Keynote Address by CDFI Fund Director Annie Donovan at the 2018 Opportunity Finance Network Conference

Thank you for the kind introduction, Jim. Thank you Lisa Mensah and the OFN Board of Directors for the invitation to join you this afternoon.

It's great to be here in Chicago, a town steeped in community development history!

It's always a pleasure to have the opportunity to engage with CDFIs in a forum like this. In fact, tomorrow morning, the CDFI Fund is hosting a breakfast and you are invited to come! At that time, we'll talk more about what we've been up to at the CDFI Fund this past year.

Most importantly, it's an opportunity to dialogue with CDFI Fund staff through a question and answer session. And, we'll be around after the breakfast for one-on-one time with CDFIs. I hope you can make it.

Today, I want to talk about the need for CDFIs and the CDFI industry to grow.

Now, this is not a simple topic to address, because as we all know, CDFIs are in a "high touch" business.

You're not just about transactions, you're about transformation. That's not a business model that easily lends itself to scaling. And yet, we have to be concerned about building scale.

I think we can all probably agree that growth for growth's sake is not our goal, but rather growth for the sake of having meaningful impact in economically distressed places is.

Growth and impact can be like sibling rivals competing for your attention. And yet, like a good parent, we have to attend to both.

From my point of view, there are two compelling reasons why the CDFI industry must operate at a greater scale.

The first is because what you do is needed.

Access to affordable financial products and services is still hard to come by in too many low-income communities. Demand for what you do far outstrips supply, as you know all too well. You live that experience every day.

Now, CDFIs have grown impressively in number and in size over the past few decades. The number of CDFIs has grown by more than 470 percent since the CDFI Fund was created in 1994, and total assets have risen about 390 percent.

But, income and wealth gaps persist.

  • Nearly 40 million Americans, 12.3 percent, live below the poverty line, according to the U.S. Census Bureau.

  • And 6 percent of Americans live in communities characterized by persistent poverty.

  • These are communities where at least 20 percent of the population has lived in poverty for 30 years or more.

  • While median household income has made gains over the past three years, the net worth of the median household is still about 20 percent lower than it was in 2007.

If CDFIs are to have the kind of impact that creates mobility from poverty and that transforms communities, the industry must scale to meet the magnitude of the problems we are trying to solve.

The second reason CDFIs need to achieve greater scale is because what you do works.

You leverage CDFI Fund investments at a 12:1 ratio on average.

You form public/private partnerships that increase access to affordable housing, create access to quality education and health care, and finance underserved entrepreneurs to start and expand small businesses.

You bring the unbanked and under-banked into the financial mainstream, where financial products and services are safe and affordable. And, you do this while maintaining healthy balance sheets and bottom lines.

The CDFI model has stood the test of time, even through the Great Recession.

So, the question becomes, HOW can CDFIs build scale without losing touch? How can CDFIs grow in both size and impact?

Today I want to talk about what the CDFI Fund is doing to support CDFI growth, and what you can think about doing for your own organization.

First, what can you do?

This past year, because I've been thinking about this topic a lot, I went in search of CDFIs that have grown impressively without trading off the advancement of their missions.

What I learned from them might serve as guideposts for other CDFIs as you think about how to shape your organization for the future.

Here are the pearls of wisdom that I gathered:

  1. Define your north star and never lose sight of it. Most CDFIs that I talked to said they start with being clear about their end goal, whether it's transforming distressed places, reducing wealth and income gaps in underserved communities, or creating economic opportunity and economic empowerment for low-income people. Staying rooted in your mission might mean that you have to dig deeper and work harder to find a path to growth that doesn't skim the surface of your target markets.

    One CDFI cautioned not to confuse mission with strategy and tactics. This CEO said he pledged he'd never move out of the state where the CDFI was founded, only to expand into six states; that they'd never have retail branches, and now they have hundreds. They grew in these ways in order to have more influence in the target markets they serve, because without that influence, they were not relevant enough to accomplish their mission. They were stubborn about the mission, but not about strategies and tactics.

  2. Double down on engagement with your target markets. There are lots of ways to engage with the communities you serve. One CDFI said that for every new market they enter into, they create a local advisory board. This is how they keep their ear to the ground, and ensure that their products and services align with community need. Community engagement is a must. It cannot be overlooked.

  3. Cultivate a strong corporate culture. What stories do you tell about who you are as an organization, both internally and externally? It's these stories that hold the power to keep your staff aligned and mission-focused as you grow.

    Now, so far, you might be thinking... it's costly to go deep, it's costly to engage. So how can you offset that?

  4. Be strategic. That means, what are you going to say no to? Because you may have to say no to some things to ensure that you have the capacity to do what you need to accomplish your mission. This can be challenging because the communities you serve often have so many needs. And, your investors may make demands of you that can serve as distractions.

    Evaluate opportunities and favor those that deliver both high impact and high financial return. Don't do one without the other. As painful as this is, sometimes you may need to pass up resources if they are inadequate to the task at hand, or misaligned with your core purpose.

  5. Be Efficient. Though efficiency may not be the end goal, don't be afraid to build it. Not every function of a CDFI must be customized. This is how you are going to create room for growth.

  6. Invest in the development of your ecosystem. CDFIs striving to meet their mission know that this cannot be done alone, but has to involve partnerships, and the development of local capacity. Contribute in ways that you can to develop the ecosystem you are part of. This will help you expand your impact.

