With Donald Trump about to take the oath of office as President of the United States and Republicans in command in Congress, the outline of what the CDFI industry might expect in federal policy changes seem to be coming into focus. It is not positive–in fact, it is alarming–and the conversations I have had with CDFI champions in Washington, DC, and my own perspective based on policy campaigns in the past suggest how CDFIs can help themselves.
CDFIs are reslient, determined, and well-liked. Even in this environment, they have friends in important places. The one thing CDFIs must not do is “nothing.” It is time to act to build on more than 20 years of success at the federal level.
There is no simple response to the complex political and policy issues in play. In fact, much of what is in play (corporate tax rates, for example) is outside of direct CDFI influence or control. Yet CDFIs can “win” in the time of Trump through renewed grassroots advocacy, a forceful narrative, bipartisan coalition building, and a few new approaches to old techniques.
In 2012, Cliff Rosenthal–the sage of community development credit unions (CDCUs)–published an insightful paper on Credit Unions, Community Development Finance, and The Great Recession. The paper analyzed what went wrong and what went right for CDCUs during and in the immediate aftermath of the Great Recession.
Rosenthal brings a seasoned and grounded perspective; he has seen and managed through more ups and downs than most, if not all, CDFI industry leaders. He understands the complex dynamics of community development, economic forces, and policy. He also is the author of a 1986 paper that foreshadowed the CDFI Fund and was a founding leader of The CDFI Coalition.
Re-reading Rosenthal’s 2012 paper recently, I sat up at Rosenthal’s warning that the CDFI industry’s success through and after the Recession could be short lived.
“In the years ahead,” he cautioned, “a worst-case scenario is not inconceivable, shaped by:
- A CDFI Fund with much-reduced appropriations–or none at all.
- An ever-more concentrated banking industry operating under a weakened or non-existing Community Reinvestment Act (CRA), which historically has spurred bank investments in CDFIs.
- Diminished philanthropic support, resulting from low returns on investments, and flagging interest in the CDFI field.”
It was not his insight or his foresight that surprised me. It was my realization that his worst-case scenario seemed overly positive in light of the 2016 election results, with Donald Trump now poised to sit in the Oval Office and Republicans controlling both the House of Representatives and the Senate.
I thought to myself, What do you call it when the worst-case scenario gets worse?
What do you call it when the worst-case scenario gets worse?
Today CDFIs face swirling headwinds every way they look. Federal policy is not the only place to focus, but it is important because the CDFI industry has become so dependent on policy, and federal fiscal policy over the past 25 years has never been as volatile for CDFIs as it is now.
In a conversation yesterday in DC, a longtime industry leader told me that we made it through the Bush years (2000-2008) and that was a bigger challenge than we face now. I was encouraged but not convinced. My conversations in DC raised my confidence level from “doubtful” to “plausible” that CDFIs and their allies could weather this storm
Then this morning, as I left DC, The Hill reported that the Trump Administration seems to be fully embracing The Heritage Foundation’s fiscal approach that calls for the elimination of The CDFI Fund and much more in sweeping cuts totalling trillions of dollars in entitlement and discretionary spending. Scare tactics? Misinformation? Fake news? We’ll see.
For only the second time since Congress created the CDFI Fund in 1994, joining CDFI interests directly to federal policy, the White House and both Houses of Congress are controlled by a single party. The strength of the CDFI industry’s bipartisan support will be tested. And so the worst-case scenario entering 2017 makes Rosenthal’s 2012 concerns seem rosey. Imagine:
- CRA gone.
- The CDFI Fund gone or in a wind-down state with CDFIs fending off claw-back efforts based on reinterpretations of existing agreements.
- Elimination or suppression of the Consumer Financial Protection Bureau (CFPB).
- Tax credits (Low Income Housing Tax Credits (LIHTC) and New Markets Tax Credits (NMTC)) devalued or gone.
- Hostile regulatory stances towards CDFIs at regulatory agencies, at the Securities and Exchange Commission (CDFI loan funds have always lived in silent fear that the SEC would come for them), at the Department of the Treasury, and at the Office of Management and Budget.
- Deeply diminished resources at key agencies including the Departments of Housing and Urban Development, Commerce, Education, Transportation, Agriculture, and others, as well as the Small Business Administration and other independent agencies.
- Tighter restrictions across agencies on the use of funds already awarded or allocated, along with a reorientation of use of funds to favor mainstream institutions and disfavor CDFIs and their allies.
- Civil rights laws on the rocks, and
- A public assault on the CDFI brand; #CDFI leaves 135 characters for the President-elect.
It seems extreme, I know, but as you watch the changing of the guard in Washington, DC, does it seem impossible? Or even unlikely?
What seems most likely at this point is that CRA and the CFPB are in real danger, the CDFI Fund will be threatened but could survive, and tax reform (reducing corporate tax rates) will decrease investor interest in LIHTC and, probably, NMTCs, in turn reducing by a substantial amount the resources for affordable housing and commercial real estate in CDFI markets.
If CDFIs and their allies want to “win” in the Time of Trump, they should start by thinking of those possibilities as probabilities. As the saying goes, Cancer until proven otherwise.
