Federal Budget Cuts Threaten Arkansas CDFIs

Darrin Williams is the CEO of Southern Bancorp Inc., one of the United States’ oldest and largest community development financial institutions. (Karen E. Segrave)

When Helena-West Helena’s water system failed in 2023, Communities Unlimited was one of the first financial institutions to offer up capital to help the struggling Delta town try to get its infrastructure back on track.

But the federal program that supports the nonprofit’s lending portfolio and others like it is at risk of being eliminated in the next federal budget after the White House included it on a list of “cuts to woke programs” earlier this year.

Communities Unlimited, a nonprofit lender headquartered in Fayetteville, is a community development financial institution, a federally certified subset of the finance industry that focuses on serving disadvantaged communities. During the last five years, Communities Unlimited has received $4.6 million from the federal fund, all of which has gone to support its loans to local water and wastewater systems.

The nonprofit, which operates in several states, has extended loans for water projects in the cities of Dumas, Harrison, Hartford (Sebastian County), Bradley (Lafayette County) and Blytheville as well as Phillips County and Crowley’s Ridge Community College in Paragould.

But those types of projects are at risk if Congress and President Donald Trump reduce or eliminate the U.S. Department of the Treasury’s CDFI Fund. Without those resources, the northwest Arkansas lender would have to use money borrowed from banks, foundations and private investors. The terms on those types of loans are short while infrastructure improvement loans typically require a 15-year term to be affordable, according to Communities Unlimited CEO Ines Polonius.

The organization wouldn’t go out of business if the CDFI Fund is cut, but it wouldn’t be able to take the same lending risks, resulting in fewer capital resources for water and wastewater projects in rural communities.

“We will see a widening of the capital gap between the needs for capital in rural places throughout Arkansas and the loans that banking institutions are able and willing to make in these places,” Polonius said. “CDFIs like Communities Unlimited will no longer be able to fill the gap.”

Disadvantaged Markets

Most of the nation’s 1,400 or so CDFIs operate revolving loan funds, as does Communities Unlimited, but some operate like traditional banks like Southern Bancorp. All of them are required to direct at least 60% of their services toward a disadvantaged target market, like a low-income population, a geographic area or certain qualified racial groups. And they often make small loans — “microloans” as they are sometimes called — that larger traditional banks usually don’t offer.

It fluctuates year to year, but there are about 50 CDFIs in Arkansas, including banks, credit unions and loan funds. Last year, the CDFI Fund made 30 awards worth $15,089,847 to Arkansas CDFIs, including six that received more than $1 million:

• Pine Bluff Cotton Belt Federal Credit Union of Pine Bluff
• Carlson Bancshares Inc. of West Memphis
• Southern Bancorp Inc. of Arkadelphia
• First National Financial Corp. of McGehee
• Farmers Bancorp Inc. of Blytheville
• Communities Unlimited Inc. of Fayetteville

Communities Unlimited doesn’t take deposits but has loaned $45 million across 24 states, providing assistance to business owners, homeowners and water systems. The organization offered a $750,000 loan to Helena-West Helena when infrastructure failures led to a weeklong water shutoff in 2023.

But the White House says the CDFI program has gotten off base. In May, the administration said awards from the fund, which totals about $324 million this year, should be eliminated in the fiscal 2026 budget, because the fund has been “abused to advance a partisan agenda.” The press release cited concerns with the administration of the CDFI Fund, including race-based awards, critical race theory, transgender awareness and climate initiatives.

Some working in the CDFI industry in Arkansas, however, say that CDFIs have enjoyed bipartisan support in the past and shouldn’t be lumped in with other causes now.

“I think the CDFI Fund is caught up with a pretty broad paintbrush or even a Jackson Pollock,” said Philip Adams, who runs FORGE, a Fayetteville-based CDFI that does work across Arkansas and southern Missouri.

Financing Ozark Rural Growth & Economy, or FORGE, was started in 1988 as a way to loan small amounts with low interest rates to farmers who couldn’t get small-dollar loans from traditional banks.

Today, FORGE is still small and only recently built the capacity to fully participate in the CDFI program, which it joined in 2010. The CDFI Fund accounts for 10% or less of the organization’s lending capital with Adams relying on other sources, including private investors who he said make “bond rates or less” on the investments.

