Loan Performance of Community Development Financial Institutions (CDFI) Fund Sponsored Institutions

Abstract

This paper tries to examine the performance of loans made by CDFI sponsored financial institutions. The CDFI program tries to encourage financial institutions to provide credit to high risk, underserved communities and businesses. The CDFI provides grants to participating institutions to entice lending. The purpose of this study is to examine if the loan performance of CDFI sponsored institutions is different from non-sponsored institutions. Given recent issues with sub-prime lending, many lenders are unsure of how best to serve certain customers. The Community Reinvestment Act was designed to encourage lenders to meet the credit needs of the communities in which they operate. More information on how loans specifically made to meet the credit needs of specific communities would help all lenders in making investment decisions. Also, by analyzing the mitigating effect of CDFI Fund programs on loan losses, lenders - particularly non-CDFI certified institutions - would be able to weigh more effectively the costs and benefits associated with lending to higher risk customers. Finally, the study provides an assessment of the CDFI program. Much research has been conducted about other federally sponsored loan programs, such as the programs provide by the Federal Housing Authority and the Small Business Administration. This study will fill a gap by providing an analysis of a third very important federal loan program.