A broadly smiling woman with dark skin and braids, wearing a black shirt with a green-leaf logo on it, stands in front of a medium-blue wall. A business name, The Olive Street Agency, with the green-leaf logo, is printed (or affixed) to the wall in white capital letters.

OpinionCDFIs

CDFIs Shouldn’t Act Like Banks, But Too Often Do

When receiving bank funding, CDFIs often limit their investments in accordance with bank restrictions. How can reforms to the Community Reinvestment Act help center the needs of underserved communities?

With support from Pacific Community Ventures, a CDFI, Rita Forte opened her first brick-and-mortar business in East Oakland and created quality jobs in the neighborhood where she grew up. Photo courtesy of PCV

A broadly smiling woman with dark skin and braids, wearing a black shirt with a green-leaf logo on it, stands in front of a medium-blue wall. A business name, The Olive Street Agency, with the green-leaf logo, is printed (or affixed) to the wall in white capital letters.

With support from Pacific Community Ventures, a CDFI, Rita Forte opened her first brick-and-mortar business in East Oakland and created quality jobs in the neighborhood where she grew up. Photo courtesy of PCV

The Civil Rights Movement sought to eradicate racial discrimination and injustice, but they unfortunately still persist today throughout many American systems, including education, housing, and access to capital. One by-product of the movement was the creation of community development financial institutions, or CDFIs. This was a federal acknowledgment of decades of systemic racial discrimination and redlining in the formal financial system. CDFIs were meant to be a wealth-building strategy for historically excluded and discriminated-against Black and brown communities. However, decades later, CDFIs still haven’t been able to, and enabled to, deploy this wealth-building strategy for underinvested communities of color.

The statistics are staggering. For example, Black Americans have a 46 percent homeownership rate, compared to white Americans’ rate of 74 percent. Data from the Home Mortgage Disclosure Act shows that, in 2017, lenders declined to give mortgages for Black applicants 80 percent more often than they did white applicants. Additionally, women of color led 89 percent of the net new businesses owned by women, according to the 2019 State of Women-Owned Businesses Report. However, Black entrepreneurs are twice as likely to be denied loans by a bank as white entrepreneurs. Black wealth in this country was decimated in the years during and following the Great Recession; we cannot afford for that to happen again in this pandemic recovery. Particularly not as people of color are poised to be the new majority in this country by 2045—building economic mobility and wealth is essential to unlocking innovation and talent in half our country’s population.

As CEO of Pacific Community Ventures, a CDFI based in Oakland, I have seen firsthand the impact that CDFIs can have on communities that have been excluded from traditional finance. I believe that CDFI leaders can be positioned to do more to serve communities of color and help them build wealth and increase their financial stability, but we need banking regulators and investors to do their part enabling us to do so, instead of further tying our hands behind our backs. Reforming the Community Reinvestment Act, or CRA, is an essential step.

How the CRA Has Affected CDFIs’ Partnerships with Traditional Investors

The CRA was enacted in 1977 at the tail end of civil rights legislation. It was intended to remedy the systemic oppression and economic exclusion resulting from redlining, when banks refused to serve neighborhoods where immigrants and people of color lived. The deliberate and systematic exclusion of these communities from lending opportunities resulted in lost opportunities to build wealth, a consequence that has affected families for generations.

[RELATED SERIES: The Racial Wealth Gap—Moving to Systemic Solutions]

The CRA created an affirmative obligation on these banks: they had to serve the needs of the entire community in which they were located. The development of CDFIs was a direct outcome of the CRA. CDFIs were created to provide fair financing and lending opportunities to traditionally excluded groups. Today, there are about 1,400 CDFIs in the U.S. With the growing number of CDFIs across the country, the racial wealth gap should be closing, especially if these lenders are actively fulfilling their mission of providing capital to underinvested and unbanked communities of color. But it’s not—the gap has actually worsened since the creation of CDFIs.

Why? For one, there’s a disconnect between how a CDFI generates investment capital and to whom this capital is ultimately disseminated. CDFIs can receive federal funding for investments from the U.S. Department of the Treasury, and they can attract investment capital from private entities, like foundations, religious institutions, and traditional banks. When a CDFI receives capital from a bank, it must abide by that bank’s set rates and terms for investing the money into a community—the same communities these banks have historically failed to invest in. The original intent of a CDFI is to disrupt the financial practices of the traditional bank, in order to meet the market failure left behind by them, not to perpetuate their historic practices further. PCV is often presented with geographic restrictions on capital, for example, which have prevented us from deploying our capital in counties in parts of California where average income is at or below the median for the state and business owners have less access to capital, or offered capital with restrictions on rates that would require us to raise the cost of capital to the same entrepreneurs who can least afford it.

With the primary objectives of the CRA not being met—with rural communities, low-income people, and communities of color unable to secure loans at better rates—we need regulators to make meaningful reforms to solve market failures such as the ones that CDFIs were created to address. With the assistance of regulators, and through CRA reform, we must ensure that CDFIs are allowed to invest in communities the way they see fit, and provide rates and terms that would better serve communities of color, not be used to inherit, then perpetuate, historic extractive practices.

