In 1994, the Clinton Administration’s Department of the Treasury created a fund to help support, capitalize, and expand community development financial institutions (CDFIs). The goal was to make banking services more readily available to distressed communities and to the non-wealthy entrepreneurs living in them. There are currently nearly 1,500 federally certified CDFIs—banks, credit unions, and loan funds—that have received about half a trillion dollars in federal support. And until recently, the program has enjoyed enormous bipartisan support.
Research suggests that every federal dollar put into CDFIs has leveraged $8 of private capital. They have historically created about 3.4 million jobs. These findings underscore the foolishness of the Trump Administration, as we reported in the last issue of The Main Street Journal, recently firing all the staff running this program.
CDFIs are down but not out. And this week’s interview with Liz Rogers of Tern Strategies, based in Maine, suggests that CDFIs anticipated this moment. Liz honed her financial skills working for one of the most successful nonprofit community development organizations in the country, Coastal Enterprises in Maine.
Liz and her colleagues have found that 91 CDFIs now accept grassroots investment. And with the government spigot closing off, even if only temporarily, more CDFIs may move in this direction.
You will also see in the interview my annoyances with CDFIs. Many of my progressive friends, for example, see CDFIs as the only legitimate form of community investing. The truth is that almost every local investment—whether in a tech startup or a grocery store—generates local income, wealth, and jobs. It’s great to invest in distressed communities, but we should applaud investment in all kinds of communities, all kinds of entrepreneurs, and all kinds of sectors.
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MS: Liz, before we dive into your current work, a bit about your background. You used to work for Coastal Enterprises in Maine. Tell us about that organization and what you worked on there?
LR: Coastal Enterprises, or CEI, is one of the best-established community development financial institutions, or CDFIs, in the country. CEI finances businesses and projects with the goal of improving people’s lives through economic opportunity. To ensure the greatest possible chance for success, CEI also provides thousands of hours of business advice and technical assistance to entrepreneurs on an annual basis. I served as chief communications officer and managed CEI’s investment note program.
MS: You have since created your own consultancy, Tern Strategies. Why the bird name? And what does your consultancy do?
LR: The name and spirit of Tern Strategies were inspired, in part, by Migrations, a novel by Charlotte McConaghy, about a woman determined to follow the migration of the last of the Arctic terns from Greenland to their nesting grounds in the Antarctic. It’s a story about loss, on many levels—the loss of natural habitats and the living things they support—birds, animals, and fish—and the impact on human beings.
The people in the book experienced great loss in their personal lives, as well, driving them to follow their hearts as the only way to keep living. I read about the Arctic terns and their journey, year after year, over huge expanses of ocean, through extreme weather, from one pole to the other and back—the longest migration of any animal on the planet, and it astounded me. Six months after I started my business, I lost my husband, unexpectedly. What had been an intriguing brand became something greater, a call to keep flying, even when your partner drops out of the sky. There is darkness in Migrations, but also hope and light.
Through the consultancy, I help my clients, all CDFIs, create and raise capital through investment offerings, connecting investors to local economies.
MS: You clearly admire CDFIs and want to expand their mission. What have they accomplished, in your estimation?
LR: I am not sure “admire” is exactly the right word. I am a part of the CDFI ecosystem, and I hope to grow the number of people who know about and support them. I had no idea what a CDFI was when I started at CEI. The more people know, the more I believe they will want to participate in this direct investment path to making communities stronger and more resilient. In Maine alone, countless number of businesses have been started with CEI financing and advice. That gives people a chance at ownership, wealth creation, job creation, economic participation, and community engagement. Multiply CEI’s impact across more than 1,400 CDFIs across the country, and you have a powerful economic engine that is at work 24-7.
MS: My progressive friends love CDFIs, but honestly, I’ve been frustrated with them for several reasons over the years. One is that some seem as demanding with their distressed borrowers, or more so than mainstream banks. What’s your view?
LR: That’s not what I see at all. It’s easy to paint a picture of an industry with broad brushstrokes, but that really doesn’t get at the complexity and depth of CDFI relationships with their clients. I see CDFI colleagues doing everything they can to help people who are struggling to pay back a loan, not just by modifying loan terms, but also by connecting borrowers with advice, technical assistance, and skills development in order to be successful.
As nonprofits, CDFIs are always partnering with others to bring in additional resources for the people they serve. It is a sad day for all when a business is not able to move forward, but that’s sometimes a reality, whether a business works with a CDFI or not. Overall, CDFI loan loss rates are very low, consistently lower than those of FDIC-insured institutions. CDFIs are nonprofits, but they depend on borrowers being successful and paying back loans because CDFIs have to pay their investors back as well. It’s a model that is unlike any other and keeps CDFIs motivated, both through mission and through their business model, to make sure capital is constantly revolving from investors to communities and back again, while managing risk, rates, return, and mission in a pretty sophisticated way.
MS: But in a way, you’re making my point. If CDFIs have loan losses below mainstream banks, doesn’t that suggest they are not taking enough risk?
LR: Risk is relative in this case, given the amount of services CDFIs offer to help borrowers succeed. It would be interesting to create a formula that calculated the benefit of those services in a way that made CDFI lending and investment comparable to traditional lenders. Also, risk is, in some cases, determined by the requirements of CDFI investors. This is a very active conversation within CDFIs and across the industry, and decisions are being made carefully, with investors, borrowers, and investees in mind, on a case-by-case basis, in the context of a total portfolio. My view is that along a continuum of capital, CDFIs have their place. We should be celebrating the role that each plays in creating a whole.
