Table Of Contentjames l. greer aaannnddd oossccaarr ggoonnzzaalleess
Community Economic
Development in
the United States
the cdfi industry and america’s
distressed communities
Community Economic Development
in the United States
James L. Greer • Oscar Gonzales
Community
Economic
Development in the
United States
The CDFI Industry and America’s
Distressed Communities
James L. Greer Oscar Gonzales
Swarthmore University of Maryland
Pennsylvania, USA Maryland, USA
ISBN 978-1-137-49790-1 ISBN 978-1-349-69810-3 (eBook)
DOI 10.1057/978-1-349-69810-3
Library of Congress Control Number: 2016953776
© The Editor(s) (if applicable) and The Author(s) 2 017
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifi cally the rights of
translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfi lms or in any other physical way, and transmission or information storage and retrieval,
electronic adaptation, computer software, or by similar or dissimilar methodology now
known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specifi c statement, that such names are
exempt from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information
in this book are believed to be true and accurate at the date of publication. Neither the pub-
lisher nor the authors or the editors give a warranty, express or implied, with respect to the
material contained herein or for any errors or omissions that may have been made.
Cover illustration: © Busà Photography
Printed on acid-free paper
This Palgrave Macmillan imprint is published by Springer Nature
The registered company is Nature America Inc. New York
To Matt Moore and our families
P
REFACE
This monograph represents an analysis of the political economy of com-
munity development1 in the USA—and specifi cally community develop-
ment fi nancial institutions (CDFIs)2 —starting with a review of the political
and economic factors that infl uenced federal housing and banking policies
during the New Deal and in the immediate aftermath of the Second World
War. The role of government, private philanthropies, non-profi ts, and for-
profi t community development agents is analyzed within a framework of
market failures that have led to disinvestment, credit rationing, and social
unrest in economically distressed areas. The analysis continues with a
review of the War on Poverty during Lyndon B. Johnson’s a dministration
1 The US Department of Housing and Urban Development (HUD) defi nes “community
development” as “activities [that] build stronger and more resilient communities through an
ongoing process of identifying and addressing needs, assets, and priority investments.
Community development activities may support infrastructure, economic development proj-
ects, installation of public facilities, community centers, housing rehabilitation, public ser-
vices, clearance/acquisition, microenterprise assistance, code enforcement, homeowner
assistance and many other identifi ed needs. Federal support for community development
encourages systematic and sustained action by State, and local governments.” h ttp://portal.
hud.gov/hudportal/HUD?src=/program_offi ces/comm_planning/communitydevelop-
ment . Thus, federal community development includes housing policy, fi nancial regulation,
and federal public policies that may address “public facilities, community centers, housing
rehabilitation, public services, clearance/acquisition, microenterprise assistance, code
enforcement, homeowner assistance and many other identifi ed needs.”
2 The certifi cation of CDFIs by the US Treasury Department, CDFI Fund, was authorized
through the enactment of the Riegle Community Development and Regulatory Improvement
Act of 1994, although many CDFIs existed prior to the creation of the CDFI Fund.
vii
viii PREFACE
and concludes with a review of the political and economic factors that led
to the creation of the CDFI Fund.
The authors are social scientists: Greer (a political scientist) and
Gonzales (an economist).3 While we follow a general chronological struc-
ture, our intent is to present critical decisions that informed the develop-
ment of the American community development movement. We emphasize
a set of choices—many made by large national philanthropies, but one
critical choice made by the federal government—that shaped what many
social scientists, especially political economists, identify as creating a
“path dependency” that shaped the trajectory of the American commu-
nity development movement. Such institutional analyses stress, as we do,
that, at critical junctures, choices energize and reinforce certain patterns
of change, stasis, and development (in our narrative, the creation of the
community development corporation [CDC] as the initial model of com-
munity development) while systematically undermining other alternatives.
Indeed, it may come as a surprise to many in the industry that the Great
Society’s War on Poverty had much at all to do with community develop-
ment in the USA. In fact, the policy appropriation of the CDC model by
federal policy-makers, coupled with an overtly political (and importantly
a racial) agenda as a model of political change, did much to discredit the
movement. Daniel Patrick Moynihan thundered an especially vindictive
polemic against community development as it was incarnated in federal
policy during the Johnson years, and this was matched by the wholesale
disinvestment by the Nixon and subsequent conservative administrations,
which systematically undermined public fi nancing for what passed as com-
munity development in the USA for many years. That the movement was
able to survive during two decades without federal support is testament
to the resiliency of the vision of the movement and the urgency of its
3 While this book might appear on its face as a history of the community development
movement in the USA, it is not, nor is it intended to provide such a narrative. Cliff Rosenthal,
who worked in the low-income credit union industry for most of his career, is writing a his-
tory of the CDFI industry. There is, in other words, an informal division of labor between
the monograph we have written and what we understand will be a more detailed and narra-
tive account of the growth and development of CDFIs in the USA that Mr. Rosenthal is
writing. Our account has, to those knowledgeable of the CDFI industry, a number of glaring
gaps of some events clearly important to the industry—particularly the meetings held at
Trinity Church in New York City and the so-called “CDFI Woodstock,” which involved
many in the movement. We are confi dent that these chapters in the development of the
CDFI industry will be more than adequately handled in the history that Cliff Rosenthal is
writing.
