New Survey Findings Highlight Community Lenders' Work Through COVID-19

CDFIs in general are small asset-size institutions, relative to more traditional financial institutions. According to the Fed’s 2019 CDFI Survey, 94 percent had total assets less than $500 million, with median assets between $25 million and $50 million. These institutions help fill a critical gap in the financial system by providing affordable financial products and services to LMI individuals and communities. Prior to the COVID-19 pandemic, demand for CDFI products and services was generally growing, and CDFIs worked to address growing demand despite constrained financial and staff resources.

The COVID-19 pandemic put CDFIs on the front lines of economic response, as they served as conduits for financial relief. But, CDFI leaders remain concerned about their institutions’ ability to cover future, unforeseen hits to their loan portfolio. Additional key findings on the financial impact of COVID-19 include:

• Lending capital streams from nongovernmental sources — including financial institutions — remained strong through the first several months of the pandemic. Of the respondent CDFIs that receive lending capital from banks with $10 billion or greater in total assets, almost 100 percent reported no change or an increase.
• Loan loss reserves are a top concern for CDFIs. Twenty-eight percent of reporting CDFIs experienced a decrease in their loan loss reserves from the end of 2019 through mid-2020.

Capital Sourcing and Deployment

The COVID-19 pandemic impacted both sides of the CDFI lending equation: capital sourcing (the money flowing in from banks, government entities, and other sources) and deployment (the money flowing out to clients). Information from past iterations of the CDFI Survey can help contextualize results from the COVID-19 CDFI Survey. According to information from the 2019 CDFI Survey, CDFIs’ top external sources of funding are federal, state, and local government entities (including the CDFI Fund), and regulated financial institutions.

Despite the economic downturn, respondent CDFIs largely reported that these sources either maintained or increased their investment in CDFIs from March through June. (See chart below.) Of the 126 respondents that receive lending capital from the federal government, 67 percent (85 CDFIs) reported no change in funding, and 31 percent (39 CDFIs) reported an increase. Similarly, 97 percent of the 103 respondent CDFIs that source capital from state and/or local government entities reported either no change or a funding increase (68 percent and 29 percent, respectively). As further discussed in the “Crisis Response, Operations, and Customer Needs ” section below, government relief programs likely played a substantial role in maintaining these funding streams.

CDFIs also largely reported that their lending capital streams from large and regional banks either stayed the same or increased from March through June. Ninety-seven percent of respondent CDFIs that receive lending capital from large banks reported no change or an increase, and 96 percent of respondent CDFIs that receive lending capital from regional banks reported the same.

Still, respondent comments suggest that capital sourcing remains a challenge for some CDFIs, particularly those that serve certain geographies and business lines. For example, one respondent noted that their CDFI’s top challenge was an “inability to attract philanthropy funding in rural and disinvested communities.” While the majority of government response programs have focused on consumer and small business recovery, CDFIs that serve other markets may face more significant capital hurdles — as one respondent reported, “Maintaining a feasible level of lending volume [is a challenge] given decreasing public sector resources for affordable housing.”

The loan deployment ratio (LDR) measures the total dollar value of loans a CDFI has deployed over its total loan fund and is a helpful metric to understand the degree to which CDFIs are extending their loan pool. As an important technical note, the LDR is only applicable to nondepository CDFIs, including loan funds and venture capital funds. Depository CDFIs — including regulated banks and credit unions — measure different key performance indicators. Ninety-six nondepository CDFIs reliably reported their LDR, and these figures show relative stability from December 31, 2019, to June 30, 2020 — the median LDR for these respondents was .80 at the end of 2019 and .79 as of June 30.

The total dollar value of respondent CDFIs’ balance sheet assets increased from $25.6 billion as of December 31, 2019, to $26.6 billion as of June 30. Like traditional financial institutions, CDFIs lend across a diversity of business lines, including consumer lending, small business lending, affordable housing, and commercial real estate, among others. In aggregate, respondent CDFIs’ assets grew regardless of business line, with the notable exception of consumer lending. While, for example, business lending assets increased by $663.6 million over the given time period, consumer lending assets decreased by $453 million. This hit reflects the broader hit to consumer finances that accompanied pandemic-driven economic effects and the cost of accommodating loan modification requests (discussed further in the “Crisis Response, Operations, and Customer Needs ” section).

