Credit unions and their advocacy groups are preparing for the worst in the event that a budget proposal to eliminate federal funding for the Community Development Financial Institutions Fund (CDFI Fund) for fiscal 2018 comes to fruition--but they're not going down without a fight.

The Trump administration recently sped up its plan to shut down grant programs for CDFIs. In a document sent to the appropriations committees on Capitol Hill, the administration proposes to “entirely eliminat[e] funding for the CDFI Fund's four discretionary grant programs, for which no awards have yet been made.”

In fiscal 2016, the CDFI Fund was funded at $233.5 million and it is presently operating under a “continuing resolution” that will maintain such spending at this level. The CDFI Fund was originally set up in 1994 and is administered by the Treasury Department. It has enjoyed bipartisan support ever since -- but now Trump’s budget proposal may seek to end it.

CDFI: A vested interest

“The CDFI Fund was created more than 20 years ago to jump-start a now-mature industry where private institutions have ready access to the capital needed to extend credit and provide financial services to underserved communities,” the budget proposal stated.

Credit unions, and especially the National Federation of Community Development Credit Unions are deeply involved in the CDFI budget discussion. Indeed, the Federation, under the direction of its founder, Cliff Rosenthal, helped advocate for the creation of the CDFI program in the first place and is spearheading efforts to preserve the program.

As of Jan. 31, 2017, 287 credit unions were certified as CDFIs -- these credit unions represent about 27% of all CDFI-certified institutions, and they hold more than 50% of total assets in CDFIs. Consequently, cutting CDFI funding, advocates of the program say, will adversely affect the low-income communities that the Fund was established to help.

Pablo DeFilippi, SVP-membership and network engagement at the Federation, said that since the Fund’s inception, it has provided more than $2 billion in technical assistance and financial assistance grants -- with credit unions receiving $254 million of that figure.

“This infusion of capital has resulted in an increased capacity to expand access to affordable and responsible, yet sustainable, loan products and financial services -- as well as financial education -- in low-income communities and financially under-served populations,” DeFilippi said.

DeFilippi believes that the Trump’s Administration’s decision to significantly reduce (or eliminate) CDFI funding reflects a “misunderstanding” of how these investments really work and the consequent impact they have on local economies.

“CDFI credit unions inject capital into communities to help consumers and small businesses in low-income communities,” he explained. “Through CDFI credit unions, consumers gain access to affordable credit options [and] asset-building opportunities.”

Some critics of CDFI funding, including the conservative think-tank Heritage Foundation, have claimed that the program represents a kind of “corporate welfare” or “subsidy” that has outlived its purpose.

DeFilippi responds that capital from the CDFI Fund are not subsidies for “unsustainable losses,” but rather comprise “critical reserves that help lenders leverage private capital and develop the information and experience” needed to successfully lend in low-wealth communities.

“Generally speaking, lenders will serve markets that they understand, where they can price the risk of loans,” he explained. “But every day tens of millions of Americans are denied access to capital and financial services because they belong to communities that are not well understood -- by lenders or regulators -- and are pre-judged to be ‘too risky.’”

The result, DeFilippi adds, is a “misallocation of capital” that limits the ability of low-wealth communities to grow and prosper, ultimately imposing massive, albeit hidden, costs upon the public at large.

DeFilippi describes the CDFI Fund as a “small public investment to improve the efficiency of capital markets” and which yields “considerable public benefits.”

“It’s also important to note that CDFIs match the small amounts of seed money from the CDFI Fund with private capital to expand lending and unleash the potential of untapped markets,” he added. “And CDFI credit unions do this better than anybody, leveraging at an average rate of $12-to-$1 over the first three years after a grant.”

Federation officials, representatives from CDFI-certified credit unions and other advocates have been meeting with legislators in Washington to voice their concerns about the possible elimination of the CDFI program.

The message, some advocates note, should align with the same populist message and movement that helped Trump win his election--speaking to and for those who feel Washington has forgotten them.

“The CDFI program has served segments of the populace neglected by the mainstream banks and have now survived and flourished for more than twenty years,” Rosenthal noted. It also has a proven return on investment that ought to appeal to Trump, as well. "[It] has proven to be a very good investment for federal dollars, having produced a multiplier effect -- ten to fifteen times the capital invested.”.

John McKechnie, a former official of both CUNA and NCUA and now a partner of Washington-based legislative advocacy group Total Spectrum, noted that the proposed budget is still in the early stages of negotiation.

