COMMUNITY DEVELOPMENT LOAN FUNDS
¾ New development finance model that has tapped capital from
"social investors" to raise funds for community development lending. Several hundred exist nationally; about half have an economic development mission.
¾ Major Characteristics:
Locally organized and controlled non-profit organizations
Capital secured primarily from deposits by individuals, churches, foundations and institutional investors.
Access to a larger and more diverse capital base allows larger average size than RLFs: almost $10 million.
Risk profile is between that of banks and RLFs
Spread earned on the difference between cost of funds and lending rates covers operating costs. Need more assets to fund operating costs vs. grant-based loan funds.
¾ CDLF Advantages as a Development Finance Institution:
Relatively simple to start-up since no charter needed
Based on community control and responsiveness
Flexibility in lending policies: no regulatory constraints
Can lend a large share of their assets (70-90% vs. 50 to 60% for banks)
Can supply below-market debt for housing or non-profits
by attracting below-market deposits and subsidies
CDLF CHALLENGES & BEST PRACTICES
¾ Securing Sufficient Capital and Subsidies to Support Operating Costs
CDLFs have a cost of funds for their deposits and thus require a larger capital base than RLFs to support
themselves. A 2% spread on $2 million only yields
$40,000 to support costs--before covering any loan losses!
A larger capital base, larger spread, or grants are needed to cover operating costs. Revenue covers about half of
expenses for the average fund; 60 to 70% for larger ones.
Mechanisms to address potential loan losses: grants, endowment, building a reserve from retained earnings, technical assistance services to borrowers.
¾ Building Stable and Diverse Capital Sources Consistent with the Fund's Lending Objectives
A "core" deposit base to ensure predictable and low turnover of deposits. This may include foundations, religious organizations, banks, and socially conscious individuals. In 2002, Boston Community Loan Fund had
$24 million in "deposits" from over 300 sources ranging in size from $100 to $1 million. This included 200
individuals, 12 foundations, 25 financial institutions, and 72 religious organizations.
Long-term loans and grants to allow higher risk lending, faster growth and an equity cushion. Sources include
CDFI Fund, foundation grants & PRIs, and intermediaries.
¾ Strong relationships with technical assistance sources. Several CDLFs evolved out of TA organizations to help finance
assisted projects and borrowers. Examples:
Institute for Community Economics
Industrial Cooperative Association
¾ Appropriate staff and administrative systems to manage both liabilities and assets:
Outreach/education to develop & maintain depositor base
Originating, underwriting & servicing loans
Financial management to balance interest rates and terms on capital sources and debt products
Financing Roles Well Suited to CDLFs
¾
Short term to medium term financing with more risk than conventional lenders but at a moderate level
¾ Smaller loans, especially via marketing partners
¾ Potential CDLF Lending Roles:
Predevelopment financing for real estate projects
Construction and bridge financing for affordable housing and commercial real estate projects
Working capital & equipment financing for small firms
Working capital and equipment financing for non-profit
organizations
COMMUNITY DEVELOPMENT CREDIT UNIONS
¾ A membership organization that provides banking services and loans to members with a common affiliation (“field of membership”)
¾ A financial cooperative--a member controlled institution based on one member-one vote governance.
¾ An insured depository institution
¾ Typically focused on servicing the banking and credit needs of low income individuals and communities
¾ 789 NCUA-designated credit unions with low-income memberships
¾ Adaptation of historic credit union to low-income
communities via civil rights movement & war on poverty.
CDCU Characteristics
¾ Focus on providing financial services and credit to members along with education, counseling, and development.
¾ Average asset size of $14 million; 2/3 of assets in loans.
¾ Lending focuses on consumer loans. Auto loans account for 43% of loan assets; home mortgages are 20%. Business loans capped at 12.5% of loan portfolio, which can be waived for LICUs.
¾ Avearge loan charge-offs of .66% in 2001
¾ Sponsorship and subsidies to organize a credit union and support operations until self-sustaining.
¾ Building a large membership to start and sustain the credit union. Regulators expect at least 500 members to issue a charter. Define a field of membership and partners with
capacity to gain several thousand members and reach several million dollars in deposits to be viable.
¾ Use non-member deposits to increase deposit base and expand lending capacity.
¾ Developing tailored banking, credit and development services to address needs of low-income communities. Raise funds to provide education, counseling and develop new products.
¾ Use partnerships to reach a larger membership, supply diverse financial services, raise capital and lower costs.
¾ Involve members in setting policies, delivering services and operations to advance the mission and reduce costs.
Potential Development Role of CDCUs
¾ Provide financial services to low-income communities.
Alternative to predatory and high-cost financial firms.
¾ Personal loans and home mortgage lending.
¾ Personal loans that finance small or micro businesses
¾ Real estate development and business lending with appropriate capital sources, affiliates, and expertise.
CDCU Challenges and Best Practice
CDCU Challenges and Best Practice
CDCU Challenges and Best Practice
FEDERAL COMMUNITY DEVELOPMENT FINANCE INSTITUTION (CDFI) PROGRAM
¾ Federally owned corporation (CDFI Fund) to support
financial institutions advancing community development for targeted groups or neighborhoods.
