Joined at the Hip: Community Development Finance and Big Banks

Over the past few decades, there’s been a proliferation of community development financial institutions (CDFIs) across the country. Working in communities that lack access to mainstream capital, community development financial institutions are banks, credit unions, loan funds, and similar vehicles certified as such by the U.S. Treasury Department. 

The Local Initiatives Support Corporation (LISC), created by the Ford Foundation in 1979, is a major player in the CDFI space. Through a network of local offices in 31 American cities, LISC channels resources to affordable housing, small businesses, education, community safety, and much else. It’s a middleman between big money—a major portion of it from philanthropy—and local actors with expertise on the ground. Since its founding, the organization has invested over $17 billion toward community development efforts, and claims to have produced upward of $52 billion in total development with that outlay.

While LISC was originally conceived and funded by Ford, it has since greatly expanded its sources of funding. In fact, Ford hasn't been a major funder of LISC for years; its biggest foundation grants over the past decade have come from the MacArthur, Kresge, Walton, and Knight foundations. 

But the really big source of LISC's financing is banks. One of its most consistent backers is Bank of America, which has provided over $1.4 billion in grants, loans and equity to LISC. 

The Bank of America Charitable Foundation’s most recent gift is another $3.8 million in grant money to fund LISC’s Financial Opportunity Centers in 21 urban areas, with additional support going to rural investment programs. Through the centers, LISC channels services to low-income clients, things like financial coaching, career counseling, affordable financial products, and help with food stamps, insurance and utilities. LISC says that through the funding, about 22,000 people will receive services. 

According to LISC president and CEO Maurice Jones, the goal here is to inject capital into underserved areas and attract business. BofA’s gift fits well with the general trend we’re seeing in bank giving these days: sizable outlays to causes like financial education, youth employment and affordable housing. Of course, there's a long history of bank involvement in community development stretching back decades. But something seems to have changed lately, judging by the growing streams of financial commitments we're seeing banks making in low-income communities. An optimistic read is that bank leaders increasingly see the importance of low- and middle-income clientele. Catering to high earners alone won’t make for a stable and profitable economy in the long run. 

This latest gift follows another big transfer of money from BofA to a national community development organization, NeighborWorks. In that case, the allocation turned out to be not so philanthropic. It was mandated as part of BofA’s Justice Department settlement following fraud leading up to 2008. 

That brings to mind an uncomfortable fact we mention often when writing about banks and low-income communities: Many top financial institutions have done more harm than good in these communities over the past 15 years, with quite a few top banks implicated in predatory lending practices. While it's nice to think that the big banks have now turned a page and embraced fundamentally different values, there are reasons for doubt. 

Earlier this year, for example, the U.S. Department of Housing and Urban Development (HUD) accused employees of BofA of discrimination against prospective Latino mortgage borrowers in South Carolina in 2013 and 2014. In a test, these borrowers were offered higher interest rate loans. The recent Wells Fargo scandal involving thousands of employees opening fake accounts also highlights the ethical problems in America's banks. Given that, we wonder how closely aligned both community development and asset building groups should be with top banks. The board of LISC, it's worth pointing out, is chaired by Robert Rubin, who was treasury secretary under Bill Clinton, where he advocated for the repeal of the Glass-Steagall Act. The resulting merger of commercial and investment banking functions made life easier for places like BofA, but also contributed to the go-go atmosphere of the early 2000s—and its fallout. 

On the other hand, working closely with banks—and having well-connected allies like Rubin—may become all the more important for CDFIs, given what's happening in Washington. The Trump administration isn't shaping up to be a friend to community development, to say the least. It has proposed gutting of HUD funding, and even if these cuts don't happen, the climate inside the Beltway doesn't bode well for organizations like LISC and NeighborWorks, which would probably have thrived under a second Clinton presidency. 

That's unfortunate. Often, community-oriented financiers can reach places where the only sources of capital are unscrupulous organizations. Add support services like the ones BofA is funding here, and you might just get a potent set of tools for community rejuvenation. 

Looking beyond government and banks, one piece of good news for LISC and other CDFIs is how impact investing has been catching on within major foundations. Kresge, long a major funder of LISC, is moving to greatly expand its investments on this score. MacArthur, another key funder of LISC, is already deep in this space and has been working to do even more. And if the Ford Foundation moves into impact investing in a major way, which seems likely, that could also mean a new stream of funding for CDFIs.