As the community finance field enters a new era—shaped by economic uncertainty, shifting capital flows, and growing calls for accountability—how can CDFIs prepare for what’s ahead? The Kresge Foundation spoke with Paige Chapel, CEO of Aeris, a national provider of ratings and performance data for CDFIs, to explore how shared standards and smarter capital can help prepare CDFIs for the future. This article is part of a series highlighting the impact of CDFIs and how the sector is adapting to the current environment. 

MD: From your vantage point, what does the current financial health of the CDFI sector look like, and where are the pressure points emerging? 

PC: When you look at the financial health of CDFI loan funds, it’s important to focus on both CDFIs and their borrowers. For now, CDFIs are holding up quite well. They have strong capital positions—both in terms of capital availability for lending and to protect investors from loan losses. Loan portfolio performance is also strong, although we are seeing very early indications of potential weakening.  

Given changes to the federal policy environment, it is reasonable to expect some negative outcomes for CDFIs’ borrowers, which will eventually impact the financial performance of the loan funds themselves. The degree of impact seems to vary geographically, with a few small business lenders in the Mid-south and Southeast reporting increased loan demand from small consumer goods manufacturers. Lending focus also warrants attention as price increases, potential labor shortages, and reduced federal funding will impact CDFIs that focus on the healthcare sector, affordable housing, and nonprofit financing. It will take time for the changes in borrowers’ financial health to ripple through the CDFI industry.  

We also expect that smaller CDFI loan funds will be most vulnerable to the economic and funding shifts that are occurring. The role of private philanthropy to bolster these organizations as they adjust to a dynamic operating environment will become critical in the coming years.  

MD: CDFIs are mission-driven, but they’re also financial institutions. As we look toward 2030 and beyond, what metrics do you think will matter most in defining what a financially strong CDFI looks like?

PC: As with any lending institution, portfolio quality and the ability to absorb inevitable loan losses will continue to define financial strength. Although we are likely to see increased loan losses, they are not necessarily a sign of weakness or failure. We expect and want mission-driven lenders to take risks as part of achieving impact. Funders and investors should focus on how a CDFI manages that risk and what new approaches it is pursuing to support the people and communities it serves during economic turbulence. CDFIs have a proven track record as first responders during times of difficulty. That has always been the case and will not change over the next five years.   

From an impact perspective, we will be watching CDFIs’ lending volume—not just the dollar volume but the number of loans they are making. CDFIs can do more with fewer resources by partnering with other lenders that can provide part of the financing on their deals, and through loan sales.  

MD: What are some of the ways you think CDFIs will use data to evolve their business models?

PC: CDFIs already sell loans, but it’s often a liquidity and risk management tool rather than a core business model activity. To advance this strategy, a developed secondary market that is accessible to the full breadth of CDFI lending will be needed, allowing loan sales to be handled efficiently and at scale. Investment bankers often emphasize the need for CDFIs to provide more nuanced loan data that meets market requirements. Although some loan funds already collect this type of data, it’s not yet a standard across the industry. Tracking and reporting this additional data may require new lending software and systems to support loan sales and servicing for a CDFI secondary market to reach meaningful scale.  

To evaluate the effectiveness and impact of their strategies, CDFIs will need to collect not only output data (i.e., the number of loans made and to whom) but also outcome data (i.e., what changes resulted from those outputs). This is time-consuming and costly for CDFIs, offering another important opportunity for philanthropy to help the field advance.  

Finally, the more standardized, longitudinal data (financial, portfolio, and impact) available on CDFI loan funds, the easier it is to demonstrate the strength and resiliency of these financial institutions as responsible stewards of capital.  

MD: How can those collectively working in the sector build stronger, longer-term relationships between capital providers and CDFIs, especially as more philanthropic and private capital enters the space?

PC: Philanthropic and private capital providers can and should support partnerships between small loan funds and larger CDFIs looking to expand their reach. Small CDFIs have deep local knowledge that can help larger players leverage their capital in new markets while expanding the impact of both institutions. But these smaller institutions also may require investments in staff, systems, and technology to attract new partners and sources of capital.  

One of the ways Aeris has been supporting smaller loan funds is through partnerships with intermediaries and private funders to build CDFI capacity through our rating process, which helps CDFIs understand their strengths and weaknesses from the perspective of a potential investor. Funders have committed to investing in the participating CDFIs to help boost their operations and prepare them for growth, creating a meaningful partnership that benefits the industry and the communities they serve. 

MD: Looking ahead, what role do you see Aeris playing in shaping the next chapter of the CDFI movement? What would you most like to see from funders and impact investors that are serious about supporting the sector’s continued evolution? 

PC: Aeris will continue to use our ratings, analyses, data and insights to (1) broaden and deepen capital market participants’ understanding of CDFI loan funds’ business models, the role they play in addressing community needs, their capacity to manage risk, and their credibility as an alternative investment and reliable source of positive impact; (2) support the design of investment products that open more diverse capital sources to smaller and mid-sized loan funds; and (3) grow the scale and capacity of smaller loan funds so they can take on and deploy more capital. We are doing this through partnerships with intermediaries, investors, and philanthropy.

Over the last 20 years, CDFIs have demonstrated time and again their ability to serve as strong stewards of capital while spurring affordable housing development, small business formation and growth, the development of healthcare and educational facilities, and financing climate resiliency. Supporting these CDFIs and industry infrastructure with funding for innovation, operations, and lending will be more critical than ever in the coming years as federal resources diminish.