How CRA Reform Can Impact Our Financial Practices

The traditional financial system simply is not working for many people in underserved communities. To achieve racial justice, we must disrupt the existing banking model and center our practices on civil rights. As regulators review the comments to reform the CRA, there should be a thorough review of the CRA examination process of banks and financial institutions. Regulators should not allow banks to pass their CRA exam if they aren’t lending to people of color and only offer expensive products that don’t actually serve the needs of the community. Enacting these critical reforms to the CRA exam will allow CDFIs to persist in decolonizing capital and underwriting practices by blending this capital with philanthropic grants and donations as well as government assistance. These changes will help address the market failures we, the CDFIs, were created to solve.

[RELATED ARTICLE: Proposed CRA Rule Receives Mixed Reviews from Housers]

Further, CDFIs should consider adopting, and be encouraged to provide, more flexible financial practices to better serve underinvested communities. In 2019, for example, Pacific Community Ventures (PCV) removed all collateral and credit score requirements from our underwriting, allowing us to deploy more capital to socially and economically disadvantaged entrepreneurs. We also removed personal property from the underwriting matrix because many entrepreneurs of color did not include personal property in their financial statements. Through these efforts, we have increased the proportion of our lending capital that goes to entrepreneurs of color in California to 78 percent in 2021.

Productive CRA reform by regulators can help CDFIs provide underinvested communities access to the financing they need to start or grow their businesses or buy homes.

CDFIs can also do more to support the communities they serve by increasing existing support services, including financial coaching, business incubation and mentorship, and high-quality technical assistance. By disrupting the existing systems and reforming our current practices, we can better serve underinvested communities and help them build wealth, increase their financial wellbeing, and break the cycle of poverty.

One example of decolonizing capital is supporting Black, Indigenous, Latinx, and Asian and Pacific Islander entrepreneurs, which is integral to PCV’s mission of creating a just economy and good jobs with dignity. In November 2021, we launched our Oakland Restorative Loan Fund, a place-based, impact-first fund and our first effort under our new strategy to decolonize capital, democratize access, and be restorative in the communities we serve.

One of the recipients of this loan fund was Rita Forte, founder and owner of the Olive Street Agency LLC, a marketing and screen-printing business. In 2022, Forte was deciding whether she would be able to keep going or would have to shut down her business. After being turned down several times by banks and financial institutions, she was pleased to learn that the PCV loan was designed to reach entrepreneurs like her. “I was shocked to see that PCV was offering a loan available for Black-owned, small businesses directly in the area that I did business in,” she says.

Nineteen smiling people of mixed ages and skin colors , most wearing blue sweatshirts, are standing (one is crouching) in front of a wall painted with an abstract mural in pastel colors.

The staff of Pacific Community Ventures models sweatshirts designed by Rita Forte, a business owner who received one of PCV’s loans. Photo courtesy of PCV

Since receiving the loan, Forte has opened her first brick-and-mortar business in East Oakland and created quality jobs in the neighborhood where she grew up. We allocated $2.5 million in no-fee, zero-interest loans for BIPOC- and AAPI-owned small-business owners in specific Oakland neighborhoods, funding a total of 37 businesses. PCV instituted this fund with several of our local community partner organizations, because we heard from small-business owners in our community that this is what they needed to stabilize their businesses. In 2021, only 13 percent of Black business owners and 20 percent of Hispanic business owners got the loans they applied for, compared to 40 percent of white owners, and less than 1 percent of venture capital dollars were invested in Black founders in 2020. By creating this loan for underinvested communities, PCV and our partners were able to help keep businesses open and create more jobs in Oakland, offering one solution to the unaffordability that caused the Black population in the city to decrease by 40 percent between 1990 and 2018. This exemplifies how beneficial CDFIs can be when utilized properly to support our communities. We must continue these efforts—with the support of regulators—to broaden our capacities and limit small-business setbacks.

Measuring CDFIs’ Impact through Data Analysis

Further, measuring a CDFI’s impact through data analysis can help advance our goals of providing more access to capital to underinvested communities of color. We cannot afford to wait any longer to tackle the massive racial wealth gap, which only shows signs of worsening—unless we have the courage and will to stop it.

This year, the CFPB issued guidance around implementing Section 1071 of the Dodd-Frank Act, requiring financial institutions to collect and report to the CFPB data on applications for credit for small businesses, including ethnicity, race, sex, and LGBTQI+ status of business owners. This guidance is a critical and important step by the CFPB, and it signals to fellow policymakers and regulators that they should thoughtfully examine how they assess their impact in the communities they serve.

Measuring makes certain that your investment accomplishes its goal over time—we measure what matters: how products can be deployed in low-income neighborhoods to benefit residents and create family-sustaining good jobs. PCV embraces the principles of decolonizing and democratizing wealth and restoring access to fair and affordable capital and financial mentorship.

[RELATED ARTICLE: Major Changes Coming for CDFIs]

Similar to the changes made by CFPB in accordance with Section 1071 of the Dodd-Frank Act, we hope that effective CRA reform will require regulators to collect disaggregated data on race and key demographics to better assist CDFIs to measure their own community development impact.

While we wait for the regulators to make decisions on the important CRA reforms, as CDFIs, we should continue to develop or strengthen meaningful partnerships with local community organizations and review our financial product offerings through an equity lens.

CDFIs were created to serve communities that have been excluded from traditional finance and now more than ever, it is important that we live up to that mission. Meaningful CRA reform can assist CDFIs in creating a more inclusive and equitable financial system that better serves all people. It also means investing in the nearly half of Americans who are people of color, enabling inclusive economic growth, and unleashing innovation, talent, and competitiveness across our country.

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