The CDFI Bond Guarantee Program offers affordable, long term, government guaranteed debt financing to promote community and economic development.Community development

Cathy Dolan

English

Research Papers in Economics

Transformational Potential
T
here is a new game-changing program available 
for community development financial institutions 
(CDFIs). The CDFI Bond Guarantee Program offers 
CDFIs up to $1 billion of affordable, long term, 
government guaranteed debt financing per year, through 
2014, to promote community and economic development 
in our nation’s low-income, low-wealth, and other disad-
vantaged  communities.  It  significantly  improves  CDFIs’ 
access to capital, offering financing terms that make sense 
for CDFIs and the communities they serve and helping 
CDFIs meet substantial unmet capital demand in target 
communities. At the same time, it has the potential to 
transform the way CDFIs capitalize themselves, improving 
sustainability and financial stability. 
Quite  frankly,  the  CDFI  Bond  Guarantee  Program 
could forever alter the landscape and future of the indus-
try. For that reason alone, we need to make sure it works 
well for CDFIs and the communities they serve.
CDFI Bond: Opportunity of a Decade
By Cathy Dolan
What is the CDFI Bond Guarantee 
Program?
The purpose of the CDFI Bond Guarantee Program is 
to create a new CDFI investment vehicle for communi-
ty and economic development purposes. Passed as part 
of the Small Business Jobs Act of 2010, it is intended to 
support CDFIs’ role as economic engines of growth in the 
nation’s disadvantaged markets.
Select features of the CDFI Bond Guarantee Program 
include:
•  $3 billion in bond guarantee authority through 2014 
with minimum bond size of $100 million; 
•  CDFIs will be able to issue taxable bonds with terms 
up to 30 years; 
•  The  Federal  Government  Guarantee  ensures  repay-
ment of verifiable losses of principal, interest, and call 
premium, if any, on bonds and notes;
28   Community Investments, Fall 2011 – Volume 23, Issue 2E
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•  The Program is being administered by the CDFI Fund 
at the U.S. Department of the Treasury;
•  The Federal Financing Bank will buy 100 percent of 
bonds and notes issued to simplify execution and min-
imize cost and pricing;
•  Participating CDFIs will be required to establish a risk 
share pool of three percent of the bond or note amount;
•  Proceeds can be used by CDFIs to finance or refinance 
activity that meets the community and economic de-
velopment definition of the Riegle Act (the enabling 
legislation for the CDFI Fund). 
The CDFI Fund states that the program rules will be 
issued in the fall of 2011 and bonds are poised to be 
issued by the spring of 2012. The Program provides up to 
$3 billion of total financing before it sunsets in September, 
2014, unless reauthorized.
Why is the CDFI Bond Guarantee Program 
so important now?
The timing for this new program couldn’t be more op-
portune. With  unemployment  rates  above  nine  percent 
and slowing GDP growth, economic recovery has been 
disappointingly weak. Low growth prospects lead to cor-
porate hesitation to invest in new ventures and hire new 
workers. However, with interest rates at historic lows, it’s 
an ideal time to borrow and invest for the future. In fact, 
recent monetary policy decisions have pushed long term 
rates even lower; as of September 25, 2011, 30-year trea-
suries are below three percent. This may be a “once in a 
lifetime” opportunity to lock in 30 year debt at rates this 
low. Once economic activity ignites, capital will become 
more expensive and more difficult to raise. There is no 
better time than now to give CDFIs access to $1 billion per 
year of up to 30 year debt, at rates similar to government 
securities. 
Why CDFIs?
CDFIs have a long history of financing and meeting the 
needs of entities and individuals that lack access to the 
mainstream financial system. But as the boundaries of the 
mainstream financial system contract, the need for CDFIs 
to fill the gap increases. Indeed, while there are reports that 
corporate cash levels are at record highs, the capital tills of 
small businesses and entrepreneurs are empty. Large com-
panies are reticent to invest in new initiatives, and banks’ 
tightened credit standards have constrained small business 
