Community Development Financial Institutions (CDFIs) deliver responsible and affordable lending to low- and moderate-income communities. Community Development Entities (CDEs) are New Markets Tax Credit conduits focused on low-income community development projects. Since its inception in 1994, the CDFI Fund awarded $61 billion in tax credit allocation authority through the New Markets Tax Credit Program. 

We caught up with some community development banking leaders at JPMorgan Chase to explore what makes a successful community relationship between various sized institutions. Nicole Williams, Vice President, and Jessel Amin, Executive Director, both of Intermediaries Lending, along with En Jung Kim, Executive Director of New Markets Tax Credit, spoke to us about how CDFIs and CDEs are integral parts of providing economic growth opportunities like grocery stores, healthcare centers, schools, and libraries to neighborhoods in need. 

Understand the Basics

Before entering a relationship with a CDFI or CDE, it is important to understand the fundamentals. That includes the lender’s goals as well as their financing and terms.

“Specifically, JPMorgan Chase is dedicated to supporting the growth of the industry by increasing our lending to CDFIs by $300 million in the next five years,” Amin says. “We are also focusing our efforts on serving the holistic banking needs of our clients. We strive to be a collaborator in solving the credit needs of our CDFI clients, and the firm’s capital comes with our dedication to the long-term and sustainable growth of the industry.”

The firm generally targets CDFI clients that are non-depository, nonprofit CDFI loan funds with more than $100 million in assets under management, Amin says. JPMorgan Chase lends to CDFIs that meet its credit criteria, which uses the CAMEL method of analysis–credit, asset quality, management, earnings and liquidity.

“In addition to impact evaluation, we look at the CDFI or CDE’s track record, management capacity and communities served,” Kim adds.

“The very strength of CDFIs is their nimble response to their community’s need,” Amin says. “However, this means each CDFI has a slightly different approach to underwriting, servicing and even their capitalization structures. Bankers must dedicate a lot of time to studying the specific nuances of their CDFI clients so that they can structure credit products that meet their unique needs.”

Recognize the Differences Between Developers and CDFIs and CDEs

Prospective borrowers should also know the differences between community development real estate lending (CDRE) and CDFIs and CDEs.

“Whereas CDRE borrowers focus largely on developing affordable units for low-income persons, CDFIs and CDEs focus on programmatic impact to support whole underinvested neighborhoods–looking at how to improve the community through both housing and services,” Kim says. “As a result, we listen to their programmatic goals and try to work with them to finance  and implement their strategies.”

Have a Strong Management Team

An important key to finding a successful community development organization is having a strong management team that can navigate the complexities of optimizing for their mission and fiscal responsibility.

“When a CDFI or CDE has a clear focus and a track record of impact and success, that is a foundation for a great relationship with JPMorgan Chase,” Williams says. “Great leadership with a consistent management team and board are very helpful.”

“Many of our CDFI clients receive public support for their work to advance racial justice. There is strong alignment between the values of JPMorgan Chase and the values of our CDFI clients,” says Amin.

Find Ways to Avoid Roadblocks 

Another best practice in CDFI and CDE lending and borrowing is knowledge of potential obstacles and how to avoid them. One of the biggest roadblocks CDFIs face is raising equity to maintain strong net asset ratios. Equity is typically raised through grants or increased retained earnings through operating activity. Operating margins can be tight, and philanthropic and federal funding can be volatile from one year to the next.

CDEs, while different in kind, also run into funding gaps and challenges when sponsoring community projects.

Navigate Challenges

When challenges do arise, it’s important to know how to navigate them. For example, during the COVID-19 pandemic CDEs and New Markets Tax Credit recipients have had to pivot their physical operations to respond to the increased community need for food distribution, health clinics and other social services.

Because of the close ties to their communities, CDFIs often serve as financial first responders. For example, CDFIs are critical to ensuring a just recovery from the pandemic by extending capital with flexible loan terms to end borrowers. In turn, CDFI investors need to rise to the moment to help match these flexible loan terms.

For example, “in a recent transaction, JPMorgan Chase was able to waive prepayment fees,” Amin says. “That way, the borrower could extend this same flexibility to their end borrowers—BIPOC (black, Indigenous and people of color) developers working to promote the growth and revitalization of their communities.” 

“Strong asset performance through multiple economic cycles is also important,” adds Amin.

“Our dedication to community impact predates 2020,” said Williams. “Our firm was moved by the pandemic, the social unrest of the summer of 2020 and the related impact to our economy and society. However, the leadership of our firm has been focused on issues of diversity and closing the opportunity gap for minorities for decades. The events of 2020 drove our leadership to launch a $30 billion commitment to advance racial equity, which allows us to have a very specific focus on CDFIs, New Markets Tax Credit projects and affordable housing.”