Treasury's CDFI Fund increases lending in low-income areas, says Cleveland Fed researcher

The Treasury Department's CDFI Fund awards grants to community development financial institutions (CDFIs) that operate in impoverished areas. Awards are intended to strengthen the institutions and increase the amount they lend to low-income borrowers. Federal Reserve Bank of Cleveland economist Kristle Cortés and Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, measured the impact of the CDFI Fund on the institutions that receive funding and the return on the fund’s investment. Their results show that CDFI Fund grants do increase lending, by 3 percent. And for every dollar awarded, 45 cents is loaned out to borrowers in the first year and up to $1.60 is loaned out within three years.

The core program of the CDFI Fund provides funds to qualified lending institutions for technical and financial assistance. Technical assistance awards can be used at the institutions themselves for various purposes, such as offsetting overhead costs or training staff and loan officers. Financial assistance awards are used to fund loans, loan-loss reserves, or capital reserves.

To evaluate how effective the Fund’s core program has been, Cortés and Lerner examined 10 years of proprietary data provided by the US Treasury. Focusing on credit unions, one of the four types of institutions that apply for funding, the researchers measured the increase in lending at three groups of credit unions: those that received grants, those that applied but did not receive grants, and those that never applied.

They found that average total loan growth increased the most at the credit unions that received an award, with a significant upward trend in lending over a three-year horizon from the award date. They also found that loan growth fell at credit unions that applied for an award but did not receive it.

Read Does the CDFI Fund Help Low-Income Borrowers?