PREFACE ix
purpose. Perhaps many in the industry might fi nd our emphasis on the
importance of the Fair Housing Act passed late in the Great Society an
unexpected contributor to housing and economic development policy in
the USA. In fact, as Alexander von Hoffman argued in an important arti-
cle in S tudies in American Political Development , the Fair Housing Act sig-
naled a dramatic shift in federal policy away from programs that involved
large federal expenditures toward ones that used incentives based in the
tax code to entice private market actors to provide benefi ts to individuals
and households, and in this way, fulfi ll the objectives of public policy. Such
“tax expenditure” programs are now recognized by political scientists and
economists as central features of American social policy. Especially impor-
tant for our narrative are the Earned Income Tax Credit, Low-Income
Housing Tax Credit, and New Markets Tax Credit (NMTC) programs.
Data available on each of these programs have been collected and analyzed
in the chapters that follow, especially Chaps. 4 and 5 .
We see this monograph as an analytically and historically informed
empirical analysis of the contribution of the CDFI and NMTC indus-
try to community economic development in the USA, indeed in creating
opportunities in highly distressed communities and in improving the lives
of thousands of our fellow citizens. One of the most important fi ndings
here, we believe, is the clear and indisputable differences in the allocation
of the lending and investment resources of the community development
industry in comparison with that of mainstream fi nancial institutions. To
anticipate a fi nding repeated in several forms in Chap. 5 , investments by
CDFIs and CDEs (in the NMTC program) are concentrated overwhelm-
ingly in highly distressed areas—low-income, impoverished, and minority
communities. In contrast, conventional lenders make loans and invest-
ments primarily in middle- and upper-income communities, the popula-
tions of which are primarily white and where unemployment and poverty
are low. The community development industry has triumphantly, for
over 30 years now, crafted successful strategies to make loans to low- and
moderate-i ncome individuals and families in very challenging circum-
stances. While we recognize, indeed highlight, the stark differences in the
lending behavior of CDFIs and CDEs, it is also obvious that community
development lenders and mainstream fi nancial institutions live in quite
different worlds under starkly different economic prerogatives. For the
most part, CDFIs are unregulated institutions and CDEs, while ostensi-
bly for-profi t institutions, have been provided by and fl ourish in a system
that grants extensive subsidies for their ongoing existence. Conventional
x PREFACE
lenders (and a r elatively small subset of CDFIs—community development
banks and credit unions) are also regulated fi nancial institutions, be it at
the federal or state levels, wherein their balance sheets and investment
portfolios are required to conform to the dictates of the regulatory sys-
tems of which they are a part. While many, perhaps most, conventional
lenders enjoy some level of public subsidy for their activities, they are both
profi t-seeking entities that must both act in accordance to their fi duciary
responsibilities to their investors and make investments that correspond to
the dictates of the “safety and soundness” criteria imposed, with variable
strictness, by their regulators. Contemporary public regulation of banks,
thrifts, insurance companies, and pension funds pales in comparison with
that of the reforms imposed by the New Deal system of regulation that
persisted in earnest for at least a generation. Nonetheless, these regula-
tory systems are real and impose (however weakly nowadays) restrictions
on either the idealized models prevalent in the economics profession or,
indeed more pragmatically, the expressed policy preferences of the bank-
ing industry on the activities of mainstream fi nancial institutions.
We recognize, in other words, that the extensive subsidy to the
American community development industry allows them to engage in the
pattern of loans and investments in low-income populations in highly dis-
tressed communities. We are equally cognizant that mainstream fi nancial
institutions, being both profi t motivated and regulated by public agencies
charged with assuring the soundness of these vital institutions, simply can-
not. Our conclusion, however, is not that of many policy-makers, or the
prevailing sentiment of the economics profession, that the direct grants
and subsidies provided to the community development industry repre-
sent a waste of public resources. Rather, we think a better strategy is to
cautiously and carefully identify the real benefi ts brought to low-income
residents in distressed communities against a reasonable estimate of their
actual costs. The conclusion, we suspect, is that these are real and tangible
benefi ts provided to a needy population within the American polity, and
that the costs of these subsidies are in fact outweighed by their benefi ts.
If this is frequently the case, and we suspect it is, then the position for the
continuation, if not the dramatic expansion, of these direct subsidies is
clear and we, as a nation, should sustain them.
Swarthmore, PA, USA Jim Greer
Washington, DC, USA Oscar Gonzales
A
CKNOWLEDGMENTS1
Many individuals kindly agreed to be interviewed for this book and we
found them universally gracious with their time and insights. While it might
not be all that obvious to those who spent some time talking to us and
responding to our questions that we integrated the content of these dis-
cussions into the following text, we want to assure them that we garnered
innumerable insights and knowledge about the community development
fi nancial institution (CDFI) and New Markets Tax Credit (NMTC) indus-
tries from our interviews. We thank Michael Novogradac; Bob Rapoza;
Allison Feighan; Sean Zielenbach, who was a staff member of the CDFI
Fund during its early years; Mark Pinsky; Matt Josephs, our former col-
league at the CDFI Fund; Debbi LaFranchi; and Elaine DiPietro. All were
very helpful and provided us their astute knowledge and insight into both
the CDFI and NMTC industries. Any mistakes or misinterpretations are
ours and ours alone and should not be attributed to any of these individuals.
1 While we are employed in the research division of the CDFI Fund, the analysis that fol-
lows is ours and ours alone, and does not refl ect any policy or position expressed or implied
by the CDFI Fund, the US Department of the Treasury, or the federal government. The
proposal to Palgrave to write this monograph was vetted through the appropriate channels
of the Treasury Department and approved, provided that we receive no remuneration and
that no resources of the CDFI Fund be employed in the writing of this book. Additionally,
both authors signed non-disclosure agreements (like many other researchers who use the
data collected by the CDFI Fund). The data on the activities of CDFIs and community
development entities (CDEs) (in the NMTC program) used in our analysis differ in no sig-
nifi cant manner from the data routinely released to the public on the CDFI Fund website.
xi
