Are Race-Based Lawsuits Affecting Community Lenders?

A year has passed since the U.S. Supreme Court struck down the use of affirmative action in college admissions. While the ruling in Students for Fair Admissions Inc. v. Harvard and UNC applied only to the use of race in determining college admissions, in its wake, conservative activists are mounting new challenges to a variety of programs that provide money or services to historically disadvantaged communities and people of color.

Targets include community development financial institutions (CDFIs), specialized lenders that serve low-income communities not traditionally reached by mainstream lenders, as well as local governments and nonprofit funders and investors.

Some examples:

• LiftFund, a CDFI that administers the Bexar County Small Business Assistance Program in Texas, was named in a lawsuit last year challenging its grant program, which weighed factors such as minority ownership in assessing applications.
• Massachusetts Growth Capital Corporation, a quasi-public state agency, was sued for a program that directed grants to pandemic-affected businesses operated by women and people of color. (The state agreed to put a pause on business grants even while the suit was pending.)
• The Fearless Fund, a venture capital firm founded by Black women, was sued for its Strivers Grant Contest for Black female entrepreneurs.
• And recently, a judge ruled that the long-standing federal Minority Business Development Agency (MBDA) must stop considering race in its application acceptance.

The conservative activists behind several of these challenges are quite open about their aim to rewrite the rules on racial justice efforts. The Wisconsin law firm that brought the suits against LiftFund/Bexar County and the MBDA, for instance, promises to fight any instance of government action to “tip the scales using equity measurements.”

Plaintiffs don’t even have to win to cast a chill on racial equity efforts. The mere threat of lawsuits could reverse decades of racial equity efforts and undo many of the commitments that businesses and institutions initiated or expanded after the racial justice uprisings of 2020, some nonprofit lending leaders and experts say.

Shelterforce recently spoke with community-lending and investing leaders and experts about the current mood across the sector; what, if anything, organizations are planning to do to stay off the radar of litigious groups looking for the next race-based program to target; and where they think this will go in the next few years.

CDFIS: Worried but sticking to the mission

Nearly 1,500 CDFIs operate nationwide, according to the Federal Reserve Bank of New York. A majority of their clients are low-income, low-wealth, or historically disinvested, according to the Opportunity Finance Network (OFN), a nationwide CDFI network. And a large percentage of clients are women, and people of color.

A sample of OFN members provided nearly $10.7 billion in financing to people, markets, and communities “underserved by mainstream finance” in 2022, according to OFN’s most recent fact sheet. This includes funding to help support jobs, small businesses, housing development, and rehabilitation and community facility projects.

The accelerating pace of lawsuits is clearly a topic of discussion in the lending world, and people are feeling nervous.

“It’s a pretty broad assault . . . It’s very hard to imagine, given what the Supreme Court has ruled, that these [lawsuits] aren’t going to have some success in stopping some of the activity that CDFIs and other community development organizations rely on,” says Mark Pinsky, founding partner at CDFI Friendly America, and formerly OFN’s president and CEO. (OFN declined to comment on current threats to race-based programs, offering instead its public statement on the “troubling trend” of legal cases.)

Micha Josephy, executive director of the Cooperative Fund of the Northeast, a CDFI that lends to food, housing, and worker cooperatives, says, “The vibes that I’m hearing are that folks are paying attention to this very closely—but the commitment to racial justice is still as strong as ever among our peers.”

Because of their shared-ownership model, cooperatives often face barriers in accessing capital from conventional lenders, and the Cooperative Fund of the Northeast arose to address this financing gap. Dorian Gregory, the CDFI’s deputy director, says, “That’s what CDFIs are set up to do, meet a gap. Those gaps are sometimes racial, and sometimes it’s business model. The whole sector exists to meet a gap, and so that’s what we’re going to keep doing. . . . we’re eyes wide open, no head in the sand, but we’re not alarmist either.”

A chilling effect

Several people who spoke with Shelterforce noted that organizations in many sectors—lending, philanthropy, Wall Street, law firms, tech companies, and others—appear to be reassessing and diluting their racial equity efforts in the face of potential lawsuits.

Glynn Lloyd, executive director of Mill Cities Community Investments, a Lawrence, Massachusetts-based CDFI, says, “This is a new battlefront for our rights, and so far, they’ve chilled the marketplace or given people an excuse not to be fully committed. They don’t have to win cases—just the threat of it has an impact.”

Tiffany Manuel, president and CEO of the consulting firm TheCaseMade (and chair of Shelterforce’s board), advises mission-based organizations on leadership skills to build stronger support for tough issues like diversity, equity, and inclusion efforts. The lenders she works with are “not dialing back yet,” she says, and are working out strategies to continue their social impact business models.

She is, however, seeing philanthropic funders step back, including halting the collection of race-specific data on the front end as part of their grantee selection, out of fear of potential race-based challenges. While they may continue to collect such data on the back end, after they have given awards, that’s often too late, she notes, if it becomes clear that organizations serving communities of color or others with diversity, equity, and inclusion (DEI) as part of their work were not among the grantees.

“I am amazed by the speed at which decades of hard work around these issues have been taken down, not only by lawsuits but also just the threat of them,” Manuel says. “It’s astounding.”

Marla Bilonick, president and CEO of the National Association for Latino Community Asset Builders (NALCAB), a CDFI intermediary that lends to CDFI and community lender members, has seen it too. “I have already seen public and private funders pull back from aligning from race- or ethnicity-specific programs and organizations. That keeps me up at night,” she says.

Manuel and Bilonick did not specify which funders have pulled back.

"I am amazed by the speed at which decades of hard work around these issues have been taken down, not only by lawsuits but also just the threat of them. It’s astounding." - Tiffany Manuel, president and CEO of the consulting firm TheCaseMade

In a recent commentary in the Chronicle of Philanthropy, representatives of the Philanthropic Initiative for Racial Equity decried a trend they see of philanthropies stepping back from racial justice objectives—in some cases pausing their own DEI efforts or pressuring grantee organizations to scrub race-specific language from their programs and adopt “colorblind” strategies. 

“Grant makers who claim to advance racial equity while using hypercautious race-neutral language . . . are giving up before they’ve even lost,” they wrote. “The most important question to ask isn’t ‘How can we protect ourselves?’ but ‘What are our values?’ Supporting people of color as they pursue freedom and self-determination should top the list.”

Assessing programs, shoring up defenses

Some organizations may be able to rest a little easier, having evolved to serve various populations without using race-specific criteria.

Amine Benali, managing director for strategy and development for the Local Enterprise Assistance Fund, another CDFI whose lending supports worker, food, and housing cooperatives, says his organization’s lending doesn’t typically fall along ethnic and racial lines. “We’re not changing who we are and our mission. We support underserved communities. If they intersect with race or gender or ethnicity, that’s just a fact.”

Lloyd says Mill Cities Community Investments’ lending over the years has naturally reached Latino community members because of its location and its Latino founders. The CDFI “is more geographically based. It just so happened that the community is Latino, and so that’s who we’re reaching,” he says. He notes that Lawrence is also one of the state’s “Gateway Cities,” a non-race-based target category for economic revitalization efforts of former manufacturing and mill cities across Massachusetts.

Others say they are doubling down on their overt racial equity missions.