Chair Waters, Ranking Member McHenry and members of the U.S. House Committee on Financial Services:
The Bank Policy Institute appreciates the Committee holding this hearing. BPI and our member institutions recognize the tremendous role that community development financial institutions (CDFIs) and minority depository institutions (MDIs) play in supporting historically underserved communities and populations.
In June 2021, BPI published a report featuring 30 best practices for banks as they intensify their efforts to support racial equity. The report, titled “The Time is Now: 30 Best Practices to Help Improve Outcomes in Black Communities” was the culmination of a year-long collaboration between BPI and its members to identify, study and share innovative steps banks are taking to deepen engagement within Black communities and increase financial inclusion opportunities – practices which many BPI member banks have already adopted.
Excerpts from the section of the report focusing on CDFIs and MDIs and offering specific recommendations are included below.
CDFI and MDI Opportunities
Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs) are excellent delivery systems for financial resources in underserved communities. CDFIs are mission-driven organizations that provide a high-touch customer experience as well as culturally appropriate marketing and customer service. MDIs are depository institutions that are majority-owned by minority individuals. They help customers who may not engage with larger depository institutions or who do not feel valued by “mainstream” financial institutions. Most of the Black-owned MDIs are also certified CDFIs and their community development missions are built into their DNA, predating the creation of the U.S. Treasury’s CDFI Fund, which was established in 1994 to certify CDFIs and support them with resources. The CDFI Fund has been historically underfunded relative to the demand in the marketplace. In short, CDFIs and MDIs often serve as a bridge for customers as they improve their financial health enroute to deeper engagement with the broader financial system.
These institutions play a critical role, but due to the chronic economic challenges faced by their customers and their stakeholders in general, these institutions could benefit from increased support. Black-owned MDIs have experienced challenges in recent years; declines in the past decade have left only 20 of these MDIs that primarily serve Black American customer bases.[1] Unfortunately the need for their services has not declined, as Black Americans remain far more likely to be underbanked compared to their White counterparts. Fifty percent of Black American households are unbanked or underbanked.[2]
CDFIs are an especially important delivery mechanism of capital to Black-owned small businesses that have been decimated during the pandemic; reports indicate that nearly half of the United States’ Black-owned small firms have had to shut their doors.[3] A benefit to partnering banks, which must always be cognizant of the risks in their capital allocation, is that CDFIs have specialized risk management knowledge about their customers and how to ensure timely and fair repayment, which can promote risk-managed lending. With more support from banks, these institutions could significantly improve their reach, a significant benefit to the communities they serve.
Best Practice 17: Banks should consider bold partnerships, anchored by CDFIs and MDIs, which will result in significantly more lending directly to Black American consumers and businesses. Banks could work with CDFIs and MDIs to build more formal partnerships focused on providing different kinds of resources but sharing a singular focus of dramatically addressing pervasive economic inequality in American Black communities. Diverse stakeholders such as state, local and federal governments, the foundation sector, the non-profit sector, universities, high net worth individuals and corporate entities could all participate. There are different roles that can be played, including:
- Corporations, banks, foundations and high net worth individuals could work together to:
- Provide large grants to or invest in preferred equity of MDIs/CDFIs
- Partner with MDIs/CDFIs on various revenue-generating business opportunities as appropriate
- Partner in providing deposits as needed for liquidity
- Support operational improvements and efficiencies at MDIs/CDFIs by:
- Helping to build and scale improved data science and analytics capabilities
- Helping invest in superior technological capabilities
- Leveraging their own personnel to provide relevant technical assistance to MDIs/CDFIs
- Government entities could work with the other coalition members to explore how to augment appropriate levels of subsidy or other means to support risk sharing across the deployment of various products or across various specific projects in partnership with MDIs/CDFIs. Forms of subsidy exist in various iterations but now is a time to explore how to optimize these policy tools given the high levels of interest by the private and non-profit sectors in increased investment in financially underserved communities.
For these partnerships to be successful, they will need coordination between bank partners and other stakeholders. These partnerships can take various forms. Banks should lead these conversations given their financial strength, technical expertise, varied customer networks, government and non-profit relationships and convening abilities. Establishing such a coalition and exploring ways to scale such a model to communities in need across the U.S. could have a powerful, sustainable and transformative impact for decades to come. BPI staff has engaged various relevant stakeholders in conversations about similar models and can help direct your personnel to these contacts accordingly.
Best Practice 18: Banks should help CDFIs and MDIs invest in compliance and customer-facing technologies. Banks have been investing in technology to drive efficiencies and better serve their customers for some time, but more must be done to help build and scale these solutions for MDIs and CDFIs which historically have not had the extra resources to invest in new technologies. If banks were to provide grants to help them transition away from legacy systems and customer-facing technologies, MDIs and CDFIs could benefit from improved customer acquisition and increased revenues. At a minimum, banks could leverage their significant technology talent to provide technical assistance to MDIs and CDFIs as they pursue these sorely needed investments. This could be done on a volunteer basis or through programmatic delivery systems such as endowed internships/fellowships for this express purpose.
Best Practice 19: Banks should support financial resilience in the MDI and CDFI sectors by investing in their equity and providing guarantees or credit facilities as appropriate. MDIs, which are more like traditionally regulated depositories than CDFIs, could be strengthened through more capital, and there is an opportunity for larger banks to provide it. The majority of CDFIs are loan funds and therefore not subject to capital regulation, but there are other mechanisms to help bolster their financial stability as well. Investing in the resilience of these institutions is currently a bipartisan policy priority in Congress, and banks’ involvement in providing lifelines to these entities would be a significant benefit to the communities that they serve.
Best Practice 20: Expand project-specific investment partnerships with MDIs and refer rejected loan applicants to CDFIs and MDIs. What deals can be worked on in tandem with MDIs that will help increase their cash flow and ultimately return on equity? Banks should consider where MDIs could fit into various aspects of their business and decide if there is room to engage an MDI or several as potential partners in the provision of products, services or processes such as payments transactions, loan participations or Community Reinvestment Act projects. This approach would be especially powerful when paired with capital injections into these MDIs. Additionally, banks could also help credit applicants they have rejected seek out other options to meet their needs. A customer may not yet be prepared to borrow from a more mainstream bank, but banks could earn goodwill (and a potential future customer relationship) by referring a rejected applicant to MDIs or CDFIs. Banks have reported that this model is an effective one for making connections with new customers while helping them meet their needs.
Thank you for your consideration of our comments. Attached is a full copy of the report.
[1] https://www.fdic.gov/regulations/resources/minority/mdi.html
[2] https://www.fdic.gov/householdsurvey/
[3] https://www.nytimes.com/interactive/2020/06/18/us/coronavirus-black-owned-small-business.html
