Secondary Markets

Basics

The CDFI borrow-and-lend business model has provided much-needed financing to community-based entities, especially those underserved by traditional banks and creditors. With all the model’s merits, it’s a costly and limiting way of doing business. CDFIs need solutions that allow them to meet demand at scale, earn additional revenue, and lower the fundraising costs of raising capital.

To offset these challenges and transform their lending potential, CDFIs could explore secondary market access.

Benefits

Secondary markets are where lenders sell loans for investor purchase, converting noncash (illiquid) loans into immediate cash (liquidity). Lending industries use secondary markets for growth by freeing up capital and distributing risk.

CDFIs could use these markets in the same way: by turning loans into sellable products that raise money from investors. CDFIs that convert originated loans into new capital offerings on secondary markets can attract investor interest in their asset portfolios and raise cash to funnel back to new mission-aligned lending opportunities.

Background

Like other types of lenders, certain segments of the CDFI industry are well established in secondary markets. Secondary markets exist for CDFI products such as single‑family mortgages and U.S. Small Business Administration (SBA) 7(a) loans. Access is more limited or underdeveloped for other core CDFI lending areas, including small business, microenterprise, consumer, and nontraditional real estate lending.

Evidence of Success

Single-family housing lenders have long had access to a robust, government-supported secondary market. Likewise, secondary markets have played important roles for some SBA 7(a) and multifamily housing lenders. Other recent successes in or potential uses of secondary markets include:

• During the COVID‑19 pandemic, state‑guaranteed loan purchase vehicles dramatically increased lending volume through the purchase of CDFI‑originated loans, which generated immediate liquidity.
• Intermediaries such as Scale Link are engaging in bulk purchases of microloans that can be resold to banks in exchange for Community Reinvestment Act (CRA) credit.
• Newer intermediaries and investment banks are finding new ways to package and securitize CDFI loan products.

As these examples show, secondary markets can work for CDFIs when supported by aggregation, credit incentives, and creative product development.

Potential Challenges

Nevertheless, secondary market access can be costly and not always matched well to CDFI business models. CDFIs will want to preserve their high-touch servicing and technical assistance models in the transfer of loan ownership. Attracting investor participation often involves credit enhancements, standardization, and reliable performance data, all of which require additional infrastructure and coordination. Geographic concentration, policy incentives, and uneven access across lending sectors further complicate expansion. Not all CDFI loans can or should be standardized to meet secondary market expectations, especially if the resulting product undermines the industry’s relationship-based lending model. 

Bottom Line

Secondary market strategies are well‑established but unevenly used by CDFIs. Some CDFIs have successfully leveraged loan sales and securitization to increase liquidity, but adoption so far is limited. As they continue to experiment, invest in data and technology, and develop ways to preserve mission‑driven lending practices, CDFIs can better explore ways to use secondary markets as financing tools.practices, CDFIs can better explore ways to use secondary markets as financing tools.

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