“It’s more of a mission than a business,” Adams said.

Southern Bancorp, the state’s largest CDFI and one of the state’s largest banks overall, operates as a traditional bank with $2.8 billion in assets and 56 locations across Arkansas and Mississippi. Southern has branches in the state’s largest cities of Little Rock and Fayetteville, but it also operates the only bank in some small towns like Elaine and Marvell, both in Phillips County.

Southern Bancorp operates three CDFIs under its umbrella of businesses, including Southern Bancorp Bank, an uncommon operation in the community lending world. Out of the approximately 1,400 CDFIs nationally, most are loan funds and only about 200 of them are banks.

Last year, Southern originated 9,270 loans worth $938 million with 85% being in its target market of low- to moderate-income communities or impoverished counties; 62% of the loans were under $10,000.

Southern CEO Darrin Williams said the bank’s asset quality is strong, despite lending in impoverished communities and working with small loans. Williams said the CDFI industry can show there are $8 in private investment for every $1 of investment from the CDFI Fund.

And Southern is profitable, Williams said, while serving its mission to work in challenging communities.

“We make no bones about making a profit,” he said. “No matter how good our mission is to serve underserved people in the community, if we don’t make money, then our mission really doesn’t matter.”

But Southern’s mission of operating in underserved communities is at risk if the CDFI Fund is reduced or eliminated. Williams said the funds allow the bank to “go deeper into underserved communities,” including its operations in some towns with fewer than 2,000 residents. There won’t be as much margin on Southern’s work in those places with the federal funds.

“While we’re having real impact there, we might have to determine whether we can stay in a market that small,” he said.

Opportunity Finance Network, a national organization of nearly 500 CDFIs including five in Arkansas, says its members provided $124 billion in financing through 2023. That financial assistance helped create or maintain more than 15,000 community facilities, 1 million businesses, 3.4 million jobs and 3 million housing units, the organization said.

Last year, President Joe Biden reappointed Williams to a board to advise the head of the CDFI Fund.

Williams said the program has enjoyed bipartisan support and noted that the Senate CDFI caucus has 14 Democrats and 14 Republicans, including Sen. John Boozman, R-Ark., and Sen. Tom Cotton, R-Ark.

U.S. Rep. French Hill, a Little Rock Republican and chairman of the House Financial Services Committee, was the chairman and CEO of Arkansas-based Delta Trust & Banking Corp. before it was sold to Simmons Bank in 2014.  A representative from Hill’s office said the congressman has been in contact with the White House on its plans for the CDFI Fund.

Assessing the Threat

As the congressional budgeting process begins, CDFIs find themselves in a position familiar from the first Trump administration, when the White House threatened to zero out the fund. The CDFIs survived that go-round and Jeannine Jacokes, the CEO of a national CDFI trade association, believes the real threat is not elimination of the fund but a question of how much it is reduced.

Jacokes, who has led the organization for 24 years, vehemently disagrees with the White House’s “woke” description of the program and called it an “inflammatory statement.”

The White House has also proposed creating a new $100 million award program focused on rural America. The program is short on details, but a brief description of the program in the president’s budget proposal says CDFIs would be required to direct 60% of their loans and investments to rural areas.

Sam Walls, CEO of Little Rock-based CDFI ACC Capital, works with new market tax credits, which his nonprofit organization sells, using the capital to perform lending and venture capital activities in low-income communities. Arkansas institutions are already focused on rural areas because of the nature of the state, he said.

“In Arkansas, you’re going to be rural,” he said. “You can’t not be rural.”

Adams, the CEO of FORGE in northwest Arkansas, said he believes the CDFI programs are focused on creating a path to wealth for whoever receives their services.

“The people we are serving have the same thing in common: They lack access to the financial system and we’ve created a mechanism to fill that gap,” Adams said.

While most CDFIs are small, Southern Bancorp is the state’s ninth-biggest bank and growing. In June, Southern announced plans to acquire Legacy Bank & Trust, a CDFI with $1.9 billion in assets in Springfield, Missouri. The acquisition will increase Southern’s assets to $4.7 billion.

Large banks like Southern will be able to weather changes to the federal program, although they may have to curtail their programs. Smaller institutions may not be in the same position, he said.

“Some of the very very small CDFI loan funds and venture funds may have to shut their doors,” Williams said.