  7. Invest for the future. Make investment decisions today that build impact for tomorrow. This is a principle that we see strongly articulated within Native CDFIs, who make it a practice to invest with the seventh generation in mind.

Those are some things to think about as you position your organization for future growth.

So, how is the CDFI Fund supporting growth?

At the CDFI Fund we think hard about how we are supporting CDFIs to both scale and create more impact. After all, if the CDFI Fund is going to encourage the industry to grow and reach new markets, we need to make sure that our rules and practices are enabling, and not limiting, that growth.

One of the ways we are attempting to do this is through the re-examination of CDFI certification criteria.

We've been taking a deeper look at certification policy and the tests we apply to entities seeking to be recognized as a CDFI.

Many of you have helped us by responding to the Request for Information that we issued in 2017. Thank you again for your thoughtful responses, and your patience as the CDFI Fund has worked through this process.

As we embarked on our review and considered different policy changes, we were guided by several objectives. They are:

  1. To support the growth and reach of CDFIs, especially as it relates to their ability to innovate and to take advantage of new technologies;

  2. To continue to foster a diversity of CDFI types, activities, and geographies;

  3. To protect the CDFI brand, that is, to continue to ensure that CDFIs are mission-driven and accountable to the communities they serve;

  4. To minimize applicant burden and increase efficiency for CDFI Fund staff in rendering certification determinations.

Most of all, we tried to remain very practical about removing obstacles that don't add any value to the certification process, or worse, hamper growth and innovation.

CDFI certification policies have not changed much since they were put into effect in 1995 - and yet, so much in the CDFI industry has changed since then.

Think about the CDFI landscape in 1995.

I happened to be around then, and CDFIs were much more geographically defined.

How many of you have changed your names over the past decade or so to reflect a larger geographic footprint, or no geographic footprint at all?

Also, many of the technology tools that exist today to reach borrowers and households with financial products and services did not exist when our certification policies were first developed. These are advancements in technology that mainstream financial institutions have been taking advantage of for years, and can lead to growth for many CDFIs.

So, the CDFI Fund must ensure that our certification policies allow CDFIs to respond to, and succeed in, today's environment.

The complaint I hear most often regarding certification is from a CDFI that is located in one geography and wants to expand into another, but is hampered by aspects of our target market and accountability tests. As long as that CDFI is seeking to serve a legitimate target market, our rules should not create a barrier to such expansion and growth.

The target market and accountability tests are the areas where we are proposing to make the most substantial changes.

For example, we are proposing to eliminate geographic restrictions on target markets. Our current rules require CDFIs to draw a map around their target market. When we measure you for this test, we only count the eligible financing activity that falls within that defined geographic area.

If a CDFI engages in eligible activity outside of its approved area, we don't count it. In order for us to count it, the CDFI Fund would first have to approve an expansion of your target market. And, the CDFI would have to meet the relevant accountability test on top of that. I have heard from so many of you that this stymies growth.

Eliminating the geographic constraints on a CDFI's Target Market will empower all CDFIs to serve their Target Market TYPE(s) - whether Investment Areas, Low Income Targeted Populations, or Other Targeted Populations - at whatever level they are capable, without concern that it will adversely impact their certification.

Similarly, we are proposing adjustments to the accountability test that will allow more flexibility with respect to how your target markets are represented on your governing and advisory boards.

Because we are not simply seeking growth for growth's sake, and because we do not want to lose sight of our north star, the other test that we are proposing to modify is the Primary Mission test.

The Primary Mission test is probably the most important, yet it's the least tangible. It's important because it distinguishes a CDFI from a conventional financial institution. The Riegle Act states that a CDFI must have a "primary mission of promoting community development." That means you don't do this development finance thing on the side or simply by circumstance. It's core to your organization. Primary mission is further defined in our regulations to mean that an organization's activities are purposefully directed toward improving the social and economic conditions of underserved people and communities.

Now, the way we've measured the primary mission test in the past has been to look at your board approved organizational documents, your mission statement, and a brief narrative statement. But the CDFI Fund should also evaluate how the primary mission is evidenced in a CDFI's strategy and products. After all, anyone can write a mission statement that conforms to the requirements of our authorizing statute, but those are just words on a page.

We're proposing that the CDFI Fund apply more rigor when examining the alignment between an organization's mission, its strategy, and its products.

That is just a brief preview of some of the changes the CDFI Fund is considering. This afternoon, there is a breakout session with CDFI Fund staff who will discuss the proposed policy changes in greater detail. Come to this session to learn more about what we are proposing to do!

In addition, later this year the CDFI Fund will issue a Request for Public Comment on a revised certification application that will reflect the policy changes we intend to make.

These certification changes will define what it means to be a CDFI for the next generation, so please respond when we release the Request for Comment.

We want to be sure that our rules allow CDFIs to meet the community development needs of today's world; to grow while maintaining commitment to mission; to build scale without losing touch.

I encourage all of you to take a few minutes today to reflect on the progress that you've made to position your organization for the future- I'd love to hear your thoughts at breakfast tomorrow morning.

Thank you so much for having me. Keep up the great work you do every day to create opportunity and prosperity in communities across America.

Presented by Director Donovan at the 2018 Opportunity Finance Network Conference on October 10, 2018.