“CDFI borrowers and the communities they serve benefit from long-term strategies, especially when they are most needed, during economically stressful times.”
When my co-author, Ellen Seidman, and I wrote those words in 2015, we were reflecting on the lessons learned from community development financial institutions’ (CDFIs) performance during the Great Recession. The sector’s unique mix of mission, flexibility and risk management enabled CDFIs to provide the patient capital that community-based nonprofits needed to survive the recession and continue to serve people when they needed it most. This patience kept services and capital in communities and resulted in a minimal 0.21% loss rate for LIIF over this period, far outperforming similarly sized traditional financial institutions.
Of course, the crisis we are facing today as a result of the COVID-19 pandemic is different than the one our nation faced in 2009. We are seeing the painful consequences on lives and livelihoods at a faster rate and higher scale than the last economic recession. COVID-19 is laying bare the deep inequities in our nation connected to race and income, with black Americans facing rates of death 2.7 times higher than white Americans and people with lower incomes facing the double bind of risking infection to maintain work.
What remains unchanged is that much of our nation’s safety net is provided by community organizations – those that provide affordable housing, quality child care and access to community health care. Many are smaller organizations that rely on subsidy, operate on thin margins and work in high need communities. This challenge once again demands that we act quickly to get resources to those nonprofits and small businesses that are on the front lines of helping people survive this crisis and contribute to our recovery. As communities and policymakers assess and respond to the human and economic toll of the COVID-19 pandemic, CDFIs stand ready to be highly effective allies in this effort.
During the Great Recession, the Low Income Investment Fund’s (LIIF’s) charge-off rate of unrepaid loans was 0.21% for construction and development loans originated from 2006 to 2009. This is compared to 2.51% for regulated commercial banks of comparable size during the same period. While not strictly comparable to banks given different regulatory requirements and profit incentives, the 500 CDFI loan funds certified at the time had largely similar outcomes with many emerging stronger in the subsequent recovery. This was due in large part to the substantial and rapid investment of capital by the U.S. Treasury’s CDFI Fund grant program made through the American Recovery and Reinvestment Act (ARRA), which recognized that CDFIs were positioned to put capital to work quickly for communities most at risk. This infusion of equity enabled CDFIs to shore up their balance sheets and provide the flexibility that even the strongest community based nonprofits at that time needed.
In “Weathering the Great Recession: A CDFI Case Study in Patient Capital,” (Federal Reserve Bank of San Francisco, 2015), we attributed this success to our ability to remain flexible, along with rigorous risk management practices and a long-term view focused on supporting the sustainability of borrowers. When faced with organizations struggling with repayments, LIIF and other CDFIs avoided foreclosing on properties. Instead, we exercised patience, agreed to loan extensions, softened terms and worked collaboratively with other lenders to help borrowers ride out the economic cycle. It meant these organizations survived, communities continued to receive services, people were able to stay in their homes and, perhaps surprisingly, CDFIs suffered lower losses than other financial institutions. We must use these lessons to inform our approach to meeting the challenge we’re faced with today.
The rate at which COVID-19 is wreaking havoc on the economy is alarming. It is clear we are headed toward an economic recession. Already, unemployment claims are at historically high levels with some projections that they could reach more than triple those during the peak of the Great Recession and rival the Great Depression. CDFI borrowers, community-based organizations, Congress and this administration cannot afford to waste time in leveraging the power of CDFIs to support the country’s recovery and resilience efforts. Concretely, this means three things.
First, the federal government needs to move quickly to clarify the ability of all CDFIs to participate fully in programs enacted in the economic recovery packages to date. In particular, the Department of Treasury and the Small Business Administration (SBA) must respond to the CDFI sector’s call to communicate that all CDFIs, regardless of SBA licensing, can participate in the Paycheck Protection Program, as both borrowers and lenders.
LIIF is hopeful of the progress made on this front. The Paycheck Protection Program Increase Act, signed by the President on April 25, sets aside $30 billion of the $310 billion for credit unions and insured depositories with less than $10 billion in assets. This includes “community financial institutions,” such as CDFIs, minority depository institutions (MDIs), certified development corporations and microlenders. Congressional Democrats have also requested that the Treasury Department and SBA use their discretion to set aside $10 billion specifically for MDIs and CDFIs, and are negotiating with the Treasury Department to significantly broaden the number of non-SBA-licensed CDFIs that can participate by, for example, reducing or waiving the applicability of Bank Secrecy Act compliance requirements.
For our part, LIIF is pleased to have launched a partnership with Community Reinvestment Fund to ensure that LIIF’s early childhood and Purpose Built Communities network partners, among others, can gain access to this next tranche of PPP loans.
Second, in its next phase of stimulus, Congress must provide CDFI-specific resources similar to those that fueled our effectiveness during the Great Recession. We join our peers in calling for:
- An emergency appropriation of at least $1 billion to the CDFI Fund, as called for by both the Opportunity Finance Network and several of the banking trade associations; and
- A special allocation of New Markets Tax Credits (NMTCs) of at least $3.5 billion consistent with the request of the NMTC Coalition.
In 2008, nearly four months elapsed between Congress’ initial response to the financial crisis and ARRA, which included similar support for the sector. Congress and the Trump administration must move more quickly now to ensure that the mission-driven nonprofit sector is able to play its critical roles amid the current crisis and contribute to our long-term recovery.
Third, it is essential that Congress provide state and local governments with the resources they need to address the crisis. This requires both:
- Funding targeted to the most affected sectors, including a minimum of $50 billion in Child Care Development Block Grant funds to states and $48 billion in HOME Investment Partnerships Program block grants to provide rental assistance and desperately needed capital for affordable housing; and
- Broad, flexible fiscal relief like the $150 billion Coronavirus Relief Fund included in the CARES Act, so that states and cities can avoid fiscal catastrophe in their coming budget cycles and the subsequent devastation of organizations that rely on those sectors for support.
Finally, as LIIF has previously noted, equally important is what the Administration should not do, namely, undermine the role of the Community Reinvestment Act (CRA) in enabling the community development sector to respond to COVID-19. More precisely, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) should:
- Cease moving forward with a proposed rule that threatened a significant decrease in private and government investment into U.S. communities even before the pandemic; and
- Work with the Federal Reserve to provide clear guidance that COVID-19 related investments will receive special credit under the current CRA evaluation framework.
The current pandemic is taking a grave, wide-ranging toll on our nation in loss of life, on our economic wellbeing and on our collective psyche. The sectors in which CDFIs invest, such as child care, health clinics and small businesses, are some of the most affected by the current stay-at-home orders. At the same time, the need for a stable, affordable home as a foundation of health and safety has never been more evident. We must work together to meet communities’ near-term needs as quickly as possible and put our nation on the path to recovery. CDFIs are ready and able to do our part.