The US banks trying to close the racial wealth gap

Few people have heard of CDFIs. For many, they’re a money lifeline.

Feb 08, 2021 | Editorial | Current Events | Business
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The little-known banks earning big investments from Big Tech

In June 2020, Netflix announced it would move 2% of its cash pile to US financial institutions that serve Black communities. That same month, PayPal announced a $500 million economic opportunity fund, with the lion's share invested into banks and credit unions that serve communities of color. Square came next, announcing a $100 million investment in support of minority and underserved communities, with $25 million going directly to community development financial institutions (CDFIs). And in November, Twitter unveiled its plan to invest $100 million in CDFIs, too.

This surge of capital to CDFIs came amid protests over racial injustice, but despite their active role in driving change, many people have never heard of CDFIs, much less know what they do. Long before 2020, CDFIs have been a lifeblood in underserved POC and low-income communities: creating jobs, financing affordable housing, and expanding new businesses every day. Now in 2021, they’re continuing to move the needle toward economic justice, this time as lenders for the Paycheck Protection Program.

Community development financial institutions: 101

Still wondering, what are CDFIs? They’re private financial institutions that operate similarly to your corner Chase or local credit union. Unlike traditional institutions (that put profits first), CDFIs’ main mission is making lending and basic financial services accessible and affordable to communities overlooked by the financial sector. Think: low-income, low-wealth communities and communities of color that traditional banks leave behind. There are four types of CDFIs:

  • Community development banks direct 60% or more of their financing to low- or moderate-income communities and are federally insured.
  • Community development credit unions provide financial services to individuals and are chartered and insured by the National Credit Union Administration.
  • Community development loan funds lend to small, usually minority-owned businesses, affordable housing projects, and community facilities.
  • Community development venture capital funds invest in private companies to earn returns for investors and better the community at the same time.

More than 1,000 American CDFIs have been certified, across every state and the District of Columbia. And even though CDFIs put profit second, they are shown to be no more prone to financial failure than their traditional counterparts and deliver comparable performance. Some private investors are even choosing to bet on CDFIs instead of other stocks or ETFs, to grow their wealth and support economic justice in one fell swoop. Here’s where the PPP comes in…

Can CDFIs get the Paycheck Protection Program back on track?

Pre-Covid, there was already a disparity in loan approvals for Black business owners versus White business owners. Then, between February and April 2020, 41% of Black-owned businesses closed their doors, for good. The ones that stayed open were in desperate need of relief. And even though CDFIs were uniquely positioned to get loans into the hands of minority business owners, they were largely sidelined in the first rollout of the Paycheck Protection Program. It wasn’t until late May (nearly two months into the program) that $10 billion in PPP funding was set aside for CDFIs, who quickly got to work. In just three months, a group of CDFIs gave out over 106,000 PPP loans valued at $7.4 billion. For comparison, the largest PPP lender (JP Morgan Chase) is 9x the size of all CDFIs put together, but only lent out 4x more in PPP funding.

For the second PPP rollout in January, Congress didn’t make CDFIs an afterthought. Instead, CDFIs were among the first institutions given early lender access. And in the first week of the program’s second act, 60,000 PPP loan applications were submitted by nearly 3,000 lenders for a total value of over $5 billion. Minneapolis-based CDFI Sunrise Banks reported it processed 2,500 loan applications. Forty five percent of those came from low- to moderate-income communities and 25% of Sunrise Bank applicants self-disclosed their race as Black. The bottom line? Just as CDFIs were key in helping Big Tech put their investment pledges into action last summer, CDFIs are proving essential to a smoother second PPP rollout. With CDFIs to thank, the US may emerge from the pandemic with many more Black-owned companies still open for business than it would have otherwise.