“It’s important to recognize that President Trump’s proposed budget is a starting point for negotiations,” he said. “Our efforts will be focused on measuring the CDFI’s strong record of creating jobs and other impacts to the legislators’ districts. The next step is making sure the CDFI Fund’s strong business case – [that] its impacts in [both] ‘red’ and ‘blue’ communities across America comes out loud and clear on Capitol Hill.”

John McKechnie
John McKechnie, credit union consultant and partner at Total Spectrum

CDFIs also underscore the basic tenets of free market and free enterprise, he said, something Trump and his supporters generall favor. As a result, McKechnie is ”guardedly optimistic” that Congress will preserve CDFI funding.

Michael Beall, chief strategic and advocacy officer at Credit Union Strategic Planning, and who is working on advocacy efforts with McKechnie, noted that the GOP-controlled House – an entity not usually known for adding money to government programs – actually increased its appropriation levels for the CDFI program last year, suggesting strong underlying support. “It matches up with Trump’s core agenda – of domestic job creation,” he added.

Michael Beall, chief strategic and advocacy officer at Credit Union Strategic Planning
Michael Beall, chief strategic and advocacy officer at Credit Union Strategic Planning

The key to advocacy, McKechnie asserts, will be to communicate with Congress of the multitude of success stories of CDFI -- and how these funds have had real-world positive impact on many deprived communities around the country. ”This is a government program that actually works,” he said. “The results are right there.”

Both NAFCU and CUNA are also engaged in efforts to save the CDFI fund.

“Ultimately, Congress will make decisions about funding programs and agencies, and in that process we will encourage Congress, as we have for years, to fully fund the CDFI program and other key credit union priorities,” said Ryan Donovan CUNA’s chief advocacy officer. “CUNA will be launching a grassroots effort, and will continue to engage with Congress, and the House and Senate Appropriators in particular, as well as the administration on this important source of funding for credit unions and their members.”

Carrie Hunt, executive vice president of government affairs and general counsel at the National Association of Federally-Insured Credit Unions, noted that in the past two years, CDFI-certified CUs received about $70 million in grant funding to support their efforts to serve low-income and moderate-income members. “These credit unions are often the only financial services option for consumers who are living from paycheck to paycheck,” she stated. “If the fund goes away, many underserved communities will lose out on the services and stability that only CDFI credit unions provide."

Real-world impact
The key to advocacy, they agreed, is being able to show real-world impact.

Donovan of CUNA cited the $250 million St. Louis Community Credit Union of St. Louis, as a “great example” of how CDFI has had a “positive impact” on the lives of many in their community. The credit union received a grant from the CDFI Fund in 2013 to help launch their “Sure Rides” program, he noted. “The program provides affordable automobile loans to low [and] moderate income individuals and families so they can have access to reliable transportation to get to and from work,” he said. “The results have been nothing short of amazing.”

Tyria, a social service agency employee at St Louis Community CU
Tyria, a social service agency employee at St Louis Community CU

Indeed, over a three-year period (2014-2016), St. Louis Community CU was able to leverage their $849,000 grant into an additional $22.7 million in auto loans to the disenfranchised members of the community.

St. Louis Community CU, which has been affiliated with CDFI since 2009, serves St. Louis City and St. Louis County in Missouri, and St. Clair, Madison, Monroe and Jersey counties in Illinois. Since 2009, the credit union said it has received more than $3.3 million in funding from various sources, including banks, private donors, governmental entities and foundations.

Among other services to low-income members, the credit union offers payday loan alternative loans and “second chance” checking accounts to people with past account management problems.

 Monica, a St. Louis Community Credit Union member
Monica, a St. Louis Community Credit Union member

In 2015, St. Louis Community CU had more than 6,000 second-chance checking accounts, while more than 4,700 members used their “Freedom Payday Loan Alternative” line of credit.

Self-Help CU, a $745 million institution based in Durham, N.C., is also a certified CDFI and a founding member of the CDFI Coalition.

“While the [Trump] administration’s budget proposal is obviously concerning, the CDFI Fund has earned broad bi-partisan congressional support, which is reflected by the US House approving a $250 million CDFI Fund appropriation in 2016,” said David Beck, a spokesman for Self-Help CU and a CDFI Coalition board member. “In fiscal 2016 alone, CDFIs made over 39,000 loans or investments totaling over $3.6 billion and financed over 11,000 small businesses. The average loan size was $91,700.

If the CDFI Fund were eliminated, Peck warned, these borrowers would likely not be able to obtain the financing “critical to their economic growth and success and communities across the country would be the weaker for it.”

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