This post is based on remarks delivered during the Community Reinvestment Act Panel at the Wisconsin Governor’s Conference on Economic Development, sponsored by the Wisconsin Economic Development Association in Madison, Wisconsin, on February 1, 2018.
Community development financial institutions (CDFIs) are specialized entities that provide loans, investments, and services in underserved or economically distressed areas. The CDFI industry emerged around 30 years ago to provide low- and moderate-income (LMI) communities with an alternative to mainstream banks. CDFIs were started and then grew in response to the limited presence of banks in many of these neighborhoods and the inability of many residents to access financial services because of credit problems or other reasons. This often meant that residents had little access to loans for business start-ups and expansion, home mortgages and home repair, or consumer purchases and other needs.
CDFIs often work intensively with clients considered higher-risk by mainstream banks. Over time, CDFIs have grown into more than providers of loans. Many now offer a range of personalized financial services, including credit counseling and repair, business planning classes, financial literacy programs, follow-up loan counseling, and technical assistance throughout the life of a loan. Perhaps most important, CDFIs can build increasingly competent and confident borrowers who may eventually become bankable customers for mainstream banks.
CDFIs seek to expand their financial resources beyond the support they receive from the U.S. Treasury Department’s CDFI Fund. They welcome financing from foundations, banks, investors, government, faith-based institutions, and individual donors. Because of the important role that CDFIs play in LMI communities, banks that make an investment in CDFIs may receive consideration for credit under the Community Reinvestment Act (CRA). The CRA requires banking regulators to assess depository institutions’ records of helping meet the credit needs of their local communities, including LMI areas. A bank investment in a CDFI can be considered a “win-win” for the bank and the CDFI, because the CDFI gets an infusion of needed capital, and the bank can secure an effective community partner.
Wisconsin's Native CDFIs
Wisconsin is home to eleven federally recognized American Indian tribes whose members reside on reservations throughout the state as well as in urban areas. The tribes have played a major role in the life of Wisconsinites, making significant historical, economic, cultural, and educational contributions.
American Indian reservations historically have been areas of high poverty and underinvestment. Reservation residents have also often lacked sufficient access to mainstream financial services. In response, American Indians in Wisconsin established four Native CDFIs to fill the lending and financial services gap for reservation residents and build strong borrowers capable of participating in the mainstream banking system. Wisconsin’s Native CDFIs are First American Capital Corporation, the Wisconsin Native Loan Fund, Niijii Capital Partners, and First Nations Community Financial. These four Native CDFIs also jointly operate under the umbrella of an association called the Wisconsin Indian Business Alliance (WIBA).
Two examples of partnerships between Native CDFIs and banks
First American Capital Corporation’s (FACC)
Formed in 2002, FACC focuses primarily on operating a small business revolving loan fund that provides loans to Native-owned businesses throughout the state. FACC also provides extensive technical assistance to loan recipients to ensure they have the support they need to succeed in their business.
FACC has partnered with Town Bank, a Wisconsin community bank, to increase access to capital for Native customers. In particular, Town Bank made a $250,000 equity equivalent investment in FACC. This long-term patient capital has a fixed rate of 2 percent interest for ten years. This investment allowed FACC to capitalize its loan fund, enabling FACC to lend to the many Native-owned businesses seeking financing support. Access to capital is a critical need experienced by almost all Native CDFIs.
Town Bank also assisted FACC in securing a $40,000 capacity-building grant from the Federal Home Loan Bank of Chicago. This grant will enable FACC to do intensive work with borrowers so they can become more bankable customers for mainstream banks. Town Bank serves on FACC’s loan committee and strives to be available to participate in FACC workshops and events. According to FACC staff, Town Bank has created a sense of partnership and trust as it shares a commitment to serving underserved communities.
Wisconsin Native Loan Fund (WINLF)
WINLF was founded in 2007 and has its headquarters on the Lac du Flambeau reservation. It provides tribal members with a variety of loan products for housing, microbusinesses, and consumer and emergency loans. It also offers one-on-one financial counseling and classes and workshops on a number of financial literacy topics. WINLF strives to advance financial health and self-sufficiency within Wisconsin’s Native communities and among tribal members and their households.
WINLF has partnered with Chippewa Valley Bank, which is a full-service community bank. The bank actively supports expanding affordable housing opportunities for low-income and minority communities and engages in community-building activities. It has partnered with WINLF in several ways. For example, a Chippewa Valley Bank vice president served as a founding board member of WINLF, helping to draft loan policies and other financial infrastructure for the CDFI. Another bank vice president has served as WINLF’s loan committee chair since the CDFI’s beginning, advising on policy, process, loan documentation, collateral use, and record keeping. The bank established a cross-referral system with WINLF, which enables each institution to build its customer base. Lastly, the bank has made donations to support WINLF’s Volunteer Income Tax Assistance site, which provides free tax preparation for low-income clients, and a bank vice president has served as an instructor in WINLF’s financial literacy training programs.
Partnerships between Native CDFIs and banks can play an important role in supporting economic development in Wisconsin’s Native communities. Native CDFIs can benefit from opportunities to gain access to capital, expertise, and networks. And for banks, working with Native CDFIs can open doors to rewarding work in Native communities that could expand banks’ business and possibly help them receive CRA consideration in the process.