¾ The Community Development Financial Institution Fund has a 15 member advisory board with 9 private citizens appointed by President, 6 Cabinet secretaries of designees (Commerce, HUD, USDA, Treasury, Interior, SBA). CDFI Fund
Administrator is appointed by the President and confirmed by the Senate.
¾ CDFI Fund certifies eligible CDFIs that meet the statutory definition of a Community Development Financial Institution:
primary mission of promoting community development
serve a targeted area or population
provide development services in conjunction with financing
maintain accountability to residents of a target area or target population
cannot be a governmental agency
can only be a bank, bank holding company, or affiliate if both the parent and affiliates collectively meet the CDFI requirements
allows a "community partnership" between a CDFI and a governmental or banking organization
¾ 468 certified CDFIs as of fall 2001
¾ CDFI Provides Assistance Under Four Programs
Core and Intermediary Component provides investment capital via grants, deposits, loans and equity investments.
A matching investment equal to the amount of the fund's assistance is required (can be waived for small rural
CDFIs). Largest program. $36.9 million to be award in FY2002. Maximum award of $2 million
Small and Emerging CDFI Program provides up to
$150,000 in technical and financial assistance to help create new CDFIs or advance young CDFIs. $5.6 million available in FY2002.
Bank Enterprise Awards provide credits against banks’
FDIC insurance fees for increased community
development lending activities. Awards cover 5 to 15%
of increased lending and TA to either CDFIs or
distressed areas. $6.5 million available in FY2002 with
$2 million maximum award.
New Native American CDFC Technical Assistance Program. $3.5 million available in FY2002. Maximum award of $100,000.
¾ Certified CDFIs by type as of 9/31/2001:
Bank Holding Companies: 52 Business Loan Funds: 111
CDFI Intermediary: 13 CDCU: 85
Housing Facility Loan Funds: 131 Microenterprise Funds: 45
Multi-bank CDC: 15 Venture Capital Fund: 16
Facts and Figures on Self-Help Credit Union & Affiliates Lending Activities/Products
Conventional small business loans
SBA 7a and 504 programs
Microenterprise staged loans
Community/non-profit facility loans
Home mortgages. Serves as intermediary purchasing non- conventional mortgage loans to low-income households
Technical assistance and training Community Impacts/Activity Levels
¾ Small Business Lending. 2001: $17.5 million to 180
businesses with over 1,300 jobs. Borrowers: 47% minority, 41% rural. Over half of loans are under $35,000
¾ Home Mortgage Lending. 2001: $9.3 million to 183 families.
Borrowers: 58% minority, 55% rural, 47% female-headed households.
¾ Community Facility Loans. 2001: $14.4 million in 52 loans for charter schools, child-care centers, and non-profit health and human service agencies, representing 700 jobs, 3,0000 day care slots and 1280 education slots.
¾ $2 billion 10-year Community Advantage where Self-Help buys and packages non-conforming mortgages to low and mod income households for secondary market sales via Fannie Mae. Borrowers are 36% minority, 44% female- headed households and 57% rural.
¾ Over 22 years, Self-Help has provided $1.78 billion in loans
to 25,800 small businesses, nonprofits, and homebuyers.
Partners and Capital Sources
¾
Total Assets of over $120 million: Credit Union $94.5 million as of 6/30/02; Venture Fun with $28 million.
¾
Long term low-interest deposits from religious organizations and individuals
¾
Local and national foundation operating support (in initial years) and capital grants
¾
State appropriations for small business lending ($2 million and secondary home mortgage role)
¾
Federal grants and programs: SBA, CDFI
Facts & Figures on VT Community Development Credit Union
Lending Products and Services
¾
Home mortgage loans on flexible and affordable terms
¾
Portfolio loan for manufactured housing
¾
Intermediate loans to meet down-payment and closing costs
¾
Home improvement loans including HUD Title 1
¾
Small business micro loans
¾
Working wheels auto loans for welfare to work clients
¾
Assistive technology loan fund for people with disabilities
¾
Energy efficiency loans
¾
Individual loans
¾
Tracker loans to repair/establish credit
¾
Retail banking services Development Services
¾
Counseling-based lending
¾
Home ownership and credit counseling
¾
Individual development accounts for home ownership, college education and small business
¾
Financial literacy counseling
¾
Education, counseling, training and lending to help low-income members, build financial knowledge, set goals and secure
financial services to meet their goals.
Community Impacts/Activity Levels: 2002
¾
Home mortgage lending: 106 loans $11.1 million in 2002
¾
Home improvement: $169 loans for $674,000
¾
Individual loans: 1613 loans for $7.8 million in 2001
¾
Small Business: 98 loans for $1.1 million
¾
Total lending: $20.8 million in 2002; 70 million for 8,700 loans over 14 years
¾
Banking services: 10,000 members with deposit accounts
¾
Self-sufficient from m interest and fees
¾
Low loan-loss rates of .5%
¾
Increased savings, better financial capacity and expanded
personal and financial goals among low-income members
Partners and Capital Sources
¾
Total Assets of $21 million
¾
Long term low-interest deposits from religious organizations,
foundations, financial institutional and individual “social investors”
¾
Local and national foundation support for new program development, research and operating support
¾
Partnerships managing lending programs for state and local governments, community action agencies
¾
