Shifting Power to Lending Partners

This post was originally published by Community Credit Lab, which is now part of Common Future.

At Community Credit Lab, we focus on three points of leverage to move away from extractive and harmful practices in traditional approaches to lending that perpetuate racial and social inequities. These points of leverage are enabling affordability of credit, facilitating access to credit, and shifting power in credit decision making—and it is our belief that in using this framework, we can begin to rebuild financial and lending practices that are contextual, equitable, and regenerative for our Lending Partners and their communities.

The focus of this part of the series is on CCL’s approach to shifting power, but it’s important to note that we believe that focusing on all three—enabling affordability, facilitating access, and shifting power—in tandem is what will create new possibilities for our financial system. As a brief refresher, below is how we define these points of leverage:nfocusing on all three—affordability, access, and shifting power—in tandem is what will create new possibilities for our financial system.

Affordability: Traditional credit uses risk-based pricing that subscribes to the practice of charging more in interest to people that have fewer resources or fewer connections to the mainstream financial system—because they are thought to be more risky. This is known as the poverty premium (among other names). At CCL, we abandon this perceived risk/return method entirely¹ and you can read Part 1 of our Blog Series to learn more about how we approach credit pricing using more equitable benchmarks.

Access: Traditional credit uses frameworks like the 5 C’s of Credit to determine whether or not an individual or business should be extended credit. These and other practices have been shown by many studies to perpetuate systemic inequalities because they refuse to acknowledge the historical context that has created the inequities in the first place. By having our Lending Partners² design the underwriting criteria for their own communities the criteria are contextualized and rooted in trust and relationship that is often missing from more transactional relationships within the traditional financial sector.

Shifting Power: Today’s financial system prioritizes efficiency by centralizing decision making through algorithms —this model continues to be replicated across alternative financial institutions and even some community investment strategies, but research shows these centralized algorithms can be problematic for communities that have faced historical discrimination. At CCL, our goal is to move away from centralized decision-making because oftentimes when we only prioritize efficiency we lose the ability to build solutions that acknowledge the diversity of our challenges in accessing credit and the work that needs to be done to build trust together. Our goal in decentralizing decision-making is to distribute power equitably and share in a vision of building regenerative and supportive lending practices. Read on to learn more about how we are doing this in practice with our Lending Partners.

Our goal in decentralizing decision-making is to distribute power equitably and share in a vision of building regenerative and supportive lending practices.

Shifting Power to Lending Partners

Power structures can serve to enable or prohibit equitable access to impact investments, financial products, and financial services. At CCL, we recognized this early on based on feedback we receive and this recognition was a driving factor behind the decision to create space for our Lending Partners to design their own Lending Programs, including the non-compliance related underwriting criteria, the terms of the loans, and the amounts of the loans. By leading the design of their own Lending Programs for their communities, Lending Partners were enabling access to affordable credit products in their communities on their terms. But, we quickly learned that is not enough. The question we were bumping up against was—who decides what Lending Programs get run by CCL?

This question challenged us to think beyond the structures we had in place to make decisions internally. We looked externally and were emboldened by the many examples popping up in the community lending ecosystem that were testing new ways to shift and share power and decision-making to those often left out. We took notes from some of our Lending Partners like Native Women Lead, ConnectUP! Institute and MORTAR, the Boston Ujima Project, The Real People’s Fund, and others that designed community investment committees. We looked to RSF Social Finance that brought together investors and borrowers to make pricing decisions.

Internalizing these examples and adapting based on continual feedback, starting in December 2021, we restructured our Lending Partnerships Committee to include Lending Partners and directly incorporate their perspectives, ideas, and goals into CCL’s governance and decision making. The Lending Partnerships Committee is responsible for making decisions about which Lending Programs we pilot and scale at CCL—expanding this to include Lending Partners distributes this power to our community and network of partners directly. This shift has already been transformational as Lending Partners now drive the evaluation of which Lending Programs and what criteria should be used to make decisions. Every meeting we are learning together what it takes to operationalize our Lending Partner’s ideas and sharing a vision for an equitable financial system together.

This shift has already been transformational as Lending Partners now drive the evaluation of which Lending Programs and what criteria should be used to make decisions.

As with all things at CCL, this will continue to evolve as we learn and get feedback on what is working and not working and as we develop new ideas together on how we can continue to share power. For now, we are excited to take a tangible step that will create a shared sense of ownership to all of the communities we serve and continue to build new structures that enable us to share resources and power.

2022 Opportunities to Learn More About Enabling & Resourcing CCL’s Affordable Lending:

As we grow the Lending Programs that CCL supports, we have identified an impact-first, blended investment structure that enables us to collectively eliminate the poverty premium for borrowers and support our Lending Partners by facilitating capital to individual and small business borrowers that are eligible for their programs:

• Kinship Notes: community investment notes that support CCL’s Lending Programs to scale. Funds from Kinship Notes are used to resource CCL’s Lending Programs at the direction of our existing Lending Partners.
• Recoverable Grants: recoverable grants that support and enable CCL’s Lending Programs. Funds from Recoverable Grants are primarily used to resource CCL’s pilot Lending Programs at the direction of our new Lending Partners.
• Unrestricted Grants: in addition to revenues from donations and service revenues that we receive from Lending Partners that are able to pay for CCL’s services, we use unrestricted funding to enables CCL’s work without covering costs via interest and fees.

Learn more by expressing interest here or contact fundraising@communitycreditlab.org to learn more about resourcing CCL’s work. Kinship Notes and Recoverable Grants are currently eligible to accredited investors and funders only.

¹ As of January 2022, the long-term Applicable Federal Rate was approximately 1.8% and, therefore, our goal is to ensure that we are able to lend to all borrowers at this rate, at the direction of our Lending Partners’ preferences. To reach this goal, we support Lending Programs to charge between 0% and prime interest, and any interest collected from loans is paid to Lending Partners to help them cover variable costs associated with running these programs.

² A Lending Partner is a community-rooted organization that provides direct and comprehensive services to individuals. Lending Partners have deep relationships with the individuals and/or businesses they support and an understanding of local and historical financial barriers.