Beyond the broad-brush spending cuts The Hill reports, the Republican party is clear in its desire to disable the CFPB, and lower corporate tax rates are a given. In another way, Rep. Jed Hensarling (D-KY), the powerful Chairman of the House Financial Services Committee, has tried in the past to disable CRA and de-fund the CDFI Fund, and I can not imagine him waiting long to pounce.
With Representative Hal Rogers (R-KY) out as the Chairmanship of the very important House Appropriations Committee, CDFI Funding no longer has the most important and influential champion it has had in Congress in one of the most important leadership roles in Congress. And it seems unrealistic to expect Treasury Secretary-designee Steven Mnuchin, who seems to have embraced predatory lending practices at his bank, to fight for the Fund.
Adding to CDFI concerns, the Federal Reserve Board of Governors will almost certainly raise interest rates over the coming years, probably gradually but steadily. For decades, CDFIs have won rate concessions from investors, particularly banks, thanks in large part to CRA. It is not a given that CDFIs will be able to raise the billions of dollars of below-market rate debt in the next year or two even if CRA remains in place and regulators enforce it fully. Combine rising costs of borrowed capital and a declining supply of zero-cost capital (CDFI Fund awards), and CDFI Boards and managers face unprecedented business challenges.
That means that CDFIs and their allies and partners across the community development world may need to focus on contingency planning, ramp up their advocacy efforts, stress test their business assumptions, and prepare to make hard strategic decisions over the next year or so.
What does it mean for CDFIs in the Time of Trump?
The CDFI industry needs to concentrate on reducing the likelihood that CRA will be threatened, the CDFI Fund will be de-funded, the CFPB will be immobilized, and tax code changes will sorely weaken LIHTC and NMTC. (The policy possibilities beyond CRA, CFPB, the CDFI Fund, and corporate tax rates seem less likely, so let’s set them aside for the sake of this discussion.)
Winning could mean fending off all challenges, but that is a set-up for disappointment. The people in charge of the federal government are in a shoot-first stance. There will not be an excess of discretion while eliminating or reducing things they oppose.
It could mean muddling the process of “flushing the government down the toilet,” a right-wing call to action going back to 1980 that reverberates in the Heritage Foundation agenda. Muddling is a passive strategy that has slowed change in Washington for decades, if not centuries. The Trump Administration and some in Congress seem determined to avoid the muddle. We’ll see.
Veteran CDFI industry leaders who worked through the Reagan, Bush I, and Bush II Administrations make a good case that the Trump team will find action much harder, slower, and frustrating than talk. The Trump transition is already behind schedule, they point out, and key confirmation processes for Cabinet Members are starting to back up. That could produce a logjam.
Disagreements between the Trump Administration and Congress make for muddle material. The delay in Rep. Mick Mulvaney’s confirmation process as Director of the Office and Management and Budget (OMB) is a particular problem since that is the lead position on budget decisions. Mulvaney has admitted to failing to pay taxes for a babysitter he and his wife employed. Further delays for Mulvaney will make it more likely that Congress, and not the White House, is driving spending.
At the same time, some of the confirmation hearings are raising evidence that the President-elect and many of his proposed Cabinet Members have not worked out their differences. That could take valuable time when momentum matters most of all.
Or winning could mean minimizing the damage through hard trade-offs. For example, in 1993, Republicans in Congress offered to get behind President Clinton’s proposal for a CDFI Fund if banks could buy their way out of CRA obligations by investing in the Fund. CDFI leaders made the case that it is a both-and situation (both CRA and CDFIs) , not an either-or choice. Community advocates could face that or similarly harmful choices now, pitting allies against one another. It’s the art of the Trump deal, where tactical gains can result in strategic losses.
In what may be the most likely, scenario, the Republicans could try to bundle all federal community development, economic opportunity, affordable housing, and possibly small business programs into a new block grant to states. The most recent model for that would be President George W. Bush’s failed 2005 “Strengthening America’s Communities Initiative”(SACI), which also prioritized job creation over everything else and proposed to cut aggregate funding by about one-third.
It’s a bruising version of a menacing game that pits allies against each other.
To win in the time of Trump, CDFIs need to organize an effective united front that spans partisan, ideological, and political self-interests. That’s a broad recommendation, not a plan, but it is possible that CDFIs are in a good, if imperfect, position to help lead the effort.
CDFIs are resilient in policy as in business. Whatever bipartisan Congressional goodwill CDFIs have banked over the past 20 years could hold the door open for CDFIs and their partner constituencies. It is not clear, however, that the reserves of good will are deep enough or broad enough to withstand the coming tsunami of spending cuts.
To win in the time of Trump, the CDFI industry needs to change, accelerate, and raise its game.
We’ll find out.
Now is a time for CDFIs to show their roots–as in their grassroots. As many CDFIs became savvier in DC advocacy over the past eight years (the “grasstops” approach), the ability to call up the broad and diverse base of allies and supporters back home fell out of practice, if not out of favor.
