Is the New Certification Application Shortchanging Rural CDFIs?

The CDFI Fund's mission is to expand economic opportunity for underserved people and communities by supporting the growth and capacity of a national network of community development lenders, investors, and financial service providers. In this post, we focus on rural CDFIs, of which there are hundreds located across the country. Many were created in banking deserts*, communities that have few or no bank branches nearby and therefore are underserved by mainstream capital. According to the Banking Deserts Dashboard, published by the Fed Communities, “deserts likely have the greatest impact on people who struggle with access to transportation, digital devices, or broadband and those who live in areas where things are more geographically spread out, especially if they also struggle with credit access.” As well, the dashboard notes that access to mainstream capital in rural areas is becoming even more difficult due to the trend toward bank consolidation and branch closures in the last five years.

In our work preparing our clients for (re)certification, we have found that a significant number of rural CDFIs are having difficulty meeting the CDFI Certification Target Market (TM) test (which requires that 60% of financial products by both number and dollar amount are directed to Target Market borrowers) with the CDFI Fund's preapproved TMs. What’s that about?

In terms of meeting the TM test, many rural areas - especially in the Midwest - are still predominantly white, so Other Targeted Population (OTP) TMs are not a viable option. While rural CDFIs have historically used Investment Areas (IAs) and Low-Income Targeted Populations (LITPs) to meet the TM test, economic shifts are making this harder. With the update to the IA tract set based on 2016-20 American Community Survey (ACS) data, the proportion of distressed census tracts in rural areas has shifted, and many of our clients have seen that the number of IA tracts in their markets has decreased.

This is great news for their communities' economies, but it doesn't change the fact that capital access is still a problem. In the midst of inflation and a tight job market, low-income entrepreneurs are finding it harder to launch businesses. Skyrocketing housing prices mean that low-income families are increasingly being priced out of homeownership (with or without CDFI loan), and rural communities have markedly less access to tax credit investors.

The consequence? Many rural CDFIs are scrambling to figure out how to meet the TM test - piecing together LITP, IA, and a few borrowers of color to get to the 60% TM requirement. Why should it be even more difficult for mission-driven lenders in rural communities to finance a more inclusive and equitable economy?

Is there a case to be made for a Rural Target Market designation for CDFI certification?

*A banking desert is defined as a census tract without a physical bank branch within a certain geographic radius from its population center or within the tract itself. That radius is determined by the type of community: 2 miles for urban communities, 5 miles for suburban communities, and 10 miles for rural communities. This definition is based on “areas with very low branch access” in the Interagency Notice of Proposed Rulemaking to Implement the CRA.