by Guest Author
As mission-driven lenders, Community Development Financial Institutions (CDFIs) increase access to capital in low-income communities through grants, loans, and even technical assistance to small business owners.[1] In support of this mission, CDFI grant programs commonly target minority and women-owned small businesses to support historically underserved communities.[2] However, the Supreme Court’s holdings overturning affirmative action in college admissions have created a ripple effect in the grantmaking space, as seen in the cases of American Alliance for Equal Rights v. Fearless Fund, and DigitalDesk, Inc. v. Bexar County and LiftFund, Inc.[3] This blog will discuss how CDFIs’ grantmaking programs support minority-owned businesses and how the end of affirmative action has had a chilling effect on such programs.[4]
Unlike traditional lenders, CDFIs make much lower profits because at least sixty percent of CDFI activities must go toward funding low- and moderate-income populations, which correlates with a higher risk of loan default.[5] Fueled by the recent SFFA decision, a CDFI in Texas called LiftFund, Inc. became the target of a racial discrimination lawsuit.[6] The plaintiff, an applicant LiftFund denied for a small business assistance program, sued LiftFund for using a “race-based and sex-based” scoring method to award its grants.[7] The court dismissed the lawsuit against LiftFund when it found the applicant had filed an incomplete application, but the outcome of another 2024 lawsuit in the Eleventh Circuit still has CDFIs feeling uneasy.[8]
Despite its non-CDFI status, the Fearless Fund is an Atlanta-based investor that provides seed funding to start-ups led by women of color.[9] When the legality of its race- and sex-based lending practices was brought before the Eleventh Circuit, the court reversed the lower court’s decision to allow the grant program to proceed amid litigation with the plaintiff.[10] Ultimately, the Fearless Fund decided to end the legal matter by ending its grant program for Black women.[11] The decision to settle was arguably wiser than pursuing a final decision from the court, which would have likely been unfavorable in light of the Eleventh Circuit’s earlier appeal decision.[12] Outside of the Circuit, however, the legality of race-based grantmaking nationwide is still unclear.[13]
Though the long-term impact of the end of affirmative action on CDFI grantmaking programs is yet to be seen, legal battles like these are likely to create a chilling effect on grantmaking activities geared towards underserved communities.[14] These battles may deter organizations from allocating necessary resources to historically marginalized groups, fearful of potential legal scrutiny.[15] As a result, the overall funding landing for these communities could shrink, leading to slower progress in addressing economic disparities among socioeconomic groups.[16] Thus, the ripples of the end of affirmative action may be felt not only among CDFIs, but among the communities CDFIs aim to serve, potentially stalling economic development and perpetuating inequities in access to financial resources.[17] Depending on how courts rule on the recent anti-DEI litigation launched against Target, Corp., it may be matter of time before these ripple effects also reach large corporations that have attempted to address social responsibility concerns in their corporate strategy.[18]
[1] What Is a CDFI, Opportunity Fin. Network, https://www.ofn.org/what-is-a-cdfi/ (last visited Jan. 31, 2025).
[2] See The Slippery Slope of a Conservative Court’s Decision on Affirmative Action, African American All. of CDFI CEOs, https://aaacdfi.org/blog/the-slippery-slope-of-a-conservative-courts-decision-on-affirmative-action/ (last visited Jan. 31, 2025).
[3] See DigitalDesk, Inc. v. Bexar Cnty. & LiftFund, Inc., No. 5:23-CV-0886-JKP-RBF, 2024 WL 2420810 (W.D. Tex. 2024); American All. for Equal Rights v. Fearless Fund Mgmt., LLC, 103 F.4th 765 (11th Cir. 2024); see also SFFA v. Harvard and SFFA v. University of North Carolina FAQ, The Supreme Court’s Affirmative Action Decision, Explained, NAACP Legal Def. and Educ. Fund, Inc., https://www.naacpldf.org/case-issue/sffa-v-harvard-faq/ (last visited Jan. 31, 2025); Mark Julian & Telford Taylor, Fearless Fund Settles with DEI Foes, Ends Grant Program for Black Women, Wash. Post (Sept. 11, 2024), https://www.washingtonpost.com/business/2024/09/11/fearless-fund-edward-blum-settlement/.
[4] Mary Mazzoni, A Chilling Legal Landscape Has Racial Equity Efforts Under Attack, Triple Pundit (Jan. 17, 2024), https://www.triplepundit.com/story/2024/racial-equity-lawsuits/792701.
[5] See Overview, Community Development Financial Institutions Fund, U.S. Department of the Treasury, FDIC, https://www.fdic.gov/resources/bankers/affordable-mortgage-lending-center/guide/part-1-docs/cdfi-overview.pdf (last visited Jan. 31, 2025).
[6] See DigitalDesk, Inc. v. Bexar Cnty. & LiftFund, Inc., 2024 WL 2420810, at *1 (W.D. Tex. 2024); see also San Antonio Team Secures Complete Dismissal for Pro Bono Client LiftFund, Inc., Norton Rose Fulbright (July 2024), https://www.nortonrosefulbright.com/en/news/4f2fdae9/san-antonio-team-secures-complete-dismissal.
[7] See African American All. of CDFI CEOs, supra note 2.
[8] See San Antonio Team Secures Complete Dismissal for Pro Bono Client LiftFund, Inc., Norton Rose Fulbright (July 2024), https://www.nortonrosefulbright.com/en/news/4f2fdae9/san-antonio-team-secures-complete-dismissal; Statement on the Eleventh Circuit Court’s Ruling Against the Fearless Fund, Afr. Am. All. of CDFI CEOs (last visited Jan. 31, 2025), https://aaacdfi.org/blog/statement-courts-ruling-fearless-fund/.
[9] See Mark Julian & Telford Taylor, Fearless Fund Settles with DEI Foes, Ends Grant Program for Black Women, Wash. Post (Sept. 11, 2024), https://www.washingtonpost.com/business/2024/09/11/fearless-fund-edward-blum-settlement/.
[10] See Julian Mark & Taylor Telford, Appeals Court Blocks Fearless Fund from Awarding Grants to Black Women, Wash. Post (June 3, 2024), https://www.washingtonpost.com/business/2024/06/03/fearless-fund-grants-blocked/.
[11] See Julian & Taylor, supra note 9.
[12] See Mark & Telford, supra note 10.
[13] See Fearless Fund Settles: Settlement Will Shape Law on Race-Based Grantmaking in Eleventh Circuit While Leaving Issue Unresolved Nationally, Patterson Belknap (Sept. 12, 2024), https://www.pbwt.com/publications/fearless-fund-settles-settlement-will-shape-law-on-race-based-grantmaking-in-eleventh-circuit-while-leaving-issue-unresolved-nationally.
[14] See Mazzoni, supra note 4.
[15] See Mazzoni, supra note 4.
[16] See Melissa Hellman, Black Financial Institutions Face New Threat Following Supreme Court Ruling, Ctr. for Pub. Integrity (Nov. 10, 2023), https://publicintegrity.org/inside-publici/newsletters/watchdog-newsletter/black-financial-institutions-under-threat-following-supreme-court-ruling/.
[17] See Hellman, supra note 16.
[18] City of Riviera Beach Police Pension Fund v. Target, Corp., et al., No. 2:25-cv-00085 (M.D. Fla.) (alleging that Target misled its investors about the “risks” of DEI initiatives).
