Impact over Equity: How the Feds Reinforced Inequality in Community Finance

This excerpt is from Community Capital: Race, Equity and the Credit Union Movement (Pine Bluff, AR: American Banner (AB) Books, 2024) by Clifford N. Rosenthal and Michael McCray, Esq., CPA. Reprinted here with author and press permission.

Cliff Rosenthal was the executive director of the National Federation of Community Development Credit Unions (now called Inclusiv) from 1983 until 2012. The federation is a national association of credit unions largely run and owned by people of color serving low-income and primarily BIPOC communities. While at the federation, Rosenthal helped lead a coalition that created the CDFI (community development finance institution) Fund. In this excerpt, Rosenthal describes how a Clinton administration program to support community development finance in communities of color nonetheless ended up providing most of its grant dollars to White-led institutions.  

Our institutions had the greatest needs; we served the “bad credit risks,” even while suffering from regulatory pressure to meet “industry standards.”The establishment of the CDFI Fund was the “holy grail” of my decades-long quest for capital for our credit unions. I had drafted the first paper calling for such a fund and had catalyzed the Coalition of CDFIs to advocate for it. CDCUs [community development credit unions] had long struggled as the only banking institutions with the explicit mission of serving low-income communities. I saw the CDFI Fund as a crucial source of donated equity that low-income credit unions could leverage to obtain additional deposits, initiating a virtuous cycle of growth and reversing their decline in communities of color. If there was one issue that I “owned,” it was the CDFI Fund. Our members were content to have me campaign for it, but it was not the focus of their hopes and plans. Some were skeptical that it would become a reality; others were cynical that they would benefit, since the federal government had so often dashed their hopes. But after the CDFI Fund became law in 1994, their interest grew, and the stakes rose.

In the summer of 1996, the CDFI Fund made its breathlessly awaited first round of awards. Unfortunately, our members’ skepticism proved largely justified. Dozens of CDCUs struggled through the exhaustive federal application process, yet only a scant half-dozen received awards—less than one tenth of our membership. Our few winners were worthy institutions that served poverty communities from the South Bronx to the East Side of Cleveland to the Navajo reservation. But I had envisioned and hoped for something more expansive, a full-blown commitment to nurture existing credit unions and incubate new ones in communities of color. My biggest disappointment came when the Fund rejected one particular credit union, the recently chartered Central Brooklyn FCU (federal credit union) organized by two brilliant young Black men (one of whom was my former staff member) and was known nationally as the “hip hop” credit union. I had invested my hopes in it as the harbinger of a new generation of credit unions.

Some of our smallest credit unions had demonstrated “performance” through decades of experience serving … the hardest-to-serve low-income markets.Why so few? Our credit unions, I was certain, deserved to get a major share. We were the largest grouping of minority-owned, minority-run financial institutions in the country. Our credit unions were found in all the financial gaps, the unprofitable markets and “banking deserts” that banks ignored: the Deep South, Indian Country, the neighborhoods that were home to Black churches from Harlem to Chicago’s South Side, to South Central Los Angeles. Surely, I thought, the CDFI Fund would recognize and prioritize support for our credit unions.

But nonprofit loan funds dominated. Most of them were only a few years old, whereas our credit unions had spent decades serving the poorest communities—Black, Latinx, Asian, and Native American. Our institutions had the greatest needs; we served the “bad credit risks,” even while suffering from regulatory pressure to meet “industry standards” and raise capital. No one claimed that the loan funds were unworthy. But, we asked, could not the Fund have found a way to make more, smaller awards rather than the relatively large investments they made in a handful of institutions?

I personally had a lot riding on the outcome—perhaps too much. Perhaps my response reflected White privilege. I did not expect to lose. Sadly, many of our members may have been less surprised at the outcome. They had felt the sting of disappointment at the hands of the government far longer and more acutely than I had. But my reaction literally paled in comparison to that of my African American board chairwoman “Evelyne” [name changed to protect privacy].

Confrontation: Fighting with Friends

Shortly after the awards were announced, I led a briefing session for our members and others in Washington. I tried to temper our members’ disillusionment; the competition for government money is always intense, and there are always more losers than winners. A big mistake! Evelyne angrily confronted me, which surprised and upset me. But more than that: she confronted the head of the CDFI Fund, an Asian American woman who was a highly respected longtime supporter of community investment. Evelyne denounced her and the fund as racist. She likely voiced the feelings of a number of our members, although few of them would have engaged a federal official the way she did. I’m sure the director was stunned.

The Fund’s applications, its procedures, its metrics, its desired impacts all were rooted in a framework that comfortably fit the largely White-led nonprofit sector.

I was stunned, as well, embarrassed but also plunged into self-doubt; was I playing the classic role acting as a White mediator, defending a racist system, and attempting to “cool out” the righteous rage of our members?

Afterward, I tried to argue our case with the director that the Fund had ignored the neediest communities in the country. She pointedly questioned whether I was arguing that “need” should take preference over “performance.” I haltingly replied that, of course, both had to be considered, but that “performance” should not be evidenced solely by a professionally done application, elaborate business plans, and a track record of raising bank and foundation money. Some of our smallest credit unions had demonstrated “performance” through decades of experience serving and surviving in the hardest-to-serve low-income markets.

I did not win. As I learned, the Fund leadership favored those that they perceived as providing the greatest impact in order to justify the Fund’s existence as a Clinton Administration start-up in a hostile legislative environment.

Throughout the 1990s, I continued my battle with the CDFI Fund. It was not a fight against enemies: the Clinton administration and its appointees were vigorously supportive of the CDFI Fund: they shared our values.¹ But the playing field was never level. The Fund’s applications, its procedures, its metrics, its desired impacts all were rooted in a framework that comfortably fit the largely White-led nonprofit sector, to the disadvantage of small-scale credit unions with limited staff resources but a record of serving Black, Latinx, and other low-income communities. Year after year, the Fund’s resources were overwhelmingly to the loan funds—consistently around 80 percent.²

To this day, I regret the race-charged confrontations of my board chairwoman with the Fund’s director. I was not proud of the uncomfortable mediating role I played. But I regret even more the disparate impact that the Fund’s allocations produced. For decades, we had witnessed the relentless erosion of financial institutions run by and for communities of color. The CDFI Fund was by no means a disaster; in so many ways, it has been the best federal vehicle to promote community economic development. But early on, it chose “impact” over “equity.”

Notes:

1. Later, the George W. Bush administration’s appointees in the early 2000s were not ideologically hostile to the Fund and indeed were supportive of some of its programs. Nonetheless, as presidential appointees, they were obliged to support President George W. Bush’s efforts to cut back the CDFI Fund or, in 2005, consign it to a likely death by “consolidating” it with other federal programs.
2. A detailed analysis appears in Clifford N. Rosenthal, Democratizing Finance: Origins of the Community Development Financial Institutions Movement, Altona, MB: FriesenPress, 2018.