Twenty-five years after U.S. lawmakers came to the sobering realization that too many U.S. communities were being denied access to credit, the problem remains acute.
Whether it’s former manufacturing centers or areas of persistent poverty, the crisis remains the same: These communities are unable to unlock their economic potential because they can’t access bank accounts, mortgages or small business loans.
The numbers tell the jarring story.
According to the FDIC’s most recent biennial survey of U.S. households, more than a quarter of U.S. households – roughly 33 million – qualified as unbanked or underbanked. Meanwhile, homeownership rates remain significantly depressed, matching where they were 25 years ago, and a swath of rural, minority, and traditionally underserved groups remain unable to access the capital they need.
Two decades ago, Washington policymakers stepped into the breach and acted, creating Community Development Financial Institutions, or CDFIs. Using market-based approaches to bring lending to these underserved communities, this new breed of private financial institution has been able to lend billions to these communities in need.
It is time for federal policy makers to take up that same mantle and act again. The federal government needs to strengthen the CDFI program as a critical step to solve the mortgage and credit challenges faced in minority, low income, and underserved communities.
That means insisting that government lending programs are allowed to work with CDFIs and empowering existing community institutions to do more: more mortgages, more small business loans, and more basic financial products for the people who will benefit the most.
Expanding the CDFI program should be a no-brainer. Studies have shown that CDFIs have a strong track record of originating high-quality, prime credits to borrowers left behind by traditional banks.
CDFIs provided loans to more than 16,000 borrowers in 2018, with more than $11 billion in loans and investments and default rates in line with or sometimes better than traditional lender offerings.
This step does not need to cost taxpayers a single penny. Instead, all Congress and regulators need to do is ensure that all community financial institutions are put on the same footing as big banks when it comes to utilizing federal programs. CDFIs and their customers shouldn’t be treated like second-class citizens by the government by being forced to pay higher fees or offer the worst rates to customers.
From a practical perspective, this could mean a number of things.
First, minority and underserved communities should no longer be excluded from access to Small Business Administration programs. The SBA should be required to accept CDFIs as lenders and make available their whole suite of lending programs to the communities of need that CDFIs serve, without additional fees.
Additionally, the Federal Reserve, FDIC and OCC should make clear that investments, loans and partnerships with CDFIs will always be recognized by regulators as furthering banks’ Community Reinvestment Act goals. And the Federal Home Loan Banks should allow CDFIs to be equal to its bank members.
These steps are critical if policymakers want to address the economic challenges underserved communities in nearly every congressional district face.
In the wake of the 2008 financial crisis, banks and regulators understandably took a new look at the practices that helped precipitate the crisis. New rules were passed and, just as critically, banks and regulators alike started to look askance at anything outside an increasingly narrow statistical way of identifying “prime” borrowers, which excludes immigrants, entrepreneurs and minority populations.
That’s not to say we should encourage imprudent lending; in fact, it’s just the opposite. Given CDFI’s community-focused mission and emphasis on the traditional “Five Cs of Credit,” they are better positioned to safely and soundly underwrite loans that will perform today, tomorrow and throughout the life of the borrower’s loan.
And critically, by empowering CDFI’s to work with the unbanked and underbanked, policymakers would be creating a bridge for these individuals and small businesses to enter into the traditional financial system.
More than two decades ago, Washington identified and acted on a persistent problem that was holding our economy back. The time is now for policymakers and regulatory agencies to again step up to the challenge and pledge the full support of the federal government to CDFIs to capture the promise and economic dynamism that was present when these little-known lending entities were first created.