Community development financial institutions played a critical role in implementing and deploying funds through the Paycheck Protection Program, making 1.3 million loans totaling more than $30 billion.
Notably, nearly 40% of the loans went to businesses in low- and moderate-income communities, providing much-needed help in both urban and rural communities. Experts and policymakers on both sides of the aisle can attest that access to these funds saved small businesses and helped provide a lifeline to entrepreneurs and their families during the worst months of the COVID-19 pandemic.
What’s more, CDFIs’ performance placed them securely in the national conversation as a critical component of an efficient and effective financial system.
But now that we have moved to a new stage of recovery — where small businesses are facing the headwinds of inflation and supply chain challenges and will need capital and other resources to rebuild — an obvious question is, what is next for these unsung heroes of the pandemic?
The CDFI Fund at the Department of the Treasury was established by legislation in the 1990s, and has led to the development of hundreds of CDFIs across the country, which vary in size, geography, focus areas and financial/technical offerings. One thing they share is their commitment to supporting underserved communities and, given what they have achieved for the American people over the last couple of years, it is time that state and national policymakers consider how to incorporate them most effectively into the mainstream ecosystem of consumer and commercial finance.
The challenge is not whether CDFIs should have that “seat at the table,” but rather, what does that seat look like in the context of national, regional and community banking institutions? Practically speaking, many CDFI customers either do not engage with traditional banks or have been referred to a CDFI by one of them. This is of course situational, and often informal. In fact, many large banks are already working with CDFIs as part of their Community Reinvestment Act programs, so these groups are well aware of the operational capabilities of the CDFI community. As such, the development of a system that encourages and incentivizes customer referrals from traditional banks in a consistent, systemic and integrated manner could be the linchpin to a more inclusive credit system.
Various proposals and programs are under development to do just that. For example, groups including the investor
All of these funds partner with local CDFIs and target underbanked communities that are often overlooked by the traditional financial system and have been wildly successful in getting responsible, affordable capital to small businesses to help them rebuild and retool from the pandemic. Policymakers should analyze these types of programs and incentivize their most impactful components at local, state and federal levels.
Another way to bolster CDFI lending would be to establish a national charter for nondepository CDFIs — to allow those with larger balance sheets and operational capacity to work directly with smaller urban and rural organizations to share their capabilities with their customer networks across state lines. Such a proposal, which would likely require congressional action, could advance lending into areas of the country where CDFIs are limited or nonexistent, without complex licensing and compliance cost overruns.
A third potential model for policymakers to examine is more concentrated support for strategic partnerships through credit unions and other mission-focused institutions. While some groups are already advancing this effort through active corporate responsibility initiatives and ongoing pandemic-related programs, institutionalizing their impact could result in permanent improvements to our financial services ecosystem.
There is no doubt that these and other models face challenges, but they are outweighed by the need to secure and perpetuate active and efficient lending in underinvested communities. The CDFI community has provided tremendous support for small businesses across America, and now it is time for policymakers to ensure that CDFIs can continue helping these and other small businesses to recover and rebuild.
