It has been a big year for community development financial institutions (CDFIs), the innovative, mission-driven organizations that provide much-needed financial services in underserved, low- and moderate-income communities across the United States.
In June, the U.S. Treasury Department’s CDFI Fund announced the new CDFI Bond Guarantee program, a potentially transformational program both because of its scale and because of the terms on which it makes capital available to CDFIs. The program could dramatically grow the amount and strengthen the impact of capital reaching communities that need it to build charter schools and community health centers, improve affordable housing, and undertake other critically important revitalization efforts.
First, consider the scale of the program. At full strength the CDFI Bond Guarantee can provide $1 billion of capital for CDFIs each year. By the end of this decade, the CDFI Fund, through the bond guarantee, stands to have more capital invested in CDFIs than the combined CDFI portfolios of the ten largest banks in the United States. Anytime a new capital program is larger than the entire existing private sector industry, it’s transformational. But it’s not just the scale that matters. It’s also the term of the capital: Thirty years, fixed rate.
That means that CDFIs will no longer have to finance long-term loans using short-term debt. They will be able to fund 30-year loans—loans that finance critically important community assets like health centers—using 30-year capital, instead of the 7-year capital that leaves them hoping that interest rates won’t go up when it’s time to refinance. For the first time, thanks to the bond guarantee, CDFIs will be able to practice true asset-liability management.
The benefits of 30-year, fixed rate loans go beyond prudent asset-liability management, however—they fundamentally change the areas where CDFIs can have an impact. The bond guarantee program is the perfect capital source for CDFIs that wish to originate single-family home mortgages. We’ve long wanted CDFIs to take a more active role in the home mortgage origination business, but lacking a source of 30-year capital to make 30-year fixed-rate loans, it was unreasonable to expect that CDFIs would be able to do so. Now they can. Hopefully CDFIs will grow to become as important in affordable homeownership as they have long been in affordable rental housing.
The CDFI Bond Guarantee program is not a perfect source of capital. The bond guarantee requires full recourse; in some cases, it even requires overcollateralization. And participants must agree to performance and financial covenants and targets for three decades. But no capital source is ever perfect, and existing programs raised their share of concerns when they were first launched. The New Markets Tax Credit (NMTC) faced questions about both its interest rate subsidy (Why not a capital subsidy?) and its 7-year term (Why not longer?) when it was announced in 2000. Thirteen years later, the CDFI Fund has awarded more than $36.5 billion in tax credit authority, making it a driving force in lending to businesses and nonprofits in low- and moderate-income communities.
Given their record of innovation and ingenuity, CDFIs are well-equipped to work through challenges with the bond guarantee program to make it a long-term success. The four pioneering CDFIs that will be first to participate in the bond guarantee program—Enterprise Community Loan Fund, LISC, CDFI Clearinghouse, and the Community Development Trust—deserve great credit for leading the way even before the final details had been ironed out. More CDFIs should explore the bond guarantee, apply for it, and close transactions with it.
When it comes to connecting underserved communities with the capital they need to revitalize, no organizations are more effective than CDFIs. That’s why Bank of America has made lending to CDFIs a priority and is pleased to be the first Qualified Issuer under the Bond Guarantee program. With the new program, CDFIs have access to a vast new source of long-term capital. I have no doubt that they will make powerful use of the program to strengthen communities and improve the lives of the people they serve.
(Photo by Via Tsuji, CC BY-NC-ND)