and consumer lending. While policy makers and regula-
tors work hard to make capital more freely available, in 
order to spark job creation and economic growth, the only 
thing growing is cash accounts. Lending and investment, 
particularly in underserved markets, remain low.
CDFIs, which are positioned to address these issues, 
report increasing demand for credit in their markets, partly 
in response to declining bank lending. According to The 
Opportunity Finance Network (OFN) 2011 2nd Quarter 
CDFI Market Conditions Report (a publication based on 
quarterly  surveys  of  CDFIs),  54  percent  of  respondents 
reported an increase in the number of financing applica-
tions received year-over-year and 55 percent reported an 
increase in loan originations.1 Among survey respondents, 
25 percent reported that they are capital-constrained and 
could have made more loans in the second quarter of 2011 
if financing capital had been available. To meet estimated 
demand in the next 12 months, the respondents reported 
they would need an additional $880 million in capital. 
The respondents made these estimates assuming they 
were limited to the type of debt financing currently avail-
able to CDFIs, which is generally less than 10 years in 
term and priced based on market spreads over treasury 
securities or LIBOR. In March 2011, OFN expanded the 
scope of this survey to gauge broader market demand for 
CDFI Bond-type financing—up to 30 years in term and 
priced at a small spread over treasury securities. The re-
sponses indicated an overwhelming confidence in CDFIs’ 
ability to absorb $1 billion per year to meet the needs 
of community businesses and individuals in low-income, 
low-wealth and otherwise disadvantaged markets.
What is the critical path to success?
What will make the CDFI Bond Guarantee Program a 
success? And how do we ensure CDFIs derive maximum 
advantage  from  the  Program  and  dramatically  impact 
communities in need? There are many important princi-
ples that will lead to a successful bond program, including 
performance and outcome based evaluation and efficient 
and affordable participation among CDFIs, but most criti-
cal are the following objectives: 
1. The need for flexibility to accommodate the variety of 
financial structures that CDFIs use to serve low-income, 
low-wealth communities
One of the CDFI industry’s strengths is its diversity of 
products and practices. In order to adequately meet the 
needs of their underserved communities, CDFIs need to 
be flexible and responsive to the unique factors that affect 
those businesses outside the mainstream financial system. 
That means the program can’t be cookie cutter or one-
size-fits-all in nature. 
To that end, eligible uses need to include all financing 
sectors, including housing, small businesses, community 
facilities, retail and commercial real estate development 
in distressed markets, and personal financial credit prod-
ucts targeted at disadvantaged populations.
29   Community Investments, Fall 2011 – Volume 23, Issue 2Moreover, the terms of the bond need to accommodate 
the way CDFIs provide capital to their targeted markets. 
CDFIs offer term financing, lines of credit, construction 
loans, secondary capital investments, and revolving lines 
of credit, and the program should accommodate all these 
types of financing products. 
2. Financing via the CDFI Bond Guarantee Program is 
used and controlled by CDFIs with a proven track record 
of mission based financing.
The prospect of a new government-guaranteed debt 
program could attract the attention of entities that fashion 
themselves as community development lenders, but who 
lack the mission-based orientation and track record of re-
sponsible financing that the CDFI industry has long stood 
for and upheld. This program should be reserved only for 
those entities that have a proven record of responsible fi-
nancing, with a strong mission of creating access to re-
sponsible and affordable financial services for disadvan-
taged and underserved communities. This program should 
not be available to CDFIs in name only.
3. Underwriting based on CDFI’s assessment of risk
Program risk criteria and issuer selection should be 
based on the CDFI industry’s performance track record, 
not on that of the mainstream financial services industry. 
There will be a temptation to look to mainstream finan-
