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CDFIs and Racial Equity

Econ Focus
Fourth Quarter 2022
District Digest
Main Story

Expanding Credit Access through Community Development Financial Institutions

Different people have disparate experiences in accessing credits. Exploring ways to close this credit access gap could provide more economic opportunities for underprivileged areas.

As revealed through data and academic literature, histor­ical inequity in credit access still affects minority borrow­ers today. To better understand how CDFIs address racial equity, the Fed's 2021 CDFI Survey asked respondents about their organization's equity goals. The results indicated that CDFIs seek to promote racial equity through targeted communication with minority communities, their lending terms and programs, and improved diversity, equity, and inclusion policies within their organizations. CDFIs strive to achieve equity by developing programming and services that increase credit access in their target markets — where tradi­tional credit is less available and utilized.

Broadly, CDFIs offer more accessible terms than the traditional credit market to reach more minority clients. This includes reduced interest rates, loan forgiveness, or gap financing. In some cases, CDFI lending products are sufficient to meet borrowers' financing needs, while other borrowers leverage their CDFI financing to qualify for additional, conventional financing. CDFIs also work to improve the accessibility of their products among minority-owned businesses with the goal of improving community economic outcomes. As one respondent put it: "We have programs that are introduced to encourage ownership of assets for Black businesses and ones that help create generational wealth."

CDFIs offer mortgage products, purchase assistance, down payment assistance, zero-down home loans, and home equity loans to support homeownership for minority clients. These tools allow homeowners to begin to build equity in their home and promote racial equity in home­ownership. One responding CDFI shared that its objec­tive is to "dismantle the deeply rooted legacy of racism in housing — from the types of homes that are built, where they're built, who builds them, and the wealth that is generated from them."

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