Reported Article Moving Community Development Forward

Are Race-Based Lawsuits Affecting Community Lenders?

Shelterforce spoke with community-lending leaders and experts about the current mood across the sector. What, if anything, are organizations planning to do to avoid becoming the next target?

Photo by Flickr user Brenda Gottsabend, Attribution-NonCommercial 2.0

This article is part of the Under the Lens series

Moving Community Development Forward

In this series, we examine the state of the community development field, the challenges and tensions it faces, and some promising approaches to this work.

A year has passed since the U.S. Supreme Court struck down the use of affirmative action in college admissions. While the ruling in Students for Fair Admissions Inc. v. Harvard and UNC applied only to the use of race in determining college admissions, in its wake, conservative activists are mounting new challenges to a variety of programs that provide money or services to historically disadvantaged communities and people of color.

Targets include community development financial institutions (CDFIs), specialized lenders that serve low-income communities not traditionally reached by mainstream lenders, as well as local governments and nonprofit funders and investors.

Some examples:

  • LiftFund, a CDFI that administers the Bexar County Small Business Assistance Program in Texas, was named in a lawsuit last year challenging its grant program, which weighed factors such as minority ownership in assessing applications.
  • Massachusetts Growth Capital Corporation, a quasi-public state agency, was sued for a program that directed grants to pandemic-affected businesses operated by women and people of color. (The state agreed to put a pause on business grants even while the suit was pending.)
  • The Fearless Fund, a venture capital firm founded by Black women, was sued for its Strivers Grant Contest for Black female entrepreneurs.
  • And recently, a judge ruled that the long-standing federal Minority Business Development Agency (MBDA) must stop considering race in its application acceptance.

The conservative activists behind several of these challenges are quite open about their aim to rewrite the rules on racial justice efforts. The Wisconsin law firm that brought the suits against LiftFund/Bexar County and the MBDA, for instance, promises to fight any instance of government action to “tip the scales using equity measurements.”

Plaintiffs don’t even have to win to cast a chill on racial equity efforts. The mere threat of lawsuits could reverse decades of racial equity efforts and undo many of the commitments that businesses and institutions initiated or expanded after the racial justice uprisings of 2020, some nonprofit lending leaders and experts say.

Shelterforce recently spoke with community-lending and investing leaders and experts about the current mood across the sector; what, if anything, organizations are planning to do to stay off the radar of litigious groups looking for the next race-based program to target; and where they think this will go in the next few years.

CDFIs: Worried But Sticking to the Mission

Nearly 1,500 CDFIs operate nationwide, according to the Federal Reserve Bank of New York. A majority of their clients are low-income, low-wealth, or historically disinvested, according to the Opportunity Finance Network (OFN), a nationwide CDFI network. And a large percentage of clients are women, and people of color.

A sample of OFN members provided nearly $10.7 billion in financing to people, markets, and communities “underserved by mainstream finance” in 2022, according to OFN’s most recent fact sheet. This includes funding to help support jobs, small businesses, housing development, and rehabilitation and community facility projects.

The accelerating pace of lawsuits is clearly a topic of discussion in the lending world, and people are feeling nervous.

“It’s a pretty broad assault . . . It’s very hard to imagine, given what the Supreme Court has ruled, that these [lawsuits] aren’t going to have some success in stopping some of the activity that CDFIs and other community development organizations rely on,” says Mark Pinsky, founding partner at CDFI Friendly America, and formerly OFN’s president and CEO. (OFN declined to comment on current threats to race-based programs, offering instead its public statement on the “troubling trend” of legal cases.)

Micha Josephy, executive director of the Cooperative Fund of the Northeast, a CDFI that lends to food, housing, and worker cooperatives, says, “The vibes that I’m hearing are that folks are paying attention to this very closely—but the commitment to racial justice is still as strong as ever among our peers.”

Because of their shared-ownership model, cooperatives often face barriers in accessing capital from conventional lenders, and the Cooperative Fund of the Northeast arose to address this financing gap. Dorian Gregory, the CDFI’s deputy director, says, “That’s what CDFIs are set up to do, meet a gap. Those gaps are sometimes racial, and sometimes it’s business model. The whole sector exists to meet a gap, and so that’s what we’re going to keep doing. . . . we’re eyes wide open, no head in the sand, but we’re not alarmist either.”

A Chilling Effect

Several people who spoke with Shelterforce noted that organizations in many sectors—lending, philanthropy, Wall Street, law firms, tech companies, and others—appear to be reassessing and diluting their racial equity efforts in the face of potential lawsuits.

Glynn Lloyd, executive director of Mill Cities Community Investments, a Lawrence, Massachusetts-based CDFI, says, “This is a new battlefront for our rights, and so far, they’ve chilled the marketplace or given people an excuse not to be fully committed. They don’t have to win cases—just the threat of it has an impact.”

Tiffany Manuel, president and CEO of the consulting firm TheCaseMade (and chair of Shelterforce’s board), advises mission-based organizations on leadership skills to build stronger support for tough issues like diversity, equity, and inclusion efforts. The lenders she works with are “not dialing back yet,” she says, and are working out strategies to continue their social impact business models.

