It wasn’t the first time that the Community Reinvestment Act (CRA) or Community Development Financial Institutions (CDFIs) have come up in discussions at the annual Social Capital Markets (SOCAP) gathering in San Francisco. But this time around, Nonprofit Finance Fund CEO Antony Bugg-Levine wanted to make it as explicit as he possibly could: In his view, the CDFI industry and those at SOCAP have failed to live up to the legacy of the civil rights movement to which many in these circles owe their jobs and careers.
The annual SOCAP gathering draws more than 3,000 people representing organizations that are either investing or seeking investment in projects that seek to produce some positive social or environmental impact in addition to financial return — a practice known as “impact investing.”
“The impact investing movement in the United States came out of the civil rights movement,” Bugg-Levine said during a panel discussion at SOCAP last week. “We are here today because of the civil rights movement manifesting itself in the CRA with the premise that we are going to change how banking works to be less racist.”
As the last major piece of legislation tied to the civil rights movement, passed in 1977, the Community Reinvestment Act, enshrined into law the principle that banks weren’t just profit-generating enterprises for the benefit of shareholders, that they had to safely and responsibly meet the credit needs of the communities where they took deposits — including low-income communities, which then as now were disproportionately people of color. After federal CDFI certification was created in 1994, many banks began providing funding to CDFIs in order to meet their CRA obligations. To Bugg-Levine, these bank-CDFI relationships were some of the first big “impact investments,” in the sense that banks were funding CDFIs to meet a specific social goal of making the banking system less racist.
But banking ultimately hasn’t changed to become that much less racist since the CRA became law and CDFIs appeared on the scene. Blacks and other minorities are still more likely than whites to be denied home mortgages or small business loans, and often pay higher interest rates and receive smaller average loan amounts when they do get access to bank loans. Meanwhile, the other types of investors largely represented at SOCAP — venture capital funds, private equity funds, wealthy families and even foundations — distribute their capital in even more inequitable ways than banks.
During his panel discussion at SOCAP last week, Bugg-Levine and co-panelists discussed their views on what’s led CDFIs and impact investing astray from their roots in the civil rights movement and what changes they are calling for — or starting to see inside their organizations — in order to get back in touch with those roots.
“How are we doing on that front? I think we’re doing fair to middling,” said panelist Ellis Carr, CEO of Capital Impact Partners, another CDFI.
Carr described his organization, now an independent nonprofit but founded as an affiliate of the National Cooperative Bank, as one that was born directly out of the civil rights movement and the “War on Poverty” with an explicit focus on economic justice.
“I don’t see as many community development financial institutions and other asset owners standing at the table with social activists as my predecessors did,” Carr says. “What I think has driven that has been that the industry has grown significantly and become very professionalized.”
The professionalization of CDFIs — bringing on board members and hiring staff with backgrounds in finance and real estate development — has been crucial to the growth of CDFIs as an industry. There are now more than 1,200 CDFIs across the country, with more than $160 billion in assets. But that has come at a cost.
“The professionalization of CDFIs as a sector of alternative financing essentially replicates the same harm that traditional banks are already doing,” said panelist Vanessa Roanhorse, a member of the Navajo Nation who consults for indigenous-owned businesses in the southwest. “If anything, they’re just as far removed from the deep work they should be doing and have actually implicated design processes that further create the barriers to applications to even apply for those funds.”
Also a co-founder of the Native Women Lead network of Native American women entrepreneurs, Roanhorse brought a critical view to CRA itself. Rather than a key tool that helps her communities, she sees CDFIs funded by CRA-motivated banks as providing cover for banks that continue financing projects like the Dakota Access Pipeline that plunder native lands for their natural resources.
“The relationship that we have had with [CDFIs] has actually been more harmful than helpful for us because that in turn is a small tiny band-aid to a gushing artery bleeding out,” Roanhorse said.
As an “alternative to the alternative,” Roanhorse mentioned working through her consultancy to expand the Co-Op Capital model of providing access to credit that recognizes the power of those embedded deep within a community, working outside of a financial institution. Under this model, in partnership with a credit union, a community-based group makes up its own process and criteria for approving loans to members.
Not long after becoming CEO of the organization three years ago, Carr recognized the need for his CDFI to be better connected to the communities where it was already working. He looked at how his CDFI had invested over $100 million into Detroit over the course of just four years, and noticed that the majority of the developers they had financed were white men in a city that’s around 80 percent black. That wasn’t an acceptable disparity. So Capital Impact Partners created the Equitable Development Initiative, which has graduated two cohorts in Detroit so far, totaling about 70 women and people of color.
“There are competent people who understand what needs to happen in these communities and want to take power to make transformational change happen in their communities but for the lack of capital,” Carr said.
Capital Impact Partners sets aside capital to finance projects for cohort members regardless of how experienced they were coming into the initiative. Some had only rehabbed one or two homes, others had done larger scale projects but had their financial assets tied up in those projects and didn’t have family or other wealth to draw upon to get the ball rolling on their next project. The CDFI has since expanded that initiative to its home territory in the Washington D.C. area.
“All throughout history we have assumed that folks who have less than do not have good ideas and they do not have capacity, when we know that there’s systemic oppression that really holds them back,” Carr said.
From the philanthropic perspective, panelist Pia Infante reflected on the civil rights movement’s demand that political institutions recognize the power inherent in every person. Getting back to those roots as a private foundation means giving more power to grantees, providing totally unrestricted funding for much longer terms, even ten or fifteen years at a time. It could even mean giving up all power to remain as a permanent fixture in the economy.
“I represent a private foundation that has elected to spend down its endowment and wants to do that to model the notion that endowments are not meant to be permanent sources of grant capital,” said Infante, co-executive director of The Whitman Institute.
More immediately, however, Infante added that it was a philanthropic imperative to “reinstate an actual democracy” as part of renewing the spirit of the civil rights movement.
“Philanthropy is often expected to take up the gap of what happens in a time when government is expected to shrink,” Infante said. “I think one role for philanthropy is to use whatever capital it has, both financial and influential, to push for representative democracy.”
Bugg-Levine is the first to admit that early on he didn’t pay as much credence as he should have to the role of the civil rights movement in shaping CDFIs and impact investing. In previous roles at the Rockefeller Foundation and the Global Impact Investor Network, Bugg-Levine was one of the early leading lights of the “impact investing” crowd that has convened at SOCAP for 12 years running.
“I’ll take personal responsibility for not connecting the new wave of interest that SOCAP represents to that [civil rights] history,” Bugg-Levine said. “It was a real failure at the beginning of the work we’ve been doing.”
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.