Portfolio Risk and Mitigation

Throughout the pandemic and economic downturn, some consumers and businesses faced capital shortages that may have threatened their ability to pay down existing debt. The federal government — as well as state and local government, private industry, and nonprofit organizations — moved quickly to help stabilize consumer and small business balance sheets through economic impact payments, expanded unemployment benefits, and the Paycheck Protection Program (PPP), among other supports. But important questions about portfolio stability remain. To what degree are CDFIs’ loan portfolios at risk of nonrepayment? And are CDFIs prepared to cover this risk?

The portfolio at risk (PAR) ratio measures the dollar value of loans that are 90-plus days past due over the dollar value of total loans outstanding. As with the LDR, the PAR was only collected from nondepository CDFIs but still provides a helpful benchmark for the industry. As of December 31, 2019, the median PAR for the 61 reporting CDFIs was .02, meaning that on average, 2 percent of the loan portfolio was at risk. As of June 30, the median PAR decreased to .01. This drop may have been driven in part by forbearance policies that CDFIs extended on a case-by-case basis to their customers. Under forbearance, payments are suspended for a set period of time and repaid in the future. Since no payment is due during the forbearance period, borrowers cannot fall into delinquency. For a full overview of the degree to which CDFIs provided forbearance and other loan accommodations to their customers, please see the “Crisis Response, Operations, and Customer Needs ” section.

Loan loss reserves help CDFIs and other financial institutions cover any losses they may incur on loans and are a critical piece of institutional safety and soundness. Median loan loss reserves for 207 respondent CDFIs increased approximately 12 percent, from a median of about $861,000 as of December 31, 2019, to a median of about $961,000 as of June 30. But these median values hide a more skewed reality for survey respondents. If we examine the change in loan loss reserves for individual CDFIs, we find that 57 surveyed CDFIs (28 percent) experienced a decrease in loan loss reserves over the given time period, 23 experienced steady reserves (11 percent), and 127 (61 percent) increased their reserves.

When asked about their top concerns and challenges, respondent CDFIs frequently discussed loan loss reserves. Open-ended comments reflect concern about the sufficiency of existing reserves and the potential need for increased reserves to cover unforeseen risk in the future. As one respondent shared, “Our CDFI would benefit from financial assistance to strengthen our balance sheet facing loss of revenue from existing portfolio at the start of the crisis and potential losses from new clients during the crisis.”

Conclusion

As was the case before the COVID-19 pandemic, CDFIs must strike a balance between loan capital sourcing and deployment to maintain their financial health, but the pandemic poses anticipated and unanticipated challenges to this balance. While capital sourcing still appears relatively strong, capital deployment is more complex, as CDFIs grapple with increased customer need, hard-to-project risk rates within their portfolios, and potential future loan losses.

The COVID-19 pandemic and public health response has impacted business activity, household finances, and demand for financial products significantly since March. CDFIs serving small businesses, nonprofits, and community development organizations faced operational challenges and worked to address the changing needs of their clients as the pandemic and public health response halted business. To understand how CDFIs have adapted and continued to support their communities, we asked respondents how COVID-19 has affected their operations and their clients.

Key findings on operational impacts and client needs include:

• Between March and June, more than half of all CDFIs in the survey experienced decreases in revenues and the dollar value of financial products closed. Only 16 percent of CDFIs reported staffing decreases, and only 4 percent reported permanent employment cuts.
• CDFIs leveraged government, community, and philanthropic economic relief programs to support their operations and serve their clients. Forty percent of CDFIs in the survey received PPP funding, and 19 percent supported their communities as PPP lenders.
• Roughly 20 percent of respondents expressed moderate or severe concern about their CDFI’s ability to survive the COVID-19 pandemic. Nearly two-thirds of respondents were somewhat or slightly concerned, and the remaining 18 percent of respondents were not at all concerned. Respondents cited operational support, access to capital, and loan loss reserves as the key forms of additional government support they need to weather the economic impacts of the pandemic.

