When you hear “Silicon Valley,” you probably think venture capitalists, tech startups and wealthy personalities such as Bill Gates and Mark Zuckerberg. So, you might be under the impression that the Silicon Valley Bank (SVB) collapse is a “Silicon Valley problem” — something only the most privileged need to worry about.
It’s not. The repercussions of the SVB failure could harm the economic wellbeing of our most underserved communities. But there is a way to prevent this damage. Democrats and Republicans should come together to create a national charter for community development financial institutions (CDFIs) to help them better support and protect entrepreneurs in historically underserved communities in both rural and urban areas.
Similar, but not identical to banks, CDFIs are built to ensure usability in underserved communities, where people may not have as much experience with traditional banking. These financial institutions bridge that gap by offering competitive capital options, often coupled with technical assistance on business planning and other advisory support programs.
A CDFI national charter simply means the introduction of a federal lending license for these institutions. It would accomplish two main goals, both of which would allow small businesses to grow and thrive in underserved areas.
First, it would allow chartered CDFIs to provide mentorship, liquidity and the necessary operational and technical support to smaller CDFIs that provide such tremendous direct customer service to their local communities.
Second, it would allow chartered CDFIs to easily provide lending in areas of the country where no CDFIs exist, without bureaucratic state licensing and compliance cost overruns. The chartering process would account for compliance and risk capability to ensure that only appropriate CDFIs that meet necessary thresholds receive such a charter. Thresholds could include but are not necessarily limited to capital minimums; loan portfolio size; number of states in which current lending is occurring; multi-year lending plan volumes; as well as the referenced operational, technology and compliance standards.
In the wake of SVB’s collapse, policymakers are busy debating ways to avoid similar situations in the future, considering stricter regulation and legislative mandates for regional and community banking systems. And with existing limits to collateral and other underwriting challenges, small business owners in traditionally underserved communities (specifically minority communities and low-income areas) could be significantly hurt by these headwinds.
While most small business lending originates from traditional financial institutions, CDFIs play a significant role in supporting entrepreneurs in underserved populations in particular.
The Treasury Department first established a CDFI fund in the 1990s, but their performance during the pandemic certainly highlighted the beneficial role such institutions can play.
CDFIs secured their place as an integral component of an efficient financial system, ensuring tens of billions of dollars made their way to the underserved in both urban and rural areas, with more than $25 billion provided in financial support in 2020 alone.
The CDFI industry generates as much as $12 of private capital for every $1 received from the CDFI Fund, serving as an efficient force multiplier for economic development.
For example, through 2021, this capital funded almost 700,000 small and micro-businesses, created or retained more than 2.5 million jobs and supported the development of housing and community facility projects.
CDFIs have proven themselves valuable tools for underserved entrepreneurs. It’s time they get the tools they need to continue to be force multipliers for underserved communities. That is where a national charter (particularly for non-depository CDFIs) could be very helpful.
There is a critical need to secure and perpetuate active and efficient lending in underserved communities. As leaders of the Bipartisan CDFI Caucus, Sens. Mike Crapo (R-Idaho) and Mark Warner (D-Va.), have made it very clear that they support CDFIs in their efforts “to scale their activities and fuel more lending in low- and moderate-income (LMI) communities.”
The SVB collapse shows that there is no time to waste. If lawmakers want to deliver reform that reaches beyond Silicon Valley, they need look no further than CDFIs.
Ja’Ron Smith is the former White House director of urban policy. Chris Pilkerton is the former acting administrator of the U.S. Small Business Administration. They are the authors of the forthcoming book “UNDERSERVED: Harnessing the Principles of Lincoln’s Vision for Reconstruction for Today’s Forgotten Communities.”