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Adapted from Back to the Future: Why Philanthropies Should (Re)turn to CDFIs to Support an Equitable Recovery from COVID-19 by Willa Seldon and Isabelle Brantley.
Multiple months into the COVID-19 crisis, philanthropy is recognizing the urgent need to support a more equitable economic response and recovery. Job losses are disproportionately falling on low-income people and communities of color. The federal Paycheck Protection Program (PPP) hasn’t adequately accounted for longstanding racial inequities in banking relationships and access to credit, and is therefore reinforcing them. And there is another housing crisis looming as renters and homeowners who have disproportionately lost their jobs can’t pay their rents or mortgages, exacerbating the inequitable financial burden of the disease.
Community development financial institutions (CDFIs) offer donors a compelling option. They have a decades-long track record of serving communities that have the least access to banking and credit. In economic downturns, CDFIs have stepped up. For example, during the Great Recession, CDFIs grew their lending activities by 76 percent, faster than traditional finance and with only slightly higher delinquency rates.
Now is the time for donors to give CDFIs some well-deserved attention, so they can support communities and sustain themselves through the near-term crisis and the longer-term recovery.
The ABCs of CDFIs
CDFIs are financial institutions that provide access to credit and other financial services to individuals, businesses, nonprofits, and communities. They grew out of the Civil Rights era when redlining and other discriminatory practices had left many communities underserved by traditional finance. Today, there are over 1,000 CDFIs in the United States, managing over $150 billion; combined, they would be in the top 20 largest domestic banks.
A recent survey of CDFIs found that they target underserved people and communities—roughly 85 percent low income, 58 percent minority, 48 percent women, and 26 percent rural communities. CDFI financial services help people of color start small businesses and buy their first homes. Their lending to nonprofits enables communities to access affordable housing, healthy food, arts and culture, schools, healthcare, and childcare. CDFIs have achieved this without taking undue risk: the CDFI net charge off rate—the percent of outstanding loans that are never repaid—is just 1 percent.
All this should mean CDFIs are ideal vehicles to respond to COVID-19’s devastating and inequitable economic impact. Here are a few examples of how CDFIs, bolstered by philanthropic support, have demonstrated their flexibility in a crisis and responded quickly.
- Hope Credit Union has processed more than 2,500 PPP loans and is restructuring existing loans to provide flexibility to people in the Mississippi Delta and across the Deep South, an area where poverty has exceeded the federal rate for over half a century—the same communities with the highest rates of slaveholding before the Civil War.
- Opportunity Fund partnered with the Silicon Valley Community Foundation to launch the Small Business Relief Fund, with additional support from Wells Fargo and other funders. The fund’s intent is to help overlooked minority, immigrant, and women-owned businesses survive, given their challenges in accessing PPP funds.
- IFF, in the Midwest, created a lending platform to make PPP loans to small nonprofits, particularly to those led by people of color shut out of capital in the past, not IFF’s traditional borrowers. But the organization saw a need and leaped to fill the gap. Additionally, with support from the MacArthur Foundation, IFF is providing technical assistance to nonprofit borrowers, to help them execute PPP-loan forgiveness and make the transition from response to recovery.
In the coming months, CDFIs will need to play an even bigger role in communities as the economic fallout progresses and as we begin shifting toward recovery.
They will need to:
- Make new loans to reopen closed businesses
- Refinance mortgages and support existing and new affordable housing and community infrastructure
- Support new entrepreneurs and cornerstone economic development projects
All this activity will focus on low-income people and communities of color that traditional banks may not serve.
Yet CDFIs face significant limitations. CDFIs often lack access to the equity or low-cost debt needed to invest more deeply in communities. Adding to the challenge, the CRA, which prompts banks to invest in CDFIs, was partly rolled back in May, potentially resulting in the loss of significant support for CDFIs at a time when their work is most needed.
What to Consider
Here are a few questions that donors might consider as they ramp up their support:
- In what ways does the CDFI seek structural change in communities? Many CDFIs are supporting policy changes, are proactively addressing gaps in funding, and have sought to become deeply embedded in communities.
- How is the organization centering racial equity internally and in its lending, programs, and services? CDFIs that continually evolve their strategies, decisions, and services to close racial gaps in economic opportunity may be particularly relevant to achieving an equitable recovery.
- How has the organization adapted its lending, programs, and services to address community needs as a result of COVID-19? Some CDFIs have adjusted their lending terms to provide greater flexibility to existing borrowers.
- What actions has the organization taken to shore up its own sustainability? It’s not that only those in the strongest position deserve support—in fact, quite the opposite given that CDFIs led by people of color are undercapitalized compared to white-led organizations. CDFIs that invest in being proactive about their own sustainability will be best positioned to survive and, eventually, thrive.
Read the original report.
 Michael Swack, Jack Northrup, and Eric Hangen, “CDFI Industry Analysis: Summary Report,” Community Investments 24, no. 2 (Summer 2012). and Opportunity Finance Network.
 Opportunity Finance Network website referencing OFN member survey from 2018; another report from Opportunity Finance Network gave slightly different statistics: On average, 75 percent of a CDFI’s clients are low-income, 52 percent are people of color, and 48 percent are female (see “20 Years of Opportunity Finance: 1994- 2013: An Analysis of Trends and Growth,” November 10, 2015).