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Debt Management

Preventing credit deserts: Guide to Native Community Development Financial Institutions

Summary

Credit deserts make it extremely difficult for native people to find access to capital or funding when they need it, such as when starting a business, buying a home or paying for medical care. Joining a Community Development Financial Institution (CDFI) can be beneficial to these affected individuals.

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Many individuals in rural America and Indian country lack access to financial institutions, according to Patrice Kunesh, director of CICD (The Center for Indian Country Development). There are currently 573 recognized tribes within the United States, and many of these indigenous groups do not have access to a financial institution within 50-70 miles of their homes.

This lack of bank availability causes a “credit desert” and can wreak havoc on the finances of those who live in these areas. Many Native Americans (as well as other natives) who don’t have access to banks and financial institutions often resort to online lending and can fall victim to inflated forms of funding such as payday loans. Loans such as these can significantly damage one’s credit and continue to dig an even deeper hole of debt, making it nearly impossible to get out of a financial pit.

Credit deserts make it extremely difficult for these native people to find access to capital or funding when they need it, such as when starting a business, buying a home or paying for medical care.

Joining a Community Development Financial Institution (CDFI) can be beneficial to individuals affected by these credit deserts. CDFI’s are financial institutions, such as banks or credit unions, that are privately owned and are dedicated to helping and serving underserved individuals and businesses of communities to receive the financial help that they need.

What is a CDFI?

CDFI’s are banks, credit unions, thrifts, loan funds and more, that are created or established to support underserved minority communities, specifically Native American, Native Hawaiian and Alaskan Native. These institutions are required to be certified by the United States Treasury in order to access the national CDFI Fund.

In order to become a certified CDFI, the institution must have a primary mission of promoting community development; provide financial products and services; serve one or more defined low-income markets; maintain accountability to the community it serves; and be a legal non-governmental entity, according to 1st Financial Credit Union.

Many of these Native CDFI’s are located on tribal lands and are managed and staffed by community members. These institutions provide specific services to benefit the communities that they serve, such as financial education, credit repair, homeownership training and business coaching, just to name a few.

Different types of institutions:

The term “Community Development Financial Institution” houses several different type of institutions within one idea. Knowing the difference between the following types of financial institutions is important when choosing which type is the most beneficial for your specific needs.

Loan Funds: Loan funds are meant to serve businesses, organizations and individuals within a specific low-income region, and they typically have lower interest rates. Community development loan funds, in particular, are perfect for those who don’t qualify for a bank loan. Borrowers are asked to pay a fixed interest rate and also a short-term varying interest rate.

Credit Unions: A credit union is a member-owned, non-profit financial institution where members can deposit money, take out loans and even open a new credit card. Credit unions tend to have lower interest rates both on credit cards and loans, cater to specific communities and also tend to have lower fees than most banks.

Banks: Community development banks provide capital to focus on rebuilding economically distressed communities through targeted lending and investing.

Thrifts: Also known as savings and loan associations, thrifts are different from banks. They can borrow money from the Federal Home Loan Banks at a low rate of interest. By law, thrifts must have 65% of their lending portfolio tied up in consumer loans.

Depository Institution Holding Companies: A Depository Institution Holding Company is either a bank holding company or a savings and loan holding company. These companies control depository institutions by owning extraneous stock in institutions such as thrifts, credit unions, commercial banks and others.

Venture Capital Funds: This refers to money provided by individual investors at the time when a small or medium business startup has strong potential for growth.

CDFI locations across the country

The table below displays all of the CDFI’s certified by the U.S. Treasury:

How can CDFI’s help communities affected by credit deserts?

Over the last 10 years, there has been an increase in the amount of Native CDFI’s. These institutions are oftentimes owned or managed by members of these communities and are more likely to facilitate and create loans that adapt to the sometimes cyclical nature of many of these community’s income sources. Hunting, fishing, farming and many other occupations rely on specific seasons and weather conditions, so income is not necessarily consistent throughout the year. Creating financial institutions that are for the people and understand what communities need can create a better service and a more educated public.

According to Novoco.com,the CDFI Fund will increase by $50 million to make the total $300 million in 2020. In the annual report on fiscal year 2018, CDFI program awardees made more than 280,000 loans or investments totaling more than $11 billion, including loans to nearly 15,000 small businesses, and 343,471 individuals received financial literacy training.

Advantages of Native Community Development Financial Institutions

  • CDFI’s create access to capital and funding that may not have been readily available before they existed. The main purpose of these financial institutions is to create a better environment for the people who live in these “credit deserts.” Each CDFI has to be certified by the U.S. Treasury and has access to the CDFI Fund, which then allows each individual CDFI to serve individuals and businesses throughout the communities where they are located.
  • They can help you rebuild your credit. These CDFI’s have credit-building programs and classes to teach how to improve credit scores and to help manage debt by facing it head-on.
  • They offer individual development programs. Programs like homeownership training, entrepreneurship and business coaching and financial education programs, to name a few, can help Native people be more fiscally responsible and educated.
  • Native CDFI’s can also have higher interest rates on savings accounts, lower minimum deposits, lower annual fees, lower APRs on credit cards and loans and more. Native home buyers and entrepreneurs can benefit from these reduced rates because financial institutions that serve a particular group tend to offer more favorable terms. However, CDFI credit cards may not have as many rewards options as rewards credit cards. It is worth your time to evaluate credit cards for yourself and choose the best one for your lifestyle. To compare the best cards for your financial situation, check out our credit card reviews.
  • CDFIs offer affordable home loans and assistive programs for native home buyers. Specific homeownership programs have been created by CDFIs to help Native Americans, Alaskans and Hawaiians buy or lease homes more quickly without restrictions due to their income. According to this report, Native CDFIs offer assistance with home loans, debt consolidation, credit repair, home improvement, down payment assistance and mortgages. These programs are specific and are relative to the housing markets and incomes of the native people within each of these communities. Creating approachable solutions for becoming a homeowner can encourage further growth of the housing markets in other native communities.
  • It means better business loans and grants, too. Native entrepreneurs are underrepresented and account for less than 2% of all business owners. With lower down payments and interest rates provided by these CDFIs, it is much easier to start a business without the impending stress of whether a bank will approve a loan. Helping these small businesses start or expand can help to circulate money and create jobs throughout the community.

The bottom line

Community Development Financial Institutions are growing around the United States. By adding more funding to the CDFI budget, Native Americans, Native Hawaiians and Alaskan Natives and many other people are finally receiving the resources to attain the financial freedom they deserve.

This funding helps to create bigger and better communities that can continue to thrive and grow. There are many different types of financial institutions involved with these programs, as well as numerous educational opportunities to create a better life for more people across the country.

 

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Published: April 30, 2019

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