Operational Impacts and Relief Program Participation

We asked respondents about changes in their CDFI’s operational position between March and June, relative to their projections for the time period. (See chart below.) Roughly half of CDFIs in the sample saw a decrease in revenues, and 57 percent saw a decrease in the dollar value of products closed. So, a portion of respondents are taking a hit to their business operations, relative to what they had projected for that portion of the year. Depository institutions, including credit unions and community development banks, were hit harder in these areas than nondepository institutions.

The majority of respondent CDFIs had no change in employment, and nearly 20 percent reported an increase in staffing. Of the 36 respondents who reported decreases in staffing (16 percent of total respondents), only nine respondents expected the reduction to be permanent. Survey comments largely reflected cautious optimism tinged with longer-term trepidation. To quote one respondent, “We have done very well during the crisis — attracting new debt and grant capital, rolling out a Crisis Relief Loan product, and transitioning to working from home. But we are very worried that as the virus rages on and the economy teeters on collapse, our clients are going to begin to default on loans.”

Seventy-nine percent of respondents said their CDFI accepted new clients with no previous connection to their CDFI between March and June of this year, including 13 of the 15 minority depository institutions (MDIs) in the survey. The median number of new clients for depository institutions (250) was higher than nondepository institutions (50), but there was a wide range in the number of clients, along with the products and services sought, across CDFIs. Some respondents credited new pandemic relief program lending streams, including PPP and state loan funds as the source of their new client base; others had increasing demand for technical assistance and advisory services. One respondent reported that their new clients “were primarily development services customers for home buyer counseling and education,” and another noted that their CDFI primarily provided new clients with “technical assistance in securing grants from other sources.”

Federal, state, and local government entities, as well as philanthropy, private industry, and community organizations, responded to the COVID-19 pandemic with support programs designed to help small businesses weather the pandemic and foster economic recovery. CDFIs were in a unique position to both benefit directly from some of the federal relief programs and help clients access funding. In April, the U.S. Small Business Administration (SBA) launched the PPP to help small businesses and nonprofits continue to pay their employees and modified the existing Economic Injury Disaster Loan (EIDL) program, which offered loans and cash advances to qualified small businesses and nonprofits to aid in the pandemic response. CDFIs could participate in the PPP as funding recipients, to support their own operations, and as eligible lenders, to help their small business clients meet payroll needs. In June, the SBA announced that $10 billion in Round 2 PPP funding had been set aside to be lent exclusively by CDFIs. To support firms lending through the PPP, the Fed offered additional liquidity in the form of PPP loan-backed term financing through the Paycheck Protection Program Liquidity Facility (PPPLF). In June, the Fed also launched the Main Street Lending Program (MSLP), which is designed to increase credit access to small and midsized businesses and nonprofits who were in good financial standing prior to the impact of COVID-19; select depository CDFIs are MSLP eligible lenders. Several respondents also reported that their CDFIs took advantage of the National Credit Union Administration (NCUA) relief program.

Forty percent of respondents received PPP funds to support their payroll spending, and 19 percent reported their firms were eligible PPP lenders (although it is important to note that the survey did not collect information on PPP loans extended by eligible lenders). Some firms did not participate directly in the PPP or EIDL programs but referred clients to other institutions or provided some technical assistance in building applications. Given that the PPP was designed to assist for-profit firms with fewer than 500 employees and nonprofit firms, it makes sense that 90 percent of respondents who received PPP funding were nondepository institutions, including nonprofit loan funds and capital funds. Of the 44 cooperativas (or Puerto Rican credit unions) in the sample, only three participated in the PPP as eligible lenders; however, cooperativas accounted for six of the nine depository institutions who received PPP funding. More than 90 percent of firms who received PPP funding reported no change or an increase in employment, outperforming firms who did not receive PPP funding. (Seventy-seven percent reported no change or an increase in employment.) Firms who reported being eligible PPP lenders reported a median 307 new clients, compared with a median 40 new clients among the firms reporting new clients but not participating in either program.

