Related Links

• Unequal Access to Credit
• CDFI Survey Results Over Time

Transcript

Tim Sablik: My guests today are Surekha Carpenter and Taylor Pessin. Surekha is a senior research analyst and Taylor is an intermediate research analyst, both on the Richmond Fed's Regional and Community Analysis team. Surekha and Taylor, welcome to the show.

Surekha Carpenter: Glad to be here.

Taylor Pessin: Thank you for having us.

Sablik: Today, we're going to be discussing the latest results from the Fed's Community Development Financial Institutions Survey.

Surekha, you've discussed these institutions — known as CDFIs, for short — on the show in the past, but I think a quick refresher is still a good place to start for listeners who might have missed that previous episode. So, what are CDFIs?

Carpenter: CDFIs are mission-driven financial institutions. They're most often credit unions, banks, and loan funds. Their mission is to expand access to banking and financial services to individuals, small businesses, and communities that have traditionally been underserved by mainstream financial institutions.

This industry is incredibly diverse. These organizations can offer banking services or lending for small business, mortgages, real estate development, intermediary financing for other CDFIs, and much more. These are often local organizations working in one part of a state or across a small region, but they can also be national. The one thing that ties all of these organizations together, the thing that they have in common, is that they are mission driven to expand access to banking and financial services.

Sablik: Taylor, can you tell us a bit about why the Fed is interested in gathering information about CDFIs and what sort of data the Fed is hoping to collect?

Pessin: The Federal Reserve has a public service mission to promote a healthy economy and provide financial stability. We are interested in CDFIs because of their role in expanding credit access and banking services. We are especially interested in how lower- and moderate-income borrowers may be interacting with lenders that are certified by the U.S. Treasury Department. These are borrowers who may otherwise utilize predatory lenders who charge extreme interest rates for their lending services due to the borrower's thin or nonexistent credit histories.

The survey collects information on the activities, performance, and impact of these institutions. We hope that the resulting data can provide insights that inform policy decisions and research.

We also aim for this survey to be useful for the industry. Organizations could get a pulse check on other CDFIs and see how they may stack up when comparing experiences with changes in demand or challenges.

Sablik: When was the last CDFI Survey fielded and who responded?

Carpenter: So, 2025 was a scheduled survey year. Our last survey was in 2023 and we conduct this survey every other year. The survey this year was open from April 11 to June 13. This year, more than others, I think the timing of the survey is really a critical part of the story.

Pessin: This year has seen a lot of changes to policies and programs that are important to CDFIs. That started all the way back in January and February with the pause of grant programs. Then a few months later, in March, there were some actions at the executive level that seemingly called into question if the CDFI Fund was going to be around much longer. That created a period of uncertainty, which led right up to our fielding period. That's important for listeners and readers of the report to be aware of as we get into some of these findings.

Uncertainty was a common theme this year where it hasn't been in past iterations of our survey. This is part of the reason why we wanted for some time to pass before we started collecting responses from CDFIs. For that reason, we held off until mid-April.

We also used very careful methodology to frame up our questions for respondents. For example, instead of asking about the past as the last 12 months, we instead asked CDFIs about the whole of 2024 so the responses wouldn't be conflating recent interruptions and changes to the experiences CDFIs had in the past.

Sablik: OK, so with that in mind, what did CDFIs that responded to the survey have to say about demand for their products and services?

Carpenter: Demand has been rising for CDFI products and services for every year we have run this survey. This year, more than 70 percent of our respondents said that their overall demand increased over 2024. Taylor just wrote a Regional Matters blog post that details how that compares to our past surveys.

Interestingly, it hasn't moved that much. In 2019 and 2023, the two other years that we asked this question, demand had risen for three-quarters of our respondents. So, that's 75 percent in those years compared to this year's 71 percent. The constant growth these institutions are reporting is really most striking because the overall economic landscape has changed quite a bit between those years.

To be clear, that's just our respondents reporting how much interest there is for their product. We don't see that much change in the rising demand for these institutions.

Their ability to meet demand is a different question and we ask that, too. Only about a third of our sample said that they were fully able to meet demand, so we can infer that there is some room for CDFIs to grow into that. We also asked respondents what drove that increase and we heard that existing customers coming back did drive some demand for a decent share of our CDFIs. But nearly 90 percent attributed the change to new customers.

Sablik: That raises an interesting question. CDFIs are seeing such a huge flow of demand from new customers. How are they able to reach new customers?

Pessin: Let's start with what is attractive about a CDFI for a borrower. CDFIs fill a market gap by connecting borrowers that may be lower income or may be credit invisible to credit and banking services.

So, how is this different than mainstream lenders? We asked CDFIs to tell us what they thought their unique value was, from their own perspective. They told us that their flexible underwriting standards and the loan terms they are able to offer are unique in the sector. Around 18 percent said that their most valuable contribution to their customers is just being able to expand access to financial services. Loan funds were more likely to cite their underwriting since they are not regulated exactly like banks or credit unions.