She is, however, seeing philanthropic funders step back, including halting the collection of race-specific data on the front end as part of their grantee selection, out of fear of potential race-based challenges. While they may continue to collect such data on the back end, after they have given awards, that’s often too late, she notes, if it becomes clear that organizations serving communities of color or others with diversity, equity, and inclusion (DEI) as part of their work were not among the grantees.

“I am amazed by the speed at which decades of hard work around these issues have been taken down, not only by lawsuits but also just the threat of them,” Manuel says. “It’s astounding.

Marla Bilonick, president and CEO of the National Association for Latino Community Asset Builders (NALCAB), a CDFI intermediary that lends to CDFI and community lender members, has seen it too. “I have already seen public and private funders pull back from aligning from race- or ethnicity-specific programs and organizations. That keeps me up at night,” she says.

Manuel and Bilonick did not specify which funders have pulled back.

I am amazed by the speed at which decades of hard work around these issues have been taken down, not only by lawsuits but also just the threat of them. It’s astounding.

Tiffany Manuel, president and CEO of the consulting firm TheCaseMade

In a recent commentary in the Chronicle of Philanthropy, representatives of the Philanthropic Initiative for Racial Equity decried a trend they see of philanthropies stepping back from racial justice objectives—in some cases pausing their own DEI efforts or pressuring grantee organizations to scrub race-specific language from their programs and adopt “colorblind” strategies. 

“Grantmakers who claim to advance racial equity while using hypercautious race-neutral language . . . are giving up before they’ve even lost,” they wrote. “The most important question to ask isn’t ‘How can we protect ourselves?’ but ‘What are our values?’ Supporting people of color as they pursue freedom and self-determination should top the list.”

Assessing Programs, Shoring up Defenses

Some organizations may be able to rest a little easier, having evolved to serve various populations without using race-specific criteria.

Amine Benali, managing director for strategy and development for the Local Enterprise Assistance Fund, another CDFI whose lending supports worker, food, and housing cooperatives, says his organization’s lending doesn’t typically fall along ethnic and racial lines. “We’re not changing who we are and our mission. We support underserved communities. If they intersect with race or gender or ethnicity, that’s just a fact.”

Lloyd says Mill Cities Community Investments’ lending over the years has naturally reached Latino community members because of its location and its Latino founders. The CDFI “is more geographically based. It just so happened that the community is Latino, and so that’s who we’re reaching,” he says. He notes that Lawrence is also one of the state’s “Gateway Cities,” a non-race-based target category for economic revitalization efforts of former manufacturing and mill cities across Massachusetts.

Others say they are doubling down on their overt racial equity missions.

NALCAB has not made any changes in its programming, Bilonick says, but it has engaged legal counsel to take a look at the organization’s programs and messaging. While it’s possible that legal advice could spur some adjustments, she says, she would stop short of changes that erase or dilute NALCAB’s focus on Latino populations. She notes that the organization’s Acceso Loan Fund, which supports lending to minority-owned businesses through a network of Latino-led nonprofit lenders and has had significant support from the Wells Fargo Foundation, is in its third iteration and still going strong. [Editor’s note: Wells Fargo supports our work.]

“We are steadfast and standing firm in terms of our mission and target population,” Bilonick says. “At the same time, we don’t want anything we do or say to put our organization or programming at risk. It’s a delicate balance, and, frankly, it is really upsetting to have to spend time and mental energy that could be spent on services thinking about this issue.”

Amber Banks-Bond is president of the African American Alliance of CDFIs, a nationwide coalition of Black-led CDFIs. For her, the current challenges make it all the more important to be loud and proud of the mission.

Eight people in two rows, all people of colors. In back row are four men, seated in front are three women and a man.
Attendees at a conference of the African American Alliance of CDFIs. Photo by Ashley Canay, courtesy of AAACDFI

“We knew the Supreme Court ruling would have impacts beyond college admissions and into any programs that are race-based. And so the ruling was disheartening,” Banks-Bond says. “But at the same time, it was very energizing, because these are the reasons that we exist, right? There are those that will always fight against the advancement of underserved people in this country. And so it was a rallying cry, in part, to say, ‘These are the reasons that we exist—to resist this type of demoralizing activity.’

“I really see them as fear tactics,” she adds, “meant to kind of strip these organizations and programs of a certain boldness and specificity that they had intended in the beginning. This is really an attack on Black leadership, access to capital, community advancement, and overall representation across industries and markets in the country.”

Banks-Bond says her organization and NALCAB work closely together, and she and other CDFI leaders say strength in numbers will be crucial as more legal challenges arise.

“I don’t perceive us making any substantial or significant changes in anything,” Banks-Bond says. “But we continue, of course, to monitor it closely and to work with similarly focused organizations. All of the work that we do is critical. So we’re not encouraging each other to step away from the mission at all. We’re in close conversations to make sure that there’s a collective defensive strategy and that we’re on the offense about the work that we’re doing in our messaging.”

