Historic Origins
CDFIs have their roots in the civil rights movement of more than half a century ago. In l966, to address discrimination against minorities and women in the home and business loan industries, Senators Robert Kennedy and Jacob Javits created a demonstration project for community development corporations, or CDCs, which were charged with revitalizing their communities with small business loans, mortgages for the underserved and the like. The following year, the first CDC in the country, supported by the Office of Economic Opportunity, was established in Brooklyn, N.Y.

In the wake of the civil rights riots, meanwhile, several religious congregations and Catholic women’s orders reassessed their giving strategies and launched community investment initiatives. The aim was to do something positive by both investing in and doing charity work for communities all at once—essentially what is known today as impact investing.

They began their experiments by investing in credit unions, food banks and day-care centers and later, during the Reagan era, in CDCs.

Traditional government investment in housing through HUD was scaled back, and as thousands of homeless appeared on the streets, it was clear shelters were not enough.  Rather than relying on grants, the CDCs began to ask for loans so they could develop affordable housing. Several CDCs evolved into some of the loan funds that are CDFIs today. Among the earliest investments—the New Hampshire Community Loan Fund and the Vermont Community Loan Fund—were made by the Sisters of Mercy.

“These were piddling little organizations run by people who theoretically couldn't do what they did because they weren’t really lenders and were thinly capitalized with little or no equity,” says Mark Pinsky, CEO of the Opportunity Finance Network (OFN), a CDFI trade group. “The nuns were doing it at 0% to 2% when interest rates were over 20%,” he says. “It was a scary thing, but it was an act of faith that made it possible.

“There are two things you learn when you borrow the nuns’ money,” he continues. “You do something important with it, with real [social] impact. And under no circumstances do you lose the nuns' community money.”

The growth in CDFIs took off in the mid-1980s. Between them, the Ford Foundation and the MacArthur Foundation invested hundreds of millions of dollars in dozens of CDFIs across the country. In l994, the establishment of the Treasury Department's CDFI Fund catapulted the field further by providing grant money that could be leveraged.

Catalytic Impact
Although measuring social impact is a hot investment topic, numbers don’t tell the whole story and can be misleading. That's because CDFIs, like other impact investments, often act as catalytic agents. For example, they may provide high-risk “gap financing” to a business or development project, which can then attract funding from conventional lenders. Or a CDFI may finance a critical development of a major corner of a neighborhood that leverages other development.

“To say that a CDFI financed 3,000 affordable homes versus another that financed 40,000 does not tell you anything because it’s out of context,” says Paige Chapel, president and CEO of the CDFI Assessment and Ratings System (CARS), which does financial analysis of these nonprofit loan funds and assesses their impact.

One example of the leveraging effect is Boston Community Capital’s Stabilizing Urban Neighborhoods (SUN) Initiative. Since 2009, it has invested nearly $70 million in foreclosed houses, buying them at market prices before evictions occur and reselling them to their current occupants at an average reduction in mortgage principal and monthly payments of nearly 40%. Besides allowing over 450 families to avoid displacement by providing them with affordable mortgages, the investment propped up property values and tax revenues and avoided situations that would create the need for more social services.

Historically, CDFIs have focused on affordable housing, child care, community health facilities and small business lending. Lately, however, there has been an increased focus on broad health issues. CDFIs, for instance, are in the midst of building an industrywide capacity to support sustainable agriculture and access to healthy and affordable food.

“If you can get a grocery store into a community that doesn't have one, or if you can expand a corner store [to include fruits and vegetables], or if you can finance a food hub that connects farmers to institutional buyers of agricultural products like hospitals and schools, you can have a big impact on the economic well-being of people,” says Pam Porter, executive vice president of strategic consulting at OFN. “It provides jobs and income, and it stabilizes property values. And it addresses a major public health issue.”

The health issue she is referring to is obesity, which studies have indicated is a problem tied to income level.

At a conference in Seattle two years ago, David Erickson, director of the Center for Community Development at the Federal Reserve of San Francisco, showed two maps of Los Angeles—one that displayed obesity rates by neighborhood and another by income level.

“They are the same map,” he said at the time. “Access to health care will not improve a person’s health. The ZIP code is more important than the genetic code.”

In fact, Letendre points out, public health officials are focusing on the same environmental and behavioral stress factors that have a negative impact on health—lack of a job, poor housing, bad food, etc.—as community development professionals. That’s one of the reasons the Federal Reserve brought the two groups together at a conference in Washington, D.C., in March.

“In the community development space, we have all these different silos—housing, health, food,” says Kimberlee Cornett, managing director of the Kresge Foundation's social investment practice. “But the thread that really runs through all of that is that almost anything we do has health implications even if it’s non-medical. Think about the weight—the mental stress level—that is lifted off a family when they know they are not going to be evicted and wind up in a shelter.”

Holistic impacts aside, CDFIs have long recognized that policy change is the way to affect millions of people. CARS awards CDFIs a “policy plus” if they can demonstrate that changing public policy is a critical part of their agenda, staffing and funding. CARS has rated 80 CDFIs representing more than half of the $11 billion in on-balance-sheet assets for the industry's loan funds. According to Chapel, about 45% of them have won the “policy plus” designation.