Statement of the Hon. Sharice Davids on Examining the role of Community Development Financial Institutions and Minority Depository Institutions in Small Business Lending
Washington, May 18, 2021
Access to capital is the lifeblood of American small business. When small firms obtain adequate funding, they can grow their business, create jobs, and bolster the overall economy.
Unfortunately, accessing capital is the single greatest challenge facing most entrepreneurs. This is especially true for underserved groups like women and minorities, who don’t have the same opportunities to access funding as their peers.
Businesses owned by women and people of color who obtain loans often receive less money and pay higher interest rates.
Fortunately, there are institutions working to close this lending gap. Community Development Financial Institutions and Minority Depository Institutions operate to get money to entrepreneurs traditionally ignored by big banks.
CDFIs provide a range of financial products and services on a fair and transparent basis in economically distressed markets, such as mortgage financing, flexible underwriting, and loans and investments to small businesses in low-income areas.
MDIs are depository institutions where 51 percent or more of the stock is owned by minority individuals, including Black Americans, Asian Americans, Hispanic Americans, and Native Americans. As of December 31, 2020, there are 142 MDIs insured by the FDIC. MDIs better serve borrowers who live in low- and moderate-income (LMI) census tracts. Over the past year, we’ve seen a wealth of evidence showcasing the power of these institutions in reaching underserved groups.
The pandemic highlighted and exacerbated the deep inequalities present in the small business sector. In 2020, Black, Latino, and Asian-Americans experienced drops in business ownership rates much higher than their White peers. These same groups also had less access to federal relief programs like PPP due to their lack of an account with a big bank.
Recognizing this inequality in capital access, I, and other members of this Committee worked to empower CDFIs and MDIs to get emergency relief to these communities. We passed set-asides in multiple bills to appropriate funds so that community lending institutions, including CDFIs, could participate in PPP on equal footing with all lenders. We crafted these set-asides to maximize PPP lending in traditionally underserved business communities, and we found that they were effective.
During the COVID-19 pandemic, small businesses reported the greatest levels of satisfaction with CDFIs and small banks. SBA’s data also shows CFIs were best able to reach underserved small businesses. CFIs were the only type of PPP lender that performed above program average when it came to the percentage of loans less than $150,000, percent of loans made in LMI areas, and percent of loans made in rural areas.
The pandemic taught us a critical lesson in the power of community financial institutions to reach communities that other lenders neglect.
Moving forward, we must examine the SBA programs that empower CDFIs and MDIs and find ways to improve them. For example, efforts like the Community Advantage Loan Program, the 504/CDC Loan Guaranty Program, and the Microloan Program have proven effective in helping CDFIs and MDIs get capital to underserved communities.
Today, I’d like to look at what programmatic changes can be made and what legislation we can pass up to improve the ability of these mission-based lenders to reach their target markets.
As this Congress and administration work toward achieving an equitable recovery for all Americans, we must fully harness CDFIs and MDIs to reach this goal.