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President Donald Trump’s policies to “make America great again” look set to make the US economy even more unequal via proposed tax breaks for the wealthy and cuts to financial and medical support for the poor.
But even in America’s highly unequal financial system, there has been a beacon of good news for the financially excluded. Thanks to the US Community Reinvestment Act, a 1977 federal law obliging lenders to look after low-income communities, some $2tn has been invested in such areas, according to 2018 estimates. That has gone some way to undoing the damage done by the earlier practice among banks of “redlining” certain poor communities — often those with large black or Hispanic populations — and routinely denying loan applications from them.
Among the most successful structures deployed by banks to comply with CRA financing requirements have been community development finance institutions, or CDFIs — not-for-profit lenders that help businesses and individuals that can’t access mainstream finance due to poor credit records or other factors.
Bank of America, the biggest contributor to such schemes, had $2bn invested in CDFIs, with operations spread across 250 institutions nationwide, according to its latest disclosures. Overall, BofA was judged by regulators at the Office for the Comptroller of the Currency to have played an “outstanding” role in CRA financing.
With economic growth under strain, CDFIs are expected to encounter substantial increased demand. A similar pattern is playing out on the other side of the Atlantic, too, where a nascent CDFI sector in the UK is struggling to keep pace with customers’ borrowing needs.
Demand may increase further, according to debt campaigners, once new regulations governing the UK buy-now-pay-later credit sector are enacted. The rules, and associated credit checking, are welcomed by many because they should help curb spiralling borrowing and punitive late-payment penalties. But the clampdown may also remove a financing mechanism that millions rely on for short-term cash flow. That is what happened a decade ago, when many so-called payday loan providers were forced out of business after regulators imposed maximum interest rates.
CDFIs, as not-for-profits, are exempt from those ceilings and often do charge high rates in line with the associated risks. But they are also valued by clients, debt experts and policymakers alike for their “wraparound care” — as small, community-anchored institutions they can be far more supportive of businesses and individuals than a faceless online loan provider or backstreet money lender.
Alternative provision such as this will prosper only if the broader financial system and the state support it. But there is good reason for such public-private partnership: it is not only decent and supportive of social and political cohesion, but also builds a pipeline of prosperity among individuals and small businesses alike.
The UK CDFI sector — which lent £323mn last year to nearly 142,000 customers — remains small. Its future growth will depend on public or state-backed bodies, such as the British Business Bank, Better Society Capital and Fair4All Finance, teaming effectively with a broader spread of banks than the likes of Lloyds, NatWest and JPMorgan Chase which have been the notable backers thus far. Campaigners also want a Fair Banking Act — an equivalent to America’s CRA — to supercharge growth.
The UK has a very long way to go to ape the US sector, which has tripled in size since 2018, according to the New York Fed, and now manages $450bn of assets. Adjacent to its CDFI data in the OCC assessment, Bank of America highlights its $1bn four-year commitment to “racial equality and economic opportunity”, and its $2bn equality progress sustainability bond. Together they reflect the group’s community financing commitment — but they may also be a vulnerability, given Trump’s war on diversity, equity and inclusion projects, and progressive initiatives more generally.
On a Davos panel in January, BofA boss Brian Moynihan was verbally attacked by a giant video-streamed Trump for allegedly debanking conservative customers. “What you’re doing is wrong,” Trump hectored, without evidence. The president has already hinted at a dislike of the Community Reinvestment Act. Millions of Americans living in poorer communities had better hope it doesn’t become his next target for abuse.
patrick.jenkins@ft.com