Principle #1: If CDFIs want to be heard in DC in 2017, they need to speak up outside the Beltway. Just getting noticed in Washington this year will be difficult. Noise from voters back home–preferably voters who are diverse in ideology, partisanship, work, and demography–is essential, starting last month.
A senior congressional aide reminded me yesterday that CDFIs need to know that the person who answers the phone in a District office probably gets more time talking with the Representative or Senator than the legislative aide in DC responsible for CDFIs.
At the same time, Wisconsin and Kentucky are key pressure-point states. Not only is House Speaker Paul Ryan from Wisconsin, but White House Chief of Staff Reince Preibus is, too. If there is a short cut to success in the coming months, several people suggested, it is Preibus. But that’s a long, long shot. Senate Leader Mitch McConnell of Kentucky is next most important.
Principle #2: The CDFI industry needs to offer a narrative that does not seem stuck in the cobwebs of 2016. It’s a different conversation this year, and no one knows what the rules are or even, in a sense, how to tell if anyone is listening. CDFIs have a unique story that bridges partisan, ideological, and economic gaps. At the same time, the CDFI narrative that seemed powerfully fresh 20 and 10 years ago–or even 10 weeks ago–now comes across as dated and faded.
The CDFI narrative has always rested on the idea that capitalism has a caring side. How do you make that point and call out economic and racial inequality in contrast to the philosophy of market fundamentalism that pervades conventional thinking, particularly Republican thought?
The narrative needs to remain authentic to CDFI values while offering a vision of bootstrap capitalism that Republicans can accept. It is a mistake to go overboard telling unsympathetic officials only what they want to believe. Masking the hard realities of economic and racial injustice at the core of CDFI work is pennywise and pound foolish. It is a long, slippery slope, and it is wrong.
The goal is not to win converts but to inject the CDFI story into the thoughts and conversations up the command chain. It is likely that there are people in influential positions in the Trump Administration who start with a positive view of CDFIs, and they need stories and data to make it easy for them to be advocates.
Principle #3: CDFIs need to hitch their wagons to other engines. If CDFIs try to eke out a “win” on their own, they will be working against their own self-interests. It is striking how firmly civil rights and consumer rights advocates have pushed preservation of the Consumer Financial Protection Bureau (CFPB) to the front of their agenda for 2017. In part, the CFPB is a lightning rod. In another part, it has worked in ways that other policies have not. As a result, consumer protection has supplanted community development as the frontline strategy for both groups of constituents.
The future of the CFPB is one of the hotter spots in the coming fight, and CDFIs need to add their support in substantial ways–not just in promises and pledges. That likely means shining a brighter spotlight than in the past on depository CDFIs–community development credit unions and community development banks.
In addition, CDFIs need to be ready to stand in harm’s way for the CRA. If Chairman Hensarling takes action to repeal or weaken CRA, it will not be done to a trumpet fanfare. It likely will slide quietly by as a rider on Dodd-Frank reform or some other vehicle. There would be no CDFI industry today if not for CRA, and there may not be much of one without CRA in the future if it comes to that.
CDFIs need to be ready to stand in harm’s way for the CRA.
CRA champions in Congress and CRA advocates in communities are standing ready. A statutory assault on CRA would generate full-throated objections and stiff resistance. CDFIs need to make themselves heard in support of CRA.
The CDFI Fund and CRA were joined at the hip by President Bill Clinton in 1993, leading to creation fo the Fund and the powerful 1995 CRA rules changes. They need to stand together again.
Principle #4: CDFIs likely will need to “give something” to “get something” and the trade-offs will not be easy. The CDFI industry is better served compromising its interests to benefit its allies and should not expect to benefit at the expense of partners. If in fact CDFIs have a supply of political capital to lean on, they need to spend it on long-term success before short-term “gets.” Just for instance, CDFIs might offer up some or all of the Capital Magnet Fund to help housing groups through the Housing Trust Fund; in exchange, they might build support for CDFI Fund core programs.
Principle #5: CDFIs need to tend to their business like it’s 1989, before they had powerful political, financial, and economic champions. Financial and mission performance is the keystone of CDFI policy success. The industry has survived multiple challenges not because of its data but because of the trust it has built through consistent and disciplined performance. CDFIs need to prepare for attacks that might never come. The bad news is that the attacks do not need to be fact-based to do damage, as we know now. The good news is that CDFIs have the goods to withstand the attacks, and CDFIs need to have their talking points in a row, influential allies lined up, and counter-strategies ready regardless of the veracity of criticism.
At the end of the day, the CDFI industry may not be able to mount an offensive challenge but cannot afford to fight a defensive battle. The CDFI industry does not have the power and influence to win by overwhelming force, the K Street “swamp” savvy to cut insider deals, or the political brand status to repel slings and arrows.
To win in the time of Trump, the CDFI industry needs to change, accelerate, and raise its game. The good news is that CDFIs are veterans of hard fights, stand strongest with their feet in their communities, and tend to defy oversimplification. At the end of the day, the difficulty everyone has fitting CDFIs into conventional boxes may be an asset; almost everyone can find a reason to like them.