Seventeen percent of CDFIs in the survey participated in local response programs, and 10 percent of respondents said they participated in state government programs. Some CDFIs received direct financial support through these programs, while others served as lenders for state and local funding or provided technical assistance to their communities. More than one-fifth of respondents received support from or otherwise participated in a pandemic response initiative offered by philanthropic organizations, including receiving and offering grants.

Client Impact and CDFI Response

As their clients managed the health and economic effects of the COVID-19 pandemic, CDFIs responded with flexibility and assistance. Clients at nearly 60 percent of CDFIs surveyed received forbearance on existing loans. (See chart below.) Several CDFIs reported increasing requests for technical assistance as clients applied for federal, state, and local relief programs. One-third of respondents said they were able to extend loan capital to existing clients, and 14 percent provided new grant capital.

Some respondents noted adapting to customer needs in other ways including loan refinance, microloan programs, and limited interest-only payments. One CDFI reported starting an emergency response consumer loan program, and others offered payment deferrals to clients. One respondent noted, “The COVID-19 crisis is impacting all of us in many ways — our physical and mental health, employment, socially, and economically. We recognize the importance of supporting our communities during these unprecedented times.”

Future Sustainability and Government Supports Needed

In response to challenging economic conditions, nearly two-thirds of respondents cited they were slightly or somewhat concerned about their CDFI’s ability to survive the impact of COVID-19. (See chart below.) Eighteen percent of respondents said they were moderately or extremely concerned, including 22 percent of depository institutions and 16 percent of nondepository institutions. Of the 13 respondents who were extremely concerned about their firm’s survival, all but one serve a client base that is at least 75 percent LMI individuals.

When asked to provide comments about their greatest challenges, respondents expressed concerns about limited access to capital and increasing concern over loan delinquencies and potential small business failures. Several respondents were worried about tenants’ ability to pay rent and the pressure on affordable housing markets. The health and safety of their members and employees, along with needing to adapt to new safety and sanitation practices, also concerned some respondents. According to one respondent, “The biggest challenge comes from giving greater priority to the health crisis, leaving the economic recovery for later. If the health crisis is not solved or controlled, the economic crisis will deepen.”

Government Supports Needed

We asked respondents to rank the relative importance of different government supports in helping their firms survive through the pandemic and economic recovery. Operational support was ranked most important for 44 percent of respondents, with 64 percent of depository and 78 percent of nondepository institutions ranking it within their top three. (See table below.) CDFIs taking on new clients and extending additional products to existing clients may require additional technology and staffing investments to address operational needs. Respondents mentioned maintaining staff health and productivity, along with staff time dedicated to business development and training, as crucial to their CDFIs’ survival. For some CDFIs, upgrading technology to serve their members virtually due to virus risks was a new priority. Equity capital ranked high on the list for most respondents, and 47 percent of nondepository institutions also ranked equity equivalent (EQ2), a capital product designed to function like equity for nonprofit CDFIs. Respondents cited limited access to low-cost capital as a barrier to accommodating increased demands for funding in their communities.

Source: Federal Reserve COVID-19 CDFI Survey

Among minority depository institutions, nearly 60 percent ranked debt capital as the top priority. Loan loss reserves and loan guarantees were a higher priority for credit unions, cooperativas, and community development banks. Respondents expressed concern over the ability of individuals and businesses to pay back new and existing loans due to uncertainty around the labor market and public health restrictions on businesses. To quote one respondent, “We have had increased demand from existing and new borrowers despite the outbreak but have been having difficulty raising new capital. Meanwhile, other deals have fallen through the pipeline due to uncertainties in the real estate market.”

Conclusion

Community development organizations, small businesses, and residents in LMI communities have faced challenges in managing the health and financial pressure of the COVID-19 pandemic. Many CDFIs used economic relief programs offered by government entities and other organizations to sustain operations and support their clients. The uncertainty around the COVID-19 pandemic and its continued economic impact will be a challenge, and most respondents expressed some concern about their CDFI’s ability to survive. Government programs designed to increase access to low cost capital and bolster operational effectiveness can enable CDFIs to support their communities as the economic recovery unfolds.