cial service providers and programs to assess the overall 
program risk and individual bond applications because 
this  is  a  new  program  to  a  largely  unregulated  sector, 
and Treasury (CDFI Fund) has few precedents to guide it. 
However, the CDFI industry has thrived for the past thirty 
years precisely because non-CDFI regulated institutions 
and for-profit finance companies operate so differently.
The markets served by CDFIs are unique and, by defi-
nition, outside the mainstream. CDFIs understand how to 
underwrite and manage the risk of businesses, individuals, 
and community projects in underserved markets because 
they are close and responsive to their borrowers, willing 
and able to provide technical assistance when necessary, 
and flexible enough to work with borrowers when diffi-
culties arise. This high-quality track record is evidenced 
by OFN’s Inside the Membership Report, which shows a 
weighted average cumulative net charge-off rate of 1.4 
percent and weighted average delinquency of more than 
30 days of 9.2 percent, as of year-end 2009.1 As of the 
second  quarter  of  2011,  problem  loans  seem  to  be  in 
decline, as OFN’s Market Conditions Report shows that 
members’ rate of delinquency of more than 30 days had 
improved to 6.5 percent. 
This performance track-record is indicative of CDFIs’ 
unique ability to underwrite and manage risk. When as-
sessing the risk of the CDFI Bond Guarantee Program and 
designing underwriting criteria for use in the selection of 
bond applicants, it will be critical for the CDFI Fund to 
use CDFIs’ track record and not that of the mainstream 
financial services sector. 
Conclusion
The CDFI Bond Guarantee Program is meant to en-
courage the creation of a new type of security that would 
provide access to responsible financing for disadvantaged 
communities at meaningful volumes, affordable cost, and 
long terms. If successful, this program could dramatically 
improve access to capital, recapitalize CDFI balance sheets 
(improving  profitability  and  financial  stability)  and  help 
banks and other mainstream financial institutions increase 
their financing in partnership with CDFIs for the benefit 
of low-income and low-wealth communities. This could 
lead to important increases in the number of jobs created 
and retained, the supply of quality affordable housing, and 
access to vital community facilities and services. In short, 
the  CDFI  Bond  Guarantee  Program  would  give  CDFIs 
access to a reliable supply of capital with a term and cost 
structure that has never before been available. 
As  our  economy  struggles  to  regain  footing,  CDFIs 
have a vital role to play as engines of growth and the CDFI 
Bond can help make it happen. As Federal Reserve Chair-
man Bernanke recently said, “Providing responsible credit 
for individuals and small business through community de-
velopment financial institutions can stimulate economic 
activity that generates local tax revenues.”2 
The  imperative  is  clear. The  CDFI  Bond  Guarantee 
Program needs to become a reality as soon as possible 
so CDFIs can increase financing to under-served markets 
and  contribute  to  job  creation  and  economic  growth. 
OFN encourages all those interested in the program to 
join the CDFI Bond Alliance, which will actively shape 
the discussion on the design and implementation of the 
CDFI Bond on behalf of CDFIs for the full lifecycle of the 
program—from initial rule promulgation, through bond 
issuance,  and  ultimately  to  encourage  reauthorization. 
For more information, visit http://opportunityfinance.net/
financing/     
Cathy Dolan is Chief Operating Officer of Opportunity 
Finance Network (OFN), the leading network of private 
financial institutions that creates growth that is good for 
communities, investors, individuals, and the economy.
30   Community Investments, Fall 2011 – Volume 23, Issue 26.	 Although	economists	would	typically	view	the	wages	paid	to	a	job	as	the	
best	summary	measure	of	the	job’s	skill	requirements,	lay	readers	may	
take	some	assurance	that	wages	as	a	skill	measure	are	highly	correlated	
with	logical	alternatives,	such	as	education	and	experience.	Moreover,	the	
ranking	of	occupational	skills	based	on	either	wage	or	educational	levels	
is	quite	stable	over	time.	Thus,	the	conclusions	here	are	not	sensitive	to	the	