We then asked, what public program makes it possible for you to offer that unique value? To this, most of our respondents said it was a program at the federal level. Over half cited the Treasury Department's CDFI Fund specifically. Others reported that Small Business Administration programs or other programs from the Treasury were most helpful. But 75 percent said that a program at the federal level made the biggest difference for them, which indicates federal funding is critical for CDFIs to be able to reach more borrowers.

Carpenter: This is particularly interesting right now, as we don't know how the federal policy will ultimately end up. The allocation for these programs may shrink over the coming years, and that's part of the uncertainty that these organizations are facing right now.

But it is important to note that these organizations are not exclusively reliant on federal dollars. That's not what we're saying. If the programs that have helped CDFIs reach more borrowers get cut, that might result in CDFIs not being able to keep up with that growth in demand that they're seeing.

Anecdotally, we have heard that CDFIs are mindful of the potential changes to the federal funding landscape. Generally, we hear that many are putting their feelers out to understand what sources of capital they could tap if federal dollars are diminished.

The new sources of capital that CDFIs might be able to leverage may impact their ability to offer the same terms that they're currently able to offer. That might make some difference in how well CDFIs are able to reach new customers and meet demand.

Sablik: In addition to this uncertainty and funding questions that you're talking about, what are some of the biggest challenges that CDFIs said they're facing right now?

Pessin: Many CDFIs responded that inadequate staffing, as well as technology and lending capital challenges, impacted their ability to meet demand.

CDFI staffing challenges tended to revolve around a mismatch of skills. Half of all respondents facing staffing challenges reported that their existing staff lack necessary skills, while 65 percent of respondents said that they had difficulty finding qualified candidates to hire and around 40 percent said that they lacked the time or resources necessary to properly train new hires.

The cost of both back office and customer facing technology also limited CDFIs' ability to meet demand. They reported issues with integrating new technology, finding the right technology or vendors, and maintaining cybersecurity.

Loan funds, which do not take deposits, also frequently cited challenges with capital and funding. Forty percent of loan funds reported that lending capital challenges had a significant impact on their ability to meet demand, with emphasis on the cost of capital as a leading challenge. Additionally, around a third of loan funds reported operational funding as a significant challenge.

We also asked if borrower qualifications had an impact on CDFIs' ability to serve more customers. Around 65 percent of CDFIs reported that customers were unable to afford their loan terms. More than half indicated that they couldn't serve their customers due to credit report challenges or a lack of collateral.

Sablik: Looking at the next one to five years, what did survey respondents have to say about their expectations for their businesses?

Pessin: We asked respondents to rate their optimism about their organization's financial prospects. Nearly 65 percent reported being either very optimistic or somewhat optimistic.

With that in mind, most CDFIs said they were looking to expand their operations in the future — 95 percent said that they want to increase their customer base, while over 80 percent want to increase the level of financing they offer. Additionally, more than half of respondents reported that they wanted to expand their geographic scope or the number of business lines they offer.

This differed by CDFIs' age and type. Older CDFIs aimed to scale up operations at a higher rate than younger ones, which makes a lot of sense. Meanwhile, a smaller percentage of loan funds reported wanting to increase their number of business lines, development services, or geographic scope when compared to the rest of the sample.

Sablik: Surekha, what do CDFIs expect for the economy as a whole and how does their perspective help to inform the Fed?

Carpenter: In addition to asking respondents about their own organization, we also asked them to rate their optimism about the economy overall. What we heard back was a little mixed.

First of all, 56 percent of respondents said that they were very or somewhat pessimistic about the health of the overall economy. Then, we had about 20 percent say that they were neutral and another 20 percent say they felt optimistic.

Historically, CDFIs have been very important lenders in tougher economic environments, as their target populations can include lower-income individuals. So, hearing their opinion on the economy gives us some insight as to how they see the economy moving, with their customers in mind. We take that into account, along with all the other sensing and learning that we do at the Fed about businesses and industries across the U.S. That gives us a sense about how people are feeling and behaving in the economy.

Sablik: So, are you hoping to learn anything else from these current survey results? Are you planning any follow-up research?

Pessin: There's one new resource we can point listeners towards: a Regional Matters blog post that looks at CDFI Survey results over time, from the year the survey opened in 2019 to our most recent findings this year. Over the coming months, we hope to deepen our longitudinal research of the survey, too. That way, we can have a better understanding of trends through time.

Carpenter: Additionally, we asked our survey respondents if they were open to being contacted for follow-up focus groups. That's something that we're hoping to build upon in the coming year — reaching back out to CDFIs to check in and see how things have changed for them. Since the CDFI Survey is fielded only every two years, that gives us some time next year to do more qualitative research, reach out, and see what else we can learn.

Sablik: Surekha and Taylor, thank you so much for joining me today to share these results.