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How does CNote optimize for positive social impact within its portfolio of CDFIs?


A common question we get from investors is: How do you know investments on CNote’s platform are generating a positive impact in communities across America?

The CDFI Certification Process

For the majority of our offerings, we partner solely with Community Development Financial Institutions (CDFIs). CDFIs are federally certified by a program within the US Department of Treasury called the CDFI Fund. The CDFI Fund was established as a bipartisan initiative by the Riegle Community Development and Regulatory Improvement Act of 1994. This certification acts as an initial gauge to measure impact, however, our assessment doesn’t stop there. 

It’s true – it’s no small feat to get certified as a Community Development Financial Institution (CDFI). To become a CDFI, an organization must meet all 7 eligibility requirements: 

1) Be a legal entity at the time of the application

2) Have a Primary Mission of Community Development

3) Be a Financing Entity

4) Offer development services in conjunction with its financial services

5) Primarily serve one or more underserved Target Market(s)

6) Maintain accountability to that Target Market

7) Be a Non-Governmental entity (unless Tribal).

The federal approval process is rigorous and can take months, but with that designation, comes the highly coveted recognition as a specialized financial institution serving low-income and other disadvantaged populations. Once certified, the entity is then held to strict reporting standards that illustrate its commitment to its designated Target Market. In fact, from that point on, the organization must annually prove that 60% of its financing activities support its certified Target Market.

Ebony Harris and the In Good Hands Learning Center Team

But does certification alone tell us all we need to know about the lending practices of a CDFI? 

Does it automatically mean they are making the right decisions for the borrowers? 

Can we be certain that their impact is positive?

While the foundation of the CDFI model is to align its interests with people in the communities it serves to foster economic development and opportunity, sometimes, in practice, lending policies can negatively affect the people they aim to empower. 

Taking a deeper look at community impact

CNote’s diligence framework takes this potential weakness into account. Though heavy emphasis is placed on financial health and sustainability factors, almost equally important consideration is given to the potential repercussions of an organization’s lending systems as well as the organization’s intended community impacts. 

CNote’s diligence team looks beyond an organization’s financials to affirm it is acting in the best interest of its clients. 

Factors CNote considers, include but are not limited to:

  1. Understanding an organization’s underwriting guidelines; 
  2. Considering its portfolio management procedures; 
  3. Reviewing its collection practices; and 
  4. Confirming its stated impacts are truly improving the lives of residents in LMI communities.

CNote recognizes CDFIs’ constant balancing act between practicing flexible yet prudent lending. In acknowledging that distinction, first and foremost, it is important to keep in mind that borrowers of CDFIs, for one reason or another, are not welcomed into the financial mainstream. Therefore, they cannot be held accountable to standards they don’t qualify to participate in. As an example, many traditional institutions place a high value on collateral while underwriting potential borrowers. If a person does not own assets, they are at an immediate disadvantage trying to navigate a process through which they plan to build assets. CDFIs take this into account and don’t disqualify a potential borrower based on a single factor. It is through this lens that CNote evaluates potential partners. 

Gloria Dickerson and her team at We2Gether Creating Change

Overall, CNote’s mission is to reduce the wealth gap by building a more inclusive economy for everyone. We strongly believe that CDFIs have the institutional knowledge, federal support, and capacity to deliver on that promise. That said, we not only evaluate potential CDFI partners on the sustainability of their financial underwriting practices but their net community impact as well. We believe this approach yields the largest net returns to both CNote investors and the communities we look to empower and help access the economic mainstream. 

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