The COVID-19 pandemic and accompanying economic crisis are widening the racial wealth gap in the U.S., and targeted strategies are urgently needed to interrupt the pattern.

With support from the Robert Wood Johnson Foundation (RWJF), CDFA researched the market demand for and feasibility of a targeted loan guarantee program that would emphasize expanding capital access for minority-owned businesses.

CDFA investigated the barriers that minority-owned businesses face when accessing capital and how a new loan guarantee program could improve lending practices. This initiative included surveying existing loan funds, interviewing state and local development finance agencies (DFAs), and researching similar loan guarantee programs operated by DFAs.

Findings from this study were used to design a holistic program that would pair a loan guarantee with flexible, character-based lending criteria as well as resources for targeted marketing, staff training, and/or outreach to minority borrowers. Participating DFAs must already be dedicated to addressing racial justice in their lending, and this loan guarantee would offer a comprehensive tool to support them in that goal.

CDFA believes this work will bring philanthropy into coordination with public finance in ways that target high social impact investments in underserved communities. A loan guarantee program of this nature will leverage DFA capital for greater impact and drive more equitable community-based lending.

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The CDFA Equitable Capital Loan Guarantee Program aims to reduce lending bias by working with DFAs to adopt more flexible, character-based lending criteria to mitigate perceived gaps in a borrower’s credit history or worthiness. The Program has two main goals:

• To increase capital flowing to minority-owned businesses by modifying outreach, engagement, and lending behavior through the implementation of a guarantee structure to mitigate real and/or perceived risks.
• To promote racial, gender and economic equity and fundamental improvements in the long-term health, social, environmental and economic outcomes of the underserved individuals and communities served by the DFAs.

To achieve these goals, the CDFA Equitable Capital Loan Guarantee Program provides a guarantee of up to 75% on loan amounts up to $250,000. Loans must be made by DFAs to eligible businesses as outlined in the Program Policies and Underwriting Guidelines. DFAs participating in the Program can receive up to $3 million of guarantee authority along with additional technical assistance funds for targeted marketing to minority-owned businesses, staff training around cultural competency, community outreach efforts, and other improvements to their lending pipeline.

The CDFA Equitable Capital Loan Guarantee Program is open to development finance agencies (DFAs) who are committed to advancing racial and economic justice. DFAs must have their capital to lend or have a clear plan for how they will build a lending program.

Participating DFAs will receive technical assistance from CDFA and our partners to evaluate and alter their current lending behaviors that may have created barriers for socially or economically disadvantaged borrowers in the past. Once a formal Behavioral Change Strategy is approved an in place, DFAs will receive up to $3 million of guarantee authority along with grant funding to support their engagement in the educational and technical assistance components of the program. DFAs must agree to abide by the financial and program reporting guidelines in order to maintain their participation in the program.

The first two DFAs selected for the program are the Development Finance Authority of Summit County (Ohio) and Tucson Industrial Development Authority (Arizona).