We need accountability in lending to financially underserved communities

 The Biden-Harris administration has made advancing equity and inclusion a top priority, committing to “embedding fairness in decision-making processes, executive departments and agencies” and working to “redress inequities in their policies and programs that serve as barriers to equal opportunity.” Recent reporting has shown these efforts are already making real gains. However, remedying centuries of systemic inequality will take sustained action. One crucial way the Biden-Harris administration can advance equity and inclusion in the economy is through investment in community development financial institutions, or CDFIs. 

CDFIs are loan funds, credit unions, banks and other organizations that express a commitment to extending financing and related services to people in economically distressed and financially underserved communities. In 1994, Congress established the CDFI Fund as a Treasury Department agency and charged it with strengthening this important part of the nation’s financial sector. Since then, the fund has certified more than 1,100 CDFIs.

As the nation navigates a debilitating maze of health, economic and social justice challenges, the essential work of these financial first responders is imperative to stabilizing and strengthening low-income and historically underserved families, businesses and communities. The administration should view this as opportunity to lift up these struggling communities, pushing them — and as a result, the economy — forward. 

In December 2020, Congress acknowledged the vital role of CDFIs through bipartisan federal legislation that made unprecedented funding available for these institutions. Moreover, recognizing that the economic devastation weighed disproportionately on communities of color, Congress placed particular emphasis on support for Minority Serving CDFIs.

However, the positive actions by lawmakers and laudable goals of the Biden-Harris administration stand in harsh contrast to analysis that raise concerns that disparate access to, and inadequate accountability with regard to CDFI funding has perversely widened wealth and opportunity gaps in high poverty areas and in communities of color.

Stark examples of this defect are evident in Mississippi, which has the nation’s highest poverty rate. Analysis of 2019 federal Home Mortgage Disclosure Act data found that among the 27 CDFI banks in Mississippi engaged in mortgage lending, 71 percent of mortgage loans went to white borrowers while only 13 percent went to Black borrowers, lower than the 17 percent rate by all mortgage lenders in the state — both remarkably below the state’s nearly 40 percent Black population rate.

While December’s legislation was a major step toward positioning CDFIs to tackle longstanding gaps that limit opportunity, assertive action is required to ensure that the funding achieves the desired results. The Treasury Department is currently taking applications for the largest pot of funding for CDFIs in recent history — $9 billion made available through the Emergency Capital Investment Program.

This capital is projected to generate up to $90 billion in lending by CDFIs, and leverage substantially more in indirect investment. However, even at this historic level, demand will far exceed the amount of funding made available by Congress.

The limited supply of this transformative funding underscores the importance that, despite a desire to move swiftly, Treasury officials not default to patterns and practices that have led to the disparate outcomes of the past. It is vital that Treasury:

1) Make awards based on a CDFI’s demonstrated record of providing financial services to “Other Targeted Populations,” defined by Treasury as low-income people and people of color.

The abysmal mortgage lending disparities described above were made possible because many Mississippi banks qualified as CDFIs because of their proximity to economically distressed places — not because of their documented service to low-income, Black and other historically underserved people.

2) Avoid award decisions solely on CDFI’s pre-existing asset size.

Minority-led and owned CDFIs nationwide are significantly undercapitalized compared to their counterparts — despite the fact that, according to the FDIC, those financial institutions locate and lend in communities of color at much higher rates than white-owned institutions.

Treasury has an opportunity and responsibility to make the Biden-Harris administration’s commitment to lifting communities of color real. Doing so will require investing in CDFIs that close, rather than widen, opportunity gaps. That is the only way to ensure that the people and communities hit hardest by the economic crisis receive the relief they so desperately need.

Bill Bynum is CEO of Hope Credit Union, a CDFI headquartered in Jackson, Mississippi.