MS: My second frustration with CDFs has been that historically, many didn’t allow for grassroots investors to participate in their model. There were some exceptions, like Calvert Notes, but for the most part, money for CDFIs came from the government, philanthropies, and deep-pocket investors. I was stunned to learn from your recent report that 91 CDFIs now accept grassroots investment. Tell us more about your findings and what those investment opportunities look like.
LR: Let me begin by giving a shoutout to my project partner, Pam Porter, Managing Director of Stepping Stone Partners, and our research funders, the Center for Impact Finance at UNH’s Carsey School and Citi Foundation. Our research builds on Pam’s prior surveys. To be clear, not all of the CDFIs on our list have formal investment note programs. But they indicated in our survey that they are open to investment. It’s an invitation for investors to start a conversation with CDFIs in their region.
Pam and I are not investment advisors, broker-dealers, or securities lawyers, and we do not provide investment advice. We are just two people who want you to get to know your friendly CDFI. Of the 99 on our list, 28 indicated that they have structured notes programs for individual and institutional investors. The majority of the 28 have offerings for retail investors. In the instances where a CDFI limits its offering to accredited investors, there are good reasons, such as the legal structure of the organization and its purpose.
The investment process usually involves multiple conversations among investors, investment advisors, and the CDFI, and includes a subscription agreement or contract. In the end, the average CDFI investment note pays a 1-3.5% rate of return, with terms from one to ten years.
MS: What are two or three good examples of CDFIs integrating local grassroots investment into their model?
LR: Think about Capital Link and its financing arm, Capital Fund. Capital Link provides financing and deep technical assistance and advice to community health centers across the country. These are healthcare providers that are meeting the needs of communities often underserved by our healthcare system. Because healthcare centers are typically paid through reimbursements from Medicare or Medicaid, it can be hard for them to get traditional financing due to the timing of revenue. Capital Link understands how community health centers operate and can respond to complex financing structures. Program and mission-related investments have been an important part of their growth.
Another example: Appalachian Community Capital (ACC), a CDFI serving 43 member CDFIs throughout Appalachia, has a new investment note program raising capital to be distributed to its members. As an intermediary, ACC has the capacity that the smaller member CDFIs don’t have to raise capital. But those CDFIs are close to communities and understand their needs. So it makes sense to have a nonprofit CDFI intermediary that is not adding to the cost of capital. ACC’s first investor in the notes program is an individual who is compelled to direct resources to communities in Appalachia.
On the whole, CDFIs are boots-on-the-ground, economic development practitioners in constant communication with small business owners and people providing needed community services.
The earliest investors in CDFIs came from faith-motivated individuals and institutions, and that support is strong to this day. Through asset managers like the Religious Communities Impact Fund (RCIF) and Mercy Investments, organizations of women’s religions are investing their pooled funds in CDFIs for mission—and return. CDFI investors are often closely monitoring impact and seeking active engagement to ensure that investments are meeting their goals. It’s notable that the CDFIs we interviewed have an 85% renewal rate when notes reach maturity.
MS: Your report also looked at the motivations of those who invest in CDFIs. What did you find?
LR: Overall, CDFI investors are engaged and growing. About 84% plan to renew their CDFI investment at maturity, and 95% plan to increase their investments. Investors see CDFI investments as aligned with their own mission (95%), as alternatives to Wall Street (63%), and they are also motivated by CDFIs’ reputations (63%)—geography and sector focus factor in as well.
MS: Back to my reservations about CDFIs. I’m very worried about any movement that depends on ongoing infusions of cash from the national government. Now that the Trump Administration has gutted the CDFI program at the Treasury Department, what’s the future going to be like for these institutions?
LR: The industry has been around for decades and has adapted to economic upturns and downturns. Since 1994, the CDFI Fund has provided irreplaceable levels of funding. And while the scale of the Trump Administration’s current actions is unprecedented, the industry is mobilizing the bipartisan support CDFIs experience on Capitol Hill by encouraging people to get in touch with their elected officials.
CDFIs are committed to diversifying their sources of capital. Long-term, a growing number of investors will help the sector thrive. The challenges are significant, but we are going to have to keep strengthening systems and structures that respond to local economic needs.
MS: Many of our readers are very interested in CDFIs—either strengthening those in their backyards or starting one. What kinds of research and other assistance does Tern Strategies offer communities?
LR: Right now, my primary focus for Tern, in partnership with Stepping Stone Partners, is on CDFI notes programs and their investors. But any time we engage in research, the aim is to create resources for a broad audience. For example, Tern partnered with Wake Forest University School of Law’s trade and development clinic to create a memo on securities law governing investment note offerings. As a communications professional, my job is to make things accessible. I also like to build connections—and a shared strategy. So, if I don’t have answers or needed expertise, I’m happy to connect the dots with someone who does.
MS: Finally, how do you invest locally yourself in Maine?
LR: I am an investor in the Genesis Community Loan Fund (and Partner Community Capital in West Virginia), and I also donate my time and resources. I’ve served as a volunteer tax preparer with the United Way and support wildlife conservation through the State of Maine. I also try to be prepared to help. For example, I have a Wilderness First Responder certification. Local investing is ultimately about supporting our shared life experience.