skill	measure	(wages,	education-experience)	nor	the	choice	of	base	year	for	
skill	ranking	(here,	1980).	
7.	 The	reason	for	using	a	different	data	source	and	time	period	for	this	figure	
from	the	prior	figure	is	that	the	Census	data	have	large	enough	sample	
sizes	to	be	useful	for	the	occupation	level	exercise,	but	they	are	less	than	
ideal	for	measuring	hourly	wages.	I	use	the	May/ORG	data	for	hourly	
wages,	which	are	a	superior	source.	
8.	 Goos,	M.,	Manning,	A.,	&	Salomons,	A.	(2009).		Job	Polarization	in	Europe.	
American Economic Review,	99	(2):	58-63.	The	choice	of	time	period	
reflects	the	availability	of	consistent	data	(unavailable	prior	to	1993).	The	
ranking	of	occupations	by	skill	level	is	invariant	across	countries,	as	neces-
sitated	by	data	limitations.	The	authors	report,	however,	that	the	ranking	of	
occupations	by	wage	level	is	highly	correlated	across	EU	countries.	
9.	 Autor,	D.,	Levy,	F.,	&	Murnane,	R.	(2003).	The	Skill	Content	of	Recent	Techno-
logical	Change:	An	Empirical	Exploration.	The Quarterly Economic Journal,	
118	(4):	1279-1333.	
10.	 Adjusting	for	inflation	using	the	Personal	Consumption	Expenditure	defla-
tor,	the	real	minimum	wage	in	constant	2008	dollars	was	$7.50	in	1979,	
$5.29	in	1989,	$6.41	in	1999,	and	$5.47	in	2006,	and	$6.53	in	2009.	Thus,	
the	real	federal	minimum	wage	declined	dramatically	between	1979	and	
1989.	It	fluctuated	modestly	in	real	terms	until	2006,	when	it	rose	sharply	
over	three	years.	
11.	 Hamermesh,	D.	(2001).	Changing	Inequality	for	Workplace	Amenities.	Quar-
terly Journal of Economics	114	(4):	1085-1123.	Pierce,	B.	(2001).	Compensa-
tion	Inequality. Quarterly Journal of Economics 116	(3):	1493-1525.	Pierce,	V.	
(2008).	“Recent	Trends	in	Compensation	Inequality.”Working	Paper	(Bureau	
of	Labor	Statistics).	
12.	 Pierce,	“Compensation	Inequality,”	Pierce,	“Recent	Trends	in	Compensation	
Inequality.”	
13.	 Notably,	the	college	completion	rate	for	this	group	was	higher	in	1990	(29	
percent)	than	in	2008	or	2008	(24	percent	and	27	percent).
Endnotes
CDFI Bond: Opportunity of a Decade
1.	 Opportunity	Finance	Network,	Market	Conditions	Reports	available	online	
at	http://www.opportunityfinance.net/store/categories.asp?cID=29
2.	 Speech	by	Chairman	Ben	Bernanke	on	April	29,	2011	at	the	Federal	Re-
serve	Community	Affairs	Research	Conference	in	Arlington,	Virginia.	http://
www.federalreserve.gov/newsevents/speech/bernanke20110429a.htm
Building Literacy Skills and Transforming Lives
1.	 ProLiteracy.	The	Impact	of	Literacy:	Basic	Facts	about	Literacy.	http://www.
proliteracy.org/page.aspx?pid=345
2.	 National	Center	for	Education	Statistics.	(2003).	National	Assessment	of	
Adult	Literacy:	A	First	Look	at	the	Literacy	of	America’s	Adults	in	the	21st	
Century.	http://nces.ed.gov/naal/pdf/2006470.pdf
3.	 Kirsch,	I.,	Jungeblut,	A.,	Jenkins,	L.,	&	Kolstad,	Al.	(2002).	“Adult	Literacy	
in	America:	A	First	Look	at	the	Findings	of	the	National	Adult	Literacy	
Survey.”	National	Center	for	Education	Statistics.	http://nces.ed.gov/
pubs93/93275.pdf
4.	 Pro	Literacy.		See	note	1.
5.	 National	Institutes	of	Health.	(October	25,	2010).	Improving	Mothers’	
Literacy	Skills	May	Be	Best	Way	to	Boost	Children’s	Achievement.	http://
www.nichd.nih.gov/news/releases/102510-reading-family-income.cfm
6.	 Center	on	an	Aging	Society.	Low	Health	Literacy	Skills	Increase	Annual	
Health	Care	Expenditures	by	$73	Billion.	Georgetown	University.	http://
ihcrp.georgetown.edu/agingsociety/pubhtml/healthlit.html
7.	 California	Health	Literacy	Initiative.	Low	Literacy,	High	Risk:	The	Hidden	
Challenge	Facing	Health	Care	in	California.	http://cahealthliteracy.org/
pdffiles/allfourpageshealthlitreport.pdf
8.	 Ibid.
9.	 Community	Health	Improvement	Partners.	When	Words	Get	in	the	Way:	A	
Collaborative	Plan	to	Address	Health	Literacy	in	San	Diego	County.	http://
www.literacysandiego.org/pdf/HealthLiteracyReport_FINAL.pdf
10.	 Creticos,	P.,	Schultz,	J.,	Beeler,	A.,	Ball,	E.	(2006).	The	Integration	of	Im-
migrants	in	the	Workplace.	The	Institute	for	Work	and	the	Economy.	
11.	 UNESCO	Literacy	Strategy.	http://www.unesco.org/new/en/education/
themes/education-building-blocks/literacy/strategy/
41   Community Investments, Fall 2011 – Volume 23, Issue 2

CDFI bond: opportunity of a decade

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CDFI bond: opportunity of a decade

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