their full potential by aligning the workforce’s skills with employers’ needs. Multiple programs and publications emerged from this initiative. For example, last year we launched a survey of community colleges in New York State to document employer engagement and the training that students receive to help them acquire the appropriate skills for available jobs.
Speaking of students, we also have a portfolio of programs that aim to promote economic education. These programs include academic competitions, lesson plans, and professional development for teachers. For those of you that offer financial education programs, you might find very useful to incorporate the New York Fed’s own free educational comic books in your curricula. You may have seen a recent article in the New York Times about our comic books, which drew parallels to the likes of the Avengers and Wonder Woman.
In addition to our efforts to make research and analysis available to community organizations, we also bring together local stakeholders to share best practices and learn about local economic conditions. Through advisory groups, the president of the New York Fed meets regularly with regional nonprofit leaders, small business owners, community banks, and other groups. We believe that it is essential to have the presence of community development financial institutions in these groups, like Linda McFarlane of the Community Loan Fund of the Capital Region, and a current serving member of one of these advisory groups. Thank you Linda for your contributions and leadership.
Every year and across the country, the Federal Reserve organizes conferences and roundtables on different subjects related to community development and education. Many of them have been organized with CDFIs. In 2017, we partnered with the Local Initiatives Support Corporation (LISC) to organize the conference Transforming Communities: Driving and Assessing Investment. We gathered leaders from across the nonprofit, public, and private sectors to discuss the crucial role of community development finance in driving the transformation of under- resourced communities. A second objective of this convening was to launch a new initiative and team at the New York Fed dedicated to community development finance. We call it CoDeFi.
This team supports the transformation of low- and moderate-income communities in our region by working to increase the impact of community investments and supporting inclusive economic development strategies. We publish Resource Guidebooks that are accessible tools to help guide investment in a community and understand its needs. This year we are launching the program Investment Connection, which was originally developed and implemented by our colleagues at the Kansas City Fed. The program aims to facilitate connections between community organizations and financial institutions to foster economic development and place-based investment.
Access to credit, thriving small businesses, workforce development, economic education, and community development finance are critical pillars of equitable growth. The New York Fed looks forward to continue partnering with national and regional stakeholders to advance them.
Catalysts for Equitable Growth
Upon learning of this year’s conference theme, “Capital Innovation: New Paths to Funding, Resources, and Partnerships,” I was struck by how timely this discussion is. We find ourselves at an inflection point in community development finance. Changes at the federal level and shifts in funding sources are causing practitioners to rethink the composition of their toolkits. At the New York Fed we are supporting policy developments that may impact how CDFIs access capital in the future.
One of these developments is the current effort to modernize the Community Reinvestment Act. The regulatory changes made to the Community Reinvestment Act in 1995 resulted in a meaningful expansion of support to underserved individuals and communities. Revisions made to the regulations explicitly recognized loans and investments in CDFIs, providing the basis for decades of significant growth and expansion. More recently, the regulatory agencies specifically addressed partnerships with CDFIs and provided clarification about the eligibility of loans to a financial intermediary. Today, CRA-motivated capital is a critical part of CDFIs’ capital base.
Still, we acknowledge the limitations of this funding source — particularly the geographical constraints of the current regulation, which naturally prioritizes areas where there are a greater concentration of banks or deposits.
As we work with our counterparts at the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) to propose updates to the CRA, the Federal Reserve is conscious of how changes may impact the CDFI industry. One proposal under review is the expansion of the definition of “community development” to include loans to or investments in CDFIs, regardless of the bank’s assessment area. This change could spur increased investment to underserved communities that suffer from a lack of access to capital.
I have witnessed how critical CDFIs can be to ensuring a strong community development ecosystem in an underserved area. Following the 2017 hurricanes in Puerto Rico, the New York Fed embarked on a series of initiatives in an effort to strengthen the capacity of community development organizations on the island. We are currently working with the nonprofit organization Inclusiv to increase the network of CDFIs in Puerto Rico by providing education on certification requirements to local cooperatives which provide critical services and capital access to some of Puerto Rico’s most at risk areas. Our hope is that increasing the number of CDFI certified institutions would send a signal to the market that these organizations are efficient, effective, and ready to collaborate with banks — just like Pathstone Enterprise Center, the Rochester-based CDFI that has played a critical role in supporting small business recovery following the disaster.
In addition to CRA modernization, the creation of Opportunity Zones is another recent development in community development finance. Historical in terms of the size of the potential capital pool, the Investment in Opportunity Act aims to channel equity capital into distressed census tracts. The prospect of investing in these Opportunity Zones has generated a lot of interest from market participants. Yet, little funds have been deployed, in part because traditional investors have limited understanding of the neighborhoods where they want to invest.
CDFIs are uniquely positioned to address this information gap given your strong ties to the communities you serve and the partnerships that you have established. For this reason the New York Fed, in partnership with our colleagues in the San Francisco Fed, will be drawing from CDFIs’ expertise when we develop the Community Toolkit, a new resource that underscores the importance of community engagement in investments in Opportunity Zones.
Finally, we are highly aware that there is a pressing need to underscore the impact of CDFIs in our communities. Sharing your financial narrative and the way you transform the lives of families is a priority. In 2009, the Richmond Fed launched a biennial survey of community development financial institutions that seek to provide additional insights to the information already being collected by CDFI Fund and other entities. This year the survey has gone national and I am glad to announce today that the survey is open for New York State. As the state with the second highest concentration of CDFIs, the inclusion of New York is of particular importance. The data from the survey will demonstrate your integral role as providers of small business capital, consumer loans, and technical assistance, as well as the challenges that you face given growing demand and limited capitalization. Through this survey, we want to amplify your story.
Survey respondents will also have the opportunity to opt into being included in a national CDFI directory that aims to foster partnerships between peers and with other stakeholders leading to new sources of capital. We strongly encourage you to participate.
The President of the New York Fed, John Williams, recently stated that the Fed seeks growth that enables everyone to fulfill their economic potential. We know that this goal is shared by the CDFI industry.
I would like to close by reemphasizing our strong interest in collaborating with the CDFI community in New York State. From Albany to Syracuse, from the North Country to Long Island, and from Elmira to the Bronx, we want to hear from you and we want to work with you. I want to express our gratitude for the significant outcomes you have achieved in your communities and recognize you for being catalysts for equitable growth.
* I am grateful to Chelsea Cruz, Maria Carmelita Recto, and Arlinda Berdynaj of the Community Development Finance (CoDeFi) team at the New York Fed for their assistance in preparing this text.