Follow the Money: Rural and Urban CDFIs in the Fifth District

Community development financial institutions (CDFIs) are financial institutions with a mission to provide affordable lending to low- and moderate-income individuals and communities. The 1,085 certified CDFIs across the U.S. manage over $185 billion and provide development services like credit counseling, financial coaching, and business classes. CDFIs are located in every state and support a diverse set of communities. But differences across geographies exist.

From the Richmond Fed's work with CDFIs, we know that states experience different levels of CDFI investment. When you drill down further, investment levels vary by county and between urban and rural areas, as shown by Transaction-Level Report (TLR) data from the CDFI Fund. For example, in the Fifth District from 2010 through 2016, metropolitan counties received an average of $7.9 million per county compared to an average of $0.1 million for nonmetropolitan counties. Taking total population into account, these county-level differences mean that per capita CDFI lending in urban areas is double that in rural areas ($60 per capita compared to $28 per capita). While TLR data only capture a portion of CDFI activity, they can help illuminate broader trends. In this post, we're asking — are there differences between urban and rural CDFIs nationally that drive this variation? If so, are those differences also present in the Fifth Federal Reserve District?

To answer these questions, we use data from the Federal Reserve's 2019 CDFI Survey. While these data are a convenience sample and are not representative of all CDFIs, they indicate that the short answer is: yes. There are some differences that may drive disparate levels of CDFI financing in urban and rural areas, particularly staffing constraints. But the full picture is more complicated. A large number of CDFIs operate in both urban and rural areas, and there are some striking similarities between the institutions that operate in these areas. What's more, other forces — including population, policy incentives, the political environment, community needs and alignment with capital program requirements — also shape the way that community development dollars flow to urban and rural communities.

How are Rural and Urban CDFIs Different?

When considering CDFI activity in urban and rural communities, it's first important to recognize that there is not necessarily a clear division between urban and rural CDFIs. The 2019 CDFI Survey asked respondents to indicate the type of geography their organizations serve, and of the 547 respondents, over half serve a mix of urban and rural areas (53.6 percent or 293 CDFIs). Just over a quarter serve only urban areas (26.5 percent or 145 CDFIs). One-fifth solely serve rural areas (19.9 percent or 109 CDFIs). 

In terms of dollars managed, there is minimal difference in the distribution of urban and rural CDFIs (see chart below). But CDFIs that serve both urban and rural areas are twice as likely as either urban or rural CDFIs to have total assets greater than $500 million. Anecdotal evidence suggests that serving diverse geographies is a business model that allows CDFIs to stay fiscally sound and have more consistent streams of income. Urban CDFIs are twice as likely as rural CDFIs to report that investment from regulated financial institutions is a top source of funding (22.8 percent of urban CDFIs compared to 11.9 percent of rural CDFIs). Regulated financial institutions primarily invest in CDFIs to meet their Community Reinvestment Act (CRA) obligation and this urban/rural difference is reflective of CRA "hotspots," which have been a feature of ongoing CRA policy discussions.

All CDFIs — regardless of the type of geography they serve — struggle with limited staff capacity. Community development financing deals require complicated capital stacking. Add to that the critical, but time-consuming, development services that CDFIs offer their clients, and limited staff capacity quickly becomes a top concern for CDFIs. On average, rural CDFIs are smaller than urban CDFIs (26 full-time employees compared to 33). That said, other characteristics of rural areas may positively impact capital deployment, including fewer degrees of separation from potential funders, lower operating costs in general, and access to funds designated for rural deployment.

As was the case with total assets, the CDFIs that serve both urban and rural areas are the largest, with an average of 60 full-time employees. In many cases, these larger, more geographically diverse CDFIs are headquartered in urban areas. This allows them to benefit from proximity to other financial institutions, sources of capital, and clients. It could also mean that funding may flow more readily to the surrounding urban community, even when their full coverage area includes rural communities. So, CDFIs that only serve rural areas are the smallest in terms of staffing, on average, and the larger CDFIs the serve rural areas may be somewhat more connected to their surrounding urban community.

Rural and Urban CDFIs in the Fifth District

Of the 47 respondent CDFIs headquartered in the Fifth District, over half serve both urban and rural areas (63.8 percent or 30 CDFIs). About one-fifth serve urban areas (21.3 percent or 10 CDFIs), and 14.9 percent (7 CDFIs) serve rural areas. However, there is variation by state. For example, while the majority of Maryland’s respondent CDFIs serve urban areas, South Carolina and West Virginia have no strictly urban respondent CDFIs (see chart below).

Respondent CDFIs in the Fifth District are relatively small in terms of asset size — 61.9 percent have fewer than $50 million in total assets. The 38.1 percent with greater than $50 million serve either urban areas alone or a combination of urban and rural areas. The staffing differences at the national level are even more pronounced among Fifth District respondent CDFIs. The average number of full-time employees for rural, urban, and urban/rural mix are 8, 19, and 52, respectively. 

On the whole, CDFIs are small but dynamic financial institutions. Those that specifically serve rural communities are, in general, smaller in terms of staff members than their urban counterparts. A deeper examination of urban and rural CDFI investment could seek to better understand how CDFIs that serve an urban/rural mix distribute their investment portfolios and to identify critical community finance gaps in both urban and rural areas.

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.