A community development financial institution (CDFI) is a niche financial institution that specializes in providing financial products and services to populations and businesses located in underserved markets. CDFIs have a mission and reputation for lending responsibility in low-income communities. A CDFI may include banks and bank holding companies, as well as credit unions, loan funds and venture capital funds. The CDFI offers products with more flexible underwriting standards, combine a range of below market financing and their own resources, and provide technical assistance with their lending activities to help ensure that borrowers use credit and capital effectively. A bank interested in partner with CDFI, should consider the following:
1. Identify the potential CDFI partner (e.g., similar goals, business lines, assessment area, etc.)
2. Evaluate the CDFI in terms of risk assessment (e.g., due diligence comparing financial ratios to a similar bank)
3. Determine level of risk and how to mitigate that risk
4. Confirm that the CDFI has taken steps to manage losses, either out of income or from an external source
Reference: FDIC, Strategies for Community Banks to Develop Partnerships with Community Development Financial Institutions, “Evaluation of Bank/CDFI Partnership Opportunities”, Page 23, March 2014.