CDFIs Must Advocate, Innovate, and Advance Justice in a Post-Pandemic World
by Rudy Espinoza & John Broadway
The COVID-19 pandemic has tested us all this past year. This global health crisis has closed many businesses and threatened the stability of millions of families. But with vaccination rates rising and the federal government re-organizing itself to support the recovery, Community Development Financial Institutions (CDFIs) are positioned to play a substantive role in making sure our recovery is an equitable one.
Our Policy Director Lyric Kelkar learned recently that the State of California was seeking out CDFIs to administer a $1.5 billion rent relief program to alleviate the mounting debt many households have accrued over the past year. The CDFI selected would be the steward of these funds and would no doubt have a role in making sure these resources made it into the hands of the most vulnerable. Her immediate thought was: "Which CDFIs will apply? I hope it's the good ones."
Her question piqued our interest. What is a “good CDFI?” What kind of CDFI do we need during this crisis? What kind of CDFIs do we need to ensure our communities not only recover but achieve economic justice?
THE HISTORY OF CDFIs
Throughout the twentieth century there were a handful of federal efforts to get capital in the hands of communities who have historically lacked access to it. These efforts sought to right the wrongdoing of banks who did not lend to communities of color; laws were in place that prohibited it, and the norms within these institutions cultivated outright bias against Black, Latinx, Asian, Jewish, and other non-white communities.
The modern community development era began with the passage of the Community Reinvestment Act in 1977; this bill requires financial institutions to meet the communities' credit needs where they are. As a result of this legislation, the community investment activities of financial institutions are "graded" by regulators. Some financial institutions who preserve their conservative (or racially biased) underwriting practices began to seek out CDFIs as "partners" and grantees so they can still meet their CRA obligations. In essence, if a bank was not lending in a community, they could invest in a CDFI who would be an intermediary lender.
In the 1980s, pioneers in the CDFI industry, like Shore Bank in Chicago and Self-Help Credit Union in North Carolina, began to innovate how they disseminated capital to entrepreneurs and families marginalized by the financial services sector. The origin story of the CDFI is radical and revolutionary, a direct response to the fact that major financial institutions refused to lend to BIPOC communities. Early CDFIs started with an unapologetic focus on serving communities, experimenting with new financial products, and finding ways to reach entrepreneurs and families who the mainstream has shunned. In recent years, some CDFIs have stepped into the policy advocacy arena to help inform how regulators oversee lending in vulnerable communities.
CDFIs TODAY
Historians like Mehrsa Baradaran and Clifford Rosenthal describe the growth of CDFIs as a "movement" of community-driven financiers, but has this "movement" become another "industry"? Are CDFIs still rooted in the definitive purpose of facilitating access to capital to BIPOC communities, or has their focus turned to protect their bottom line?
In 2018, one CDFI collected late fees on roughly 75% of its loans. Refinance rates are not publicly available, but 80% of its loans go to repeat customers which suggests predatory practices where sales agents target clients in need. Moreover, investigations by Pro Publica and The Guardian found their debt collection to be abusive. Not only are they highly litigious, but they tend to drop their lawsuits if a borrower hires a lawyer, signaling their claims are primarily intimidating in nature.
Another institution certified as a CDFI charges APRs upwards of 190% on their loans. And while some CDFIs advocate against predatory lending practices, some actively push for exceptions that would allow it to lend at higher rates than the laws allow. These predatory institutions should not be the ones we trust to administer pandemic relief funds, and these are certainly not the institutions we need to help underserved communities thrive.
A “ONCE IN A GENERATION” MOMENT
Congress is deliberating over six trillion dollars in stimulus dollars for communities. President Biden's America's Families Plan proposes $1.8 trillion to support families and a “caring economy”. The American Jobs Plan proposes $2.3 trillion to support infrastructure improvements throughout our country. The American Rescue Plan, which Congress already passed, approved $1.9 trillion to fund the pandemic recovery, with $2.2 Billion coming to Los Angeles alone.
Some argue that these resources don't constitute a "New Deal" for our communities but still they present an essential opportunity for us to invest in the initiatives that we have long fought for. The pandemic has shown us that it IS possible to use public land and facilities to house the houseless. It IS possible to provide cash payments to vulnerable families. WE CAN administer large stimulus initiatives that support small businesses. We learned a lot in a year of crisis, and we can't afford to mishandle the opportunity to make sure that equity governs our decision-making.
CDFIs have a vital role to play in this process.
CDFIs, if they are true to their origins, are an ideal player to help governments administer these initiatives because of their history. While some CDFIs have stretched the definition of "community development," others have strong relationships with low-income community members, actively work to reach out to vulnerable small businesses, and are actively experimenting with how to propagate community-owned assets.
CDFIs OF THE FUTURE
We are living in a special moment in time, a “once in a generation” opportunity to move our systems towards transformation and justice. CDFIs need to play their part in making sure that equity is at the forefront of our community’s recovery and development.
To do this, CDFIs need to re-align themselves with the origins of the field, a radical and experimental subsection of the financial services industry that identified a need and rose to the occasion to address it.
But, looking back is not enough. Navigating the tough road ahead will require CDFIs to be willing to innovate and be actively introspective in their processes. The Paycheck Protection Program is just one example of how simply administering grants and loans isn't enough. We must constantly be re-evaluating our processes, ensuring they're fair, inclusive, and equitable.
Part of this process includes the willingness to re-evaluate our criteria for administering loans, too: a low credit score should not constitute an interest rate upwards of 30, 50, or 200 percent. CDFI should not force customers to pay a higher cost for their loan in exchange for a speedy transaction. CDFIs service offerings must prioritize people over profit, and intentionally dismantle our preconceived notions of who is “risky.”
The CDFI we need in the future does not just empower communities with the capital but also with knowledge. It's clear that technical assistance paired with loans is a must; beyond providing capital, we must ensure our interactions with clients always impart knowledge that builds our client's capacity to be more informed and ideally self-sufficient.
CDFI's of the future need to be ready to innovate their operations whenever a crisis hits to meet the community's needs. During this pandemic, that may be doing something like hosting vaccine deployment or creating emergency cash funds; prototyping must find a home in a CDFI.
CDFIs of the future must be good community partners. Not just with our clients but with other like-minded organizations. We must be willing to innovate how we engage with partners, build coalitions, and work together to create the future that our communities need and deserve. Whether we recognize it or not, community development lending is political. The CDFI we need can not extrapolate itself from the socio-economic experiences and political battles that our communities are facing. CDFIs should lean into their expertise as lenders, but they must also stand alongside those advocating affordable housing, immigrant rights, and alternatives to incarceration.
We are living in unprecedented times. Few, if any, have the playbook to get through this, and there is no doubt we need CDFIs to help our economy recover. What type of CDFI do we need? We need those who remember their origins, their mission, and are willing to move beyond business as usual, and create new tools to support our communities.