Understanding the Native CDFI landscape

From launching a business to developing affordable housing, the ability to borrow money helps individuals and communities finance their investments. In Indian Country, however, limited access to credit has posed constraints to economic development. Native Community Development Financial Institutions (CDFIs) emerged to help address the credit gap in Native communities.

New research from the Center for Indian Country Development (CICD) provides a census of the Native CDFI landscape. Like other Native American Financial Institutions, Native CDFIs foster financial inclusion and opportunity in Indian Country through public commitments to providing affordable and culturally informed financial services, credit, and capital. Understanding the practices that characterize Native CDFIs—and distinguish them from other financial institutions—can provide valuable information to practitioners, policymakers, and investors.

In 2023, we administered a comprehensive online survey to the 73 Native CDFI loan funds—the predominant type of Native CDFI—that we identified as being in operation at the time.¹ In total, 49 of them, or two-thirds of the identified Native CDFI loan funds, completed the survey. The results, which we view as representative of the Native CDFI industry overall, illustrate shared approaches, opportunities, and challenges as well as variation in the characteristics and services of Native CDFI loan funds, hereafter referred to as Native CDFIs.

CICD conducted this study as part of our broader work to understand access to credit and financing in Native communities. In keeping with a core responsibility of the Federal Reserve System under its community development function, we share our findings in order to help inform efforts to improve economic outcomes in low- and moderate-income communities in the United States, including many Native communities.

Native CDFIs vary in their geography, experience, and size

Native communities are distinctive, and so are the Native CDFIs serving them. Based on our survey, almost all Native CDFIs (94 percent) operate as nonprofit organizations, and three-quarters (73 percent) are independent entities rather than tribally owned. At the same time, individual Native CDFIs differ from each other in their geographic location, experience, and size.

Geography. Native CDFIs are located throughout the country. Based on regions defined by the U.S. Census Bureau, more Native CDFIs served the Pacific, Mountain, and West North Central portions of the United States—geographies in which there are a large number of American Indian reservations—than served any other region. Half of Native CDFI headquarters (53 percent) can be found on reservations and a third (33 percent) in urban areas, with minimal overlap between the two categories.

Experience. Native CDFIs bring a range of years of experience in the industry, with the oldest Native CDFI in our sample opening in 1952 and the newest in 2023, the year of the survey. The average age of Native CDFIs was 15.5 years and the median age was 14 years.

Size. Native CDFIs are small on average, but they vary considerably in number of employees, number of loan clients, and portfolio size. Portfolio sizes for Native CDFIs in our sample ranged from $40,000 to $20 million, with an average size of $5.7 million.

Community needs inform strategic goals, financial products, and client-development services

Native CDFIs report a wide range of strategic goals, financial products, and client-development services driven by the needs of their communities.

Strategic goals. Native CDFIs draw on their strategic goals to tailor the design of services and guide the selection of products they offer. As shown in Figure 1, when asked about their top three strategic goals, Native CDFIs most often reported encouraging Native entrepreneurship (67 percent), investing in Native communities (51 percent), and fostering financial inclusion in Native communities (39 percent). Other goals frequently reported as among their top three included providing equitable lending practices (35 percent) and improving the housing market in Native communities (29 percent).

Financial products. Almost all Native CDFIs (96 percent) reported that they offer more than one type of loan, with the majority offering two or three types. In line with their goal of encouraging Native entrepreneurship, 65 percent provide business loans and 73 percent provide micro loans for businesses, as shown in Figure 2. Many Native CDFIs (69 percent) also provide consumer loans to foster financial inclusion and economic activity in local communities. To address their goal of improving the housing market in Native communities, 29 percent provide mortgage loans—including U.S. Department of Housing and Urban Development Section 184 loans, which are designed to facilitate homeownership in Native American communities—and 39 percent provide home improvement loans.

Client-development services. In addition to financial products, Native CDFIs offer a range of services to help clients develop business skills and achieve financial empowerment. Most Native CDFIs offer business technical assistance (84 percent) and credit counseling or financial education (82 percent). Smaller shares of Native CDFIs offer services such as homeownership counseling and technical assistance (49 percent), commercial real estate technical assistance (16 percent), and rent reporting² (2 percent).

Native CDFIs also differ in whether they require loan clients to take up development services and what specific programs they use to provide those services. Among Native CDFIs offering credit counseling or financial education, approximately 35 percent usually require it as a loan precondition, 39 percent sometimes require it, and 27 percent never require it. Among Native CDFIs offering business technical assistance, only 17 percent require clients to take specific classes, while the vast majority—83 percent—provide this service only when needed to help support the client and the business.

Native CDFIs work to help all who seek their services, even those not yet ready to borrow

Although Native CDFIs vary in their characteristics and services, they share defining features. Past CICD research has identified that Native CDFIs work to help everyone who seeks their services—an aspiration reflected in their approaches to assessing and managing loan risk.