Solutions, Strategies, and Hope

Some CDFI leaders, investors, and consultants in the sector concede that realistically, making some adjustments in program language and structure is probably a wise move.

The national organization Just Solutions offers an explainer on legal attacks and paths forward. Suggestions for near-term action center on staying within current legal options by making programs race-conscious, for instance, allocating funds to neighborhoods impacted by inequities, but not race-based, as in specifying race quotas or preferences. For the long term, they urge organizing and power-building to transform laws and courts.

All of the work that we do is critical. So we’re not encouraging each other to step away from the mission at all.

Amber Banks-Bond, president of the African American Alliance of CDFIs

Others suggest strategies such as targeting “new, small, and emerging” entities, which may help direct funds to people in historically marginalized groups; and some harbor hope that the publicity generated by suits like the one against Fearless Fund could itself cause a backlash, generating greater interest in the untapped potential of entrepreneurs of color.

Betty Francisco, CEO of Boston Impact Initiative (BII), an impact investing fund focused on economic justice, says her organization is holding firm to its mission—investing in diverse, impact-focused businesses, many of which lack the networks and access to capital needed to start or scale up—but is vetting its programs to make sure they comply with current law.

Five people, three men and two women, of varying skin tones, pose in a long hallway. All are wearing white hard hats. Three are wearing bright yellow shirts with a logo and "Synergy," two are wearing bright yellow safety vests.
One of the organizations funded by Boston Impact Initiative is Synergy Contracting Inc., a unionized construction firm owned by Jeysi Zuniga, in front. Photo by Karla Morales, courtesy of BII

“One of the things BII and other organizations are doing, which is recommended, is engaging legal counsel to understand what the legal implications might be, given the current environment,” Francisco says. “We want to make sure if something changes, we are following the law.”

She worries that some organizations are deciding too quickly to make changes.

“What we are seeing is organizations over-correcting because of fear,” she says. “Instead of making small adjustments, where they are considering race but not in a discriminatory way, they are just eliminating DEI or race considerations altogether.”

She cites examples, like Wall Street firms quietly pulling back diversity programs, and law firms such as Perkins Coie, Morrison Foerster, and Winston & Strawn that were sued by the American Alliance for Equal Rights over their fellowship or summer associate programs to promote attorney diversity. The targeted law firms—along with others that feared being the next target—have opted to change the criteria of their programs and make them open to all students, Francisco says.

“When you become completely color-blind, you are sending a different kind of message, that perhaps you’re not as committed,” she says. “So boards and organizations need to assess what is the actual legal risk versus their fears. I’ve been asked, ‘Do we need to change our mission?’ But changing mission is not what’s necessary—you may just need to look at how your programs are structured.”

Francisco and others say larger foundations and corporations have a role to play in supporting or defending smaller organizations and their missions.

“The business community could continue to use the power of their voice and dollars to continue to advance the promise of diversity, equity, and belonging in their strategies of how they invest their dollars,” says Francisco. “Large corporations could come forward and talk about the business case for diverse teams.”

She notes that equity efforts are by no means dying off. “A lot of media coverage has pretty much claimed that DEI is dead. But that’s not true,” she says.

Manuel, of TheCaseMade, says, “The good news is that we have the opportunity to regroup and reaffirm our belief that diverse, equitable communities matter.”

Looking Ahead

Some leaders are finding solace in keeping an eye on the long view, and several referred to the repeating cycle of progress and backlash.

“In the end, business and economic development and the desire to create thriving communities benefits everyone,” Francisco says. “So the pendulum will eventually swing back.”

Pinsky hopes that by the time any of the current cases could rise to the Supreme Court, there will have been a shift in the court’s makeup. In the meantime, he’d like to see legislative change.

“Legislatures these days seem to have trouble making any decisions,” he says, “but let’s hope that in a better environment there can be legislation that explicitly makes it legal, as it should be, [to have] race-based strategies. Then the legal issue goes away. The whole point is that the court said ‘this is not supported by the law’—but if you change the law, that’s how you fix these things.”

Bilonick at NALCAB suggests that this year’s presidential election will surely affect the direction of anti-DEI efforts: “Depending on how the election goes, the anti-DEI movement may either become emboldened or diluted,” she says, “and it could even be counterintuitive. If the Biden-Harris administration wins a second term, the threat to the anti-DEI movement could feel stronger to DEI opponents, and therefore that​ could embolden anti-DEI operatives.”

As for a longer forecast, she says, “I would hope that by five years from now, the pendulum will have swung back to nonprofits, philanthropy, and government being allowed to speak openly and freely about directing services and support toward target populations that have been historically underinvested, underserved, and marginalized.”

Josephy, of the Cooperative Fund of the Northeast, says, “Those of us who work for justice recognize that there’s been a push and a pull historically. Whenever there’s progress, there’s a reaction to that progress. We’ve experienced it before. We have faith that the arc of the universe does bend towards justice, even if it is long.”

He adds, “It’s important that we move together in community with other people, because we’re stronger together. Through alignment, through collaboration, we have a lot more power to achieve on our mission, to create economic opportunity and justice for communities that have really been excluded from that.”

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