The following section provides an overview of the 229 CDFIs who responded to the survey. These institutions represent approximately 17 percent of certified CDFIs in the United States and its territories:

• The majority of respondents are community development loan funds and credit unions, and all certified CDFI organization types are represented in the survey sample.
• The majority of respondent CDFIs have a customer base that is primarily LMI.
• Cooperativas — community development credit unions in Puerto Rico — made up about one-fifth of this year’s respondents.

Organization Type

Respondents to the Fed’s COVID-19 CDFI Survey represent about 17 percent of certified CDFIs in the United States, a status designated by the CDFI Fund. More than half (54 percent) of respondent organizations were community development loan funds. Fourteen percent were community development credit unions, and 11 percent were microenterprise development banks. The share of respondent organizations is loosely representative of the distribution of financial institution types in the industry. Respondent CDFIs were mostly community development loan funds, followed by credit unions.

This year’s survey, like in 2019, captures responses from institutions that serve a variety of communities. Notably, 44 respondents to the survey (19 percent) were cooperativas. Cooperativas — community development credit unions in Puerto Rico — are represented in this survey as an organizational type, although their business model is identical to that of community development credit unions. All 16 of Puerto Rico’s CDFI-certified cooperativas responded to the survey, as well as 22 cooperativas with a pending certification or technical assistance applications.

Minority Depository Institutions (MDIs) are defined by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 as “any depository institution where 51 percent or more of the stock is owned by one or more socially and economically disadvantaged individuals.” Six percent of respondent institutions to the survey were MDIs. Most respondent MDIs are community development credit unions (57 percent of MDIs). Separately, 15 respondent organizations (7 percent) are Native CDFIs, which operate in Native communities nationwide. Some Native CDFI respondents are also MDIs and some are not. Survey respondents represent about 22 percent of certified Native CDFIs in the United States.

Fifteen percent of total respondents were not certified by the CDFI Fund (33 organizations). Of those, all but six have pending applications for either certification or technical assistance.

Geographic Distribution of Respondents

This year’s survey garnered responses from organizations based in 41 states and Puerto Rico. CDFIs headquartered in Puerto Rico made up 20 percent of all respondents — the most of any state or territory — followed by New York (7 percent), Texas (6 percent), and California (5 percent).

Service areas of respondent CDFIs were widespread across the United States and some of its territories. Respondents to this year’s survey operate across each of the 50 U.S. states, Guam, and Puerto Rico. States most serviced by respondents include California (6 percent), Illinois (6 percent), New York (6 percent), Michigan (5 percent), Georgia (5 percent), Texas (5 percent), and Ohio (5 percent).

More than three quarters of respondents serve urban (79 percent) and rural (76 percent) areas, while about half serve suburban places. A plurality of surveyed CDFIs operate within one state or part of one state.

Customer Demographics

To receive certification, CDFIs must serve at least one designated target market: either an “investment area” or a “target population.” Per the CDFI Fund, qualified target populations include low-income populations and underserved racial and ethnic minority groups. Low income is defined as a family income that is 80 percent or less of an area’s median income. Similarly, moderate income describes anyone earning less than 120 percent of the area median income. LMI is a term frequently used in community development lending and banking activities, and as the name suggests, captures populations in both income categories.

As illustrated by the chart below, respondent CDFIs serve high shares of LMI clients. Furthermore, respondent organizations reported to serve small shares of middle- and upper-income clients.

The racial breakdown of respondent CDFIs’ clients is more complex. The majority of respondent CDFIs that engage in consumer and small business lending serve at least some minority individuals and small business owners. Twenty-three percent of CDFIs in the survey sample indicated that at least half of their clients are black, and 32 percent indicated that at least half of their clients are Hispanic. (See chart below.)

Respondents to the COVID-19 CDFI Survey varied by organizational type, geographic area, and clients served. The survey captured responses from almost one-fifth of certified CDFIs and valuable responses from noncertified CDFIs. Because LMI and minority communities have been especially hard-hit by the negative effects of the COVID-19 pandemic in 2020, CDFIs will continue to be critical to their communities’ well-being.