Underwriting measures. Recognizing that credit scores may be unreliable signals of creditworthiness in environments with limited access to credit, Native CDFIs commonly take a holistic approach to assessing credit risk. Whereas conventional lending typically relies on data such as credit scores and income figures to make credit decisions, many Native CDFIs also draw on loan officers’ knowledge and understanding of their clients. For example, Native CDFIs may factor in loan officers’ assessment of client engagement in the borrowing process, “character scores” that look at indicators such as clients’ support networks and reputation in the community, and—in the case of business loans—measures of the client’s commitment to business.

In our sample, most Native CDFIs reported considering what might be viewed as “hard” data, such as income (96 percent of Native CDFIs), payment history (80 percent), and credit scores (67 percent), in their underwriting process. And as shown in Figure 3, the use of “soft data” is prevalent as well. For example, while many Native CDFIs use credit scores, an even larger share (78 percent) use information-based measures of a client’s character. A majority also reported looking at a client’s commitment to business (67 percent) and engagement with the lender (61 percent) to assess repayment prospects. These results reinforce previous CICD research finding that many Native CDFIs use relationship-based lending criteria.

Native CDFIs may also accept different forms of collateral for loans than lenders typically accept, enabling them to offer loans without heavy reliance on credit scores. For example, a borrower with a limited credit history might arrange with their employer and the Native CDFI to pledge their personal leave time as loan collateral, which the Native CDFI could collect and apply toward loan repayment. More than a quarter of Native CDFIs (28 percent) reported accepting tribal distribution payments as collateral, while smaller shares reported using artwork and personal leave as collateral (11 and 9 percent, respectively).

When a client is not ready to borrow, Native CDFIs will often work with them to increase their loan readiness through financial education classes and guidance. If a potential client seeks a product or service the Native CDFI cannot provide, the Native CDFI often refers the client to partner organizations.

Risk management practices. In cases of loan delinquency, Native CDFIs tend to rely on nonpunitive measures. Asked what actions they would take for a loan that was 30–90 days delinquent, 80 percent of Native CDFIs reported that they would send a notice to the borrower, 72 percent reported that they would conduct a phone interview, and 28 percent reported that they would conduct an in-person interview. For loans that are 90 or more days delinquent, survey responses suggested that it would be uncommon for Native CDFIs to send the loan to a collection agency. In these cases, almost all Native CDFIs (91 percent) reported that they work with borrowers to restructure their loans.

Native CDFIs see success in their work, but scarcity of capital is a challenge

The survey asked Native CDFIs about their successes and challenges. Most perceive their work to have positive client and community outcomes, but their responses also reinforce previous research identifying insufficient capital for operations and lending as a recurring challenge.

Successes. Native CDFIs track a variety of client outcomes beyond loan performance, including changes in debt (tracked by 73 percent of Native CDFIs); credit scores (70 percent); income (64 percent); behavior, indicated by measures such as education attainment or employment status (45 percent); and access to conventional lenders (43 percent). Asked to rate their success, most Native CDFIs considered their work to be successful in increasing financial literacy, encouraging economic activity, contributing to community development, and obtaining grants. Native CDFIs rated themselves somewhat lower—but still successful—at providing a variety of consumer products and supporting Native culture.

Our analysis found positive correlations between many of the success measures, suggesting that supporting Native CDFI success in one area is likely to support success in another area. For example, we found a positive correlation between perceived success in facilitating the establishment of small businesses in the communities Native CDFIs serve and supporting Native culture and arts.

Challenges. Despite their perceived impact, Native CDFIs report that a variety of challenges constrain their ability to serve their communities. As shown in Figure 4, more than half (52 percent) reported that scarcity of capital has been one of the biggest challenges for their organization.³ Other reported challenges include hiring staff, lack of donor awareness, lack of potential client awareness, infrastructure, geographic location, and funder requirements.

Among those reporting capital constraints, 39 percent said they would be able to lend more than three times what they currently offer if not constrained by capital, 28 percent reported they would be able to lend two to three times more, and 33 percent reported they would be able to lend twice as much.

Appreciating Native CDFIs’ distinctiveness and commonalities

Past research by CICD has identified common features—such as community knowledge, geographic proximity to reservation communities, and holistic lending criteria—that distinguish Native CDFIs from traditional banks. This latest study reconfirms the commonality of those shared practices while also documenting the considerable variation among Native CDFIs.

Data from the 2023 survey enabled us to identify four Native CDFI clusters based on characteristics related to their administration, operation, geography, and loan products. Details on the shared products, services, and practices of each cluster can be found in the related working paper.

Native CDFIs share a commitment to client-centered approaches as the cornerstone of their work and, at the same time, are as distinctive as the communities they serve.

Endnotes

1 Native CDFIs include Native loan funds, Native credit unions, and Native banks. While our survey sample includes Native CDFI loan funds certified by the CDFI Fund as well as non-certified Native CDFI loan funds, Native CDFI loan funds are the predominant type of Native CDFI based on the CDFI Fund’s list of certified CDFIs.

2 Rent reporting is the process of reporting a renter’s payment history to credit bureaus, enabling applicants to build or improve their credit scores by having their on-time rent payments reflected in their credit reports.

3 The availability of capital can change over time. Survey results reflect Native CDFI loan fund responses in 2023, the year the survey was administered.