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Meeting the Moment for CDFIs

LISC COO Annie Donovan, who formerly led the federal CDFI Fund, reflects on four questions CDFIs should be asking themselves to affect greater racial and economic justice.  “This is not a time for CDFIs to take cover behind our mission statements. This moment calls us all to deeper reckoning.”

The world in which we find ourselves has ignited much needed soul searching about so many dimensions of American life, especially for white Americans who may just be waking up to the pernicious ways in which the playing field has never really been level for everyone.

The disproportionate health and economic impacts of the coronavirus on Black, Indigenous, and other people of color (BIPOC), especially Black Americans, is just the latest data point. The outpouring of response to the deaths of unarmed Black Americans at the hands of the police is opening our eyes to the through- line from slavery, to Jim Crow, to the over-policing of Black communities and the school- to- prison pipeline. And, it’s opening our hearts to the pain and trauma of our existing social order, which diminishes our common humanity.

For most Community Development Financial Institutions (CDFIs), this is not news. Many of our organizations were birthed in response to the civil rights movement and have been deeply committed to the work of social and economic justice, whether it is headline news or not.  But this is not a time for CDFIs to take cover behind our mission statements. This moment calls us all to deeper reckoning.

But this is not a time for CDFIs to take cover behind our mission statements. This moment calls us all to deeper reckoning.

LISC is taking a close look at our own operations in this light. In fact, after decades of work in the CDFI world, I think there are four key questions we should all be asking in order to accelerate just and equitable outcomes.

  1. Do we have diverse leadership? As CDFIs, our C-suite leaders and boards of directors should reflect the communities we serve. No doubt, progress has been made over the past decade, but we are not there yet. This should be a special call-in to white folks to not accept excuses such as, “I can’t find qualified people.” We need to look harder, to readjust our lens about who fits and who doesn’t. Let’s create new networks, and build inclusive environments in which people of color want to stay and develop their skills because they see a path to advancement.
     
  2. Do our underwriting guidelines disrupt systemic racism? Most CDFIs have built their credit policies in ways that mirror the mainstream financial industry, so bias is often inherent. How do we push the edge of the credit envelope? Our colleagues at IFF have done excellent work in this area. Read more about what they and others are doing.
     
  3. Are our financial products built for the current environment? COVID-19 has wreaked economic havoc on our communities, and our old approaches may not work right now.  For example, we may need to suspend our love affair with leverage.

    When I was director of the CDFI Fund, I could recite the leverage numbers for federal dollars with great alacrity: 8:1 for New Markets Tax Credits, 12:1 for CDFI Financial Assistance Awards, 20:1 for the Capital Magnet Fund -- meaning that for every one dollar of investment of federal funds, $8 or $12 or $20 of investment from other sources could be attracted. This is a powerful argument for supporting CDFIs.

    But, often there is a trade-off between leverage and flexible product features.  If the top of the capital stack is going to overleverage our borrowers, or create end products that are too difficult or impossible for BIPOC communities to use, then we’ve missed the point of our work. As Congress considers a proposed $1 billion additional appropriation for the CDFI Fund, lawmakers should bear in mind that expectations regarding private-sector leverage should be tempered. We must put relief, recovery, and equitable outcomes first.
     
  4. What are we asking of our investors when it comes to racial equity? This is a tricky one. CDFIs are on the receiving end when it comes to raising capital. We often have to conform to the terms and conditions set by our investors, even if they limit what we are able to do with our own capital when we combine it with theirs. We must collectively bring our funders along with us to help us deepen our impact in BIPOC communities. Many investors have made statements of solidarity with the Black community, and have pledged resources to deeper work around justice. Let’s help them directly connect those commitments to significant local impact.

Over the years, CDFIs have demonstrated the creditworthiness of communities ignored or abandoned by mainstream capital markets. Now, we must deepen our commitment to outcomes that advance racial equity. If history is any indication, I fear this window of progress could close too quickly, as progress seems to come in fits and starts. Let’s not waste this moment when CDFIs can accelerate our contribution to an America where all people have the chance to thrive.

Annie DonovanABOUT THE AUTHOR

Annie Donovan, COO
Annie Donovan joined LISC In May 2019 as COO.  Immediately prior, she was a Senior Fellow at the Beeck Center for Social Impact and Innovation at Georgetown University and a Senior Fellow at the Center for Community Investment at the Lincoln Institute of Land Policy. Annie’s distinguished career in community development and impact investing include serving as Director of the U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund).