For community development financial institutions (CDFIs), these are extraordinary times. The most recent industry study, released in December 2022, reported that CDFI assets total $457.9 billion—a seven-fold increase in eight years and nearly $200 billion more than just two years before. At this year’s sector conference, organized by the Opportunity Finance Network (OFN), a sellout crowd of over 2,200 people participated and considered where CDFIs needed to go and what they needed to do.
Last year’s conference celebrated CDFI growth and explored ways to leverage federal funding. This year, that exploration continued. Special attention was placed on the Greenhouse Gas Reduction Fund, a $27 billion clean-energy loan fund created by last year’s Inflation Reduction Act.
[Today] CDFI assets total $457.9 billion—a seven-fold increase in eight years and nearly $200 billion more than just two years before.
But the conference also took a look at deeper movement challenges. One highlight in this regard was this year’s Ned Gramlich Lifetime Achievement Award. The award honors leading figures in the CDFI world and is named after a former Federal Reserve governor who had called for regulating subprime mortgages in 2000, seven years before subprime lending collapsed and helped precipitate the Great Recession. Sadly, Gramlich’s warnings were ignored until it was too late.
The Gramlich Award is offered annually, typically given to a single individual in the field. But this year was different. Effectively, the award recognized an institution—ShoreBank—50 years after its founding. The CDFI’s four founders—Mary Houghton, Ron Grzywinski, Jim Fletcher, and Milton Davis—shared the Gramlich Award honors. Fletcher and Davis died years ago, but Houghton and Grzywinski both received their awards in person.
Grzywinski, in his acceptance speech, challenged the field. He called on banks to dramatically increase their financial and strategic support for CDFIs while also insisting that CDFIs step up their game. To further explore these themes, NPQ interviewed Houghton and Grzywinski afterward.
What Was ShoreBank?
ShoreBank, noted Houghton in her acceptance speech, was founded in a South Chicago neighborhood that had shifted in the sixties and early seventies from “100-percent White to 95-percent Black.” Explicitly, ShoreBank was designed to act as an anti-redlining strategy that would lend to and invest in low-income neighborhoods and neighborhoods of color like Chicago’s South Shore that so many other banks had failed to support.
During its 37 years of operation, Grzywinski pointed out that the bank grew from an initial $40 million in assets to $2.5 billion, with an extraordinarily low loan loss rate of 18 hundredths of 1 percent. While ShoreBank died in 2010 during the Great Recession, brought down due to market changes—and political factors—that were largely beyond its control, it is widely acknowledged to have been a key institution that helped build the entire CDFI field.
ShoreBank’s influence persists. As Houghton mentioned in her acceptance speech, in addition to the CDFI’s fieldwide indirect influence, three CDFIs today directly owe their origins to ShoreBank—Southern Bancorp in Arkansas, Northern Initiatives in Michigan, and Craft3 in the Pacific Northwest.
Learning from CDFI History
How have CDFIs gotten to where they are today? In answering this question, Houghton and Grzywinski emphasized two factors. One was the rise of nonprofits within the CDFI sector. The second was the demise of commercial community banks—institutions that once played much of the lending role that today has been assumed by CDFIs.
Regarding the first theme, Grzywinski emphasized that ShoreBank was a for-profit bank. An overwhelming majority of CDFIs today, however, are nonprofits. Grzywinski indicated that when the legislation to create the CDFI Fund was being debated in 1993 and 1994, he and Houghton were concerned that including nonprofits in the legislation would prove to be a mistake because they believed that nonprofits would not be sustainable. Grzywinski conceded this was wrong: “We underestimated the passion and motivation of the people running not-for-profit organizations.”
As for the second theme, Houghton emphasized that one key factor behind rapid CDFI growth has been the dramatic shrinkage in for-profit community banking. “There has been substantial consolidation of the banking industry for a number of years,” she noted. “If you go back and look, you’ll find there were over 14,000 banks in the mid-1980s and there are now just over 4,000 and the number is going down steadily and will continue to go down.” The result, Houghton observed, is that “banks are quite disconnected from those local markets where they might have used to work in.” This, she added, “has created a gap in access to credit” that CDFIs have had to fill.
Just because a bank calls a CDFI that borrows from it a partner does not make it so.
For CDFIs, banking consolidation has sometimes created an opportunity to hire bankers. Many bankers, noted Grzywinski, are willing to work for less than they might earn in the commercial banking system because they support the CDFI mission.
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However, Houghton cautioned that not all bankers are a good fit for CDFIs. Houghton and Grzywinski are on the board of Craft3. Houghton noted that the CDFI has “gotten very careful of how they screen for the bankers they recruit.” The CDFI, she said, assesses candidates for key characteristics, both in a positive sense (common banker characteristics that correspond to what is needed in a CDFI staff role), as well as negative screens (common banker characteristics that can harm CDFIs).
Principles for Future Partnerships
As far as where Grzywinski and Houghton want to see the field go, the idea of partnerships featured prominently. But not all partnerships are alike, Grzywinski warned. “Banks like to use the word ‘partners,’” Grzywinski observed. But, he noted, just because a bank calls a CDFI that borrows from it a partner does not make it so.
A true partnership between banks and CDFIs would be…organized around the idea of restoring the value of the local banking relationship.
Grzywinski added, “I never thought of ShoreBank as being a partner with any of the community borrowers that we dealt with. If they didn’t pay their loans, we would try every other way to solve the problem,” but “in the end, we knew we could foreclose, and they knew we could foreclose.” Most CDFIs that work with banks, Grzywinski insisted, are borrowers from banks—not partners.
For Grzywinski, a true partnership between banks and CDFIs would be strategic in nature. It would be organized around the idea of restoring the value of the local banking relationship. And it would include a large technical assistance component. Grzywinski noted that “CDFIs can be, to use a military metaphor, the boots on the ground—the kind of organizations that demonstrate the passion, the commitment, the knowledge of what’s going on in local communities that big megabanks can never do.”
Grzywinski elaborated, “The big megabanks can write procedures and can write regulations—all that kind of good stuff—but they don’t deal with people as people really exist. That’s where the partnership needs to be.” Banks and CDFIs, Grzywinski said, “both have to realize that they each have a responsibility.” The CDFIs must do more in terms of training people and providing the technical assistance needed to make local community-based lending effective. For their part, banks have to do more thinking about how they can finance needed development—“not how they can’t.”
Grzywinski added that government regulators, too, have a role. “The regulators have to think more broadly about their public responsibility. The regulators will say they are protecting the depositors’ money. That’s true. They do a good job at that, but that is not their only job.”
A Call for a Coordinated Approach
As Houghton noted, both for-profit and nonprofit lenders are needed to meet the economic needs of low- and moderate-income communities. ShoreBank, she explained, although it was set up as a for-profit community development bank, also worked consistently with affiliated nonprofits.
As Houghton put it, “Wherever ShoreBank operated, we had both a bank and nonprofit affiliate because they could take different levels of risk and attract different funding sources. There were things that nonprofits could do as unregulated institutions that banks couldn’t do. Communities need regulated capital, and they need access to slightly higher-risk capital in order to do community development.”
Grzywinski also emphasized this point: “ShoreBank was not just a bank. It was a real estate development company. It was a nonprofit. It was an SBIC (Small Business Investment Corporation), chartered by the US Small Business Administration.”
This integrated approach, Grzywinski emphasized, has potentially far broader application. Large banks are typically owned by bank holding companies, much like ShoreBank was, only they operate at a much larger scale. “There is enormous potential within bank holding companies.” Grzywinski noted that 1972 regulations (since updated) issued by the Federal Reserve recognize that “bank holding companies possess a unique combination of financial and managerial resources making them particularly suited for a meaningful and substantial role in remedying our social ills.”
To date, Grzywinski observed, bank holding companies have helped to generate more corporate profits for shareholders (such as by managing credit card operations), “but [banks] sure haven’t been interested in using [holding companies] for economic development.” This is true even though the Fed’s regulation clearly stated its goal to encourage bank activity “to promote community welfare, such as the economic rehabilitation and development of low-income areas.”
Near the end of his award acceptance speech, Grzywinski emphasized the potential of what could emerge from the kinds of partnerships that he was advocating between banks and CDFIs, were they to become a reality. “The management potential is there; the money is there; the capital is there.” He concluded with a call for action: It is time, Grzywinski said, “to push a little bit harder.”