Make the financial system fairer, support more CDFIs
When COVID hit the U.S. economy in March 2020 and tens of millions of small businesses across the country closed, it provided a rare system-wide insight into the glaring flaws in our banking system. If the system was a power grid – linking capital to individual businesses – we learned that a massive part of our economy was in the black.
Lawmakers had moved quickly to create the Paycheck Protection Program to help American businesses weather the storm and tapped commercial banks to disburse the funds. Unsurprisingly, however, the lion’s share went to their best and biggest clients. A recent analysis of the program found that 72% of PPP funds were captured by households with incomes in the top 20%, adding to previous studies that show the huge disparities in the distribution of aid from the program.
But the PPP was just one of hundreds of new programs that were passed into landmark legislation. There is a unique per-generation level of public funding from federal and state governments that could help transform American life, but the banking system is not ready to take full advantage of these injections due to underinvestment. chronicle in an essential element of infrastructure: community finance.
The financial system that has developed over the past 30 years has prioritized consolidation and scale in the pursuit of profit – as the private companies within it are incentivized to do – and the levers available government to ensure access and equity have failed to adapt at the scale and speed required. Tools like the Community Reinvestment Act and antitrust regulations have failed to evolve to respond to stronger market forces, leaving millions of Americans without access to the credit needed to start businesses, strengthen communities and build better lives. .
Fortunately, a subset of the financial system has been created – through civil rights-era laws and regulations – to fill these gaps through the formation of community development financial institutions and community organizations. loans and similarly structured community services. There are more than 1,200 such organizations across the country designed to create financial products and services for individuals, families, businesses and communities that are otherwise largely “unbankable” – in other words, not profitable for banks.
These critical organizations, however, are individually and collectively very small. The entire CDFI industry has combined total assets of $222 billion. By comparison, JPMorgan Chase – a bank – has $2 trillion in assets, nine times the assets of the entire CDFI industry. The sheer size of the industry is often used as an excuse by policy makers and others in power to dismiss the role of CDFIs in fixing flaws in the financial system. But the sheer size of the industry is a symptom of divestment and lack of attention, despite the outsized role CDFIs play in times of crisis and every day in between.
If we are to have a more diverse and inclusive economy – and put critical federal resources to work – we need a much larger and stronger delivery system for community capital solutions.
CDFIs have intensified significantly during the pandemic, as they have repeatedly throughout economic crises. They’ve given out $30 billion in PPP loans, with a much higher reach for very small businesses, low-income communities, and communities of color. They came together to increase their lending to small businesses, while the rest of the credit markets declined. And they provided practical advice, empathic support to thousands of families and business owners who needed somewhere to turn during a long time of uncertainty.
When properly resourced, CDFIs serve the needs of their local community, state, or region. In California, Equity Opportunities Fund saw a need for independent truckers to access financing to upgrade their long-haul trucks to meet the state’s enhanced emissions guidelines. With access to finance, these entrepreneurs can maintain their independence while reducing their carbon footprint.
In West Virginia, Partner Community Capital works with local governments to promote tourism and local entrepreneurship in a region transitioning to a more diverse post-coal economy.
In Oakland, California, Pacific Community Ventures partnered with local organizations to address structural racism in lending by providing restorative capital to local Black-owned businesses.
In Texas, River City Federal Credit Union, through its strong PPP loans, has identified new opportunities to better serve its members managing individual businesses. The credit union has now revamped its underwriting procedures with sole proprietors in mind to offer broader financing options with the best possible rates.
Away from donations, these loan programs have proven that their clients are not more risky, they are simply less efficient at serving than their much larger counterparts, so they require a mission and intent beyond pure profit.
Many programs authorized in the bailout, the infrastructure and jobs act, and the recently announced cut inflation act, such as the state’s small business credit initiative, the fund revolving loan for energy efficiency, broadband access programs and greenhouse gas reduction fund, will benefit from a distributed and community financial system.
Like PPPs, these are all large programs designed to leverage the private sector to ultimately support households, businesses and local communities. To succeed, they need tested and reliable partners to ensure wide reach and fair distribution.
These programs will take time to work their way through the system, so the window of opportunity is open, but not for long. Passing these bills and programs is an incredible first step, but it will mean nothing if it does not result in a direct and positive impact on people’s lives.
For CDFIs to increase their capacity to participate in these programs, they need support now. Mackenzie Scott’s grants to many of the nation’s largest CDFIs were the first large-scale example of unrestricted support to build capacity, technology, systems and people. But scaling up CDFIs and other community organizations shouldn’t depend on the smart handouts of a wealthy woman. A resilient and equitable financial system requires a more comprehensive solution at all levels of philanthropy and government.
The United States was unfortunately unprepared to implement PPPs in a way that reached the people and businesses that needed support the most. Doing the work now can ensure they won’t be left in the dark again.