COMMUNITY DEVELOPMENT LOAN FUNDS New development finance model that has tapped capital from "social investors" to raise funds for community

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1 COMMUNITY DEVELOPMENT LOAN FUNDS 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. 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. 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

2 CDLF CHALLENGES & BEST PRACTICES 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. 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.

3 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 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 Short term to medium term financing with more risk than conventional lenders but at a moderate level Smaller loans, especially via marketing partners 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

4 COMMUNITY DEVELOPMENT CREDIT UNIONS A membership organization that provides banking services and loans to members with a common affiliation ( field of membership ) A financial cooperative--a member controlled institution based on one member-one vote governance. An insured depository institution Typically focused on servicing the banking and credit needs of low income individuals and communities 789 NCUA-designated credit unions with low-income memberships Adaptation of historic credit union to low-income communities via civil rights movement & war on poverty. CDCU Characteristics Focus on providing financial services and credit to members along with education, counseling, and development. Average asset size of $14 million; 2/3 of assets in loans. 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. Avearge loan charge-offs of.66% in 2001

5 CDCU Challenges and Best Practice Sponsorship and subsidies to organize a credit union and support operations until self-sustaining. 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. Use non-member deposits to increase deposit base and expand lending capacity. Developing tailored banking, credit and development services to address needs of low-income communities. Raise funds to provide education, counseling and develop new products. Use partnerships to reach a larger membership, supply diverse financial services, raise capital and lower costs. Involve members in setting policies, delivering services and operations to advance the mission and reduce costs. Potential Development Role of CDCUs Provide financial services to low-income communities. Alternative to predatory and high-cost financial firms. Personal loans and home mortgage lending. Personal loans that finance small or micro businesses Real estate development and business lending with appropriate capital sources, affiliates, and expertise.

6 FEDERAL COMMUNITY DEVELOPMENT FINANCE INSTITUTION (CDFI) PROGRAM Federally owned corporation (CDFI Fund) to support financial institutions advancing community development for targeted groups or neighborhoods. 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. 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 468 certified CDFIs as of fall 2001

7 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. 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

8 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 nonconventional mortgage loans to low-income households Technical assistance and training Community Impacts/Activity Levels 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 Home Mortgage Lending. 2001: $9.3 million to 183 families. Borrowers: 58% minority, 55% rural, 47% female-headed households. 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. $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% femaleheaded households and 57% rural. Over 22 years, Self-Help has provided $1.78 billion in loans to 25,800 small businesses, nonprofits, and homebuyers.

9 Partners and Capital Sources Total Assets of over $120 million: Credit Union $94.5 million as of 6/30/02; Venture Fun with $28 million. Long term low-interest deposits from religious organizations and individuals Local and national foundation operating support (in initial years) and capital grants State appropriations for small business lending ($2 million and secondary home mortgage role) Federal grants and programs: SBA, CDFI

10 Facts & Figures on VT Community Development Credit Union Lending Products and Services Home mortgage loans on flexible and affordable terms Portfolio loan for manufactured housing Intermediate loans to meet down-payment and closing costs Home improvement loans including HUD Title 1 Small business micro loans Working wheels auto loans for welfare to work clients Assistive technology loan fund for people with disabilities Energy efficiency loans Individual loans Tracker loans to repair/establish credit Retail banking services Development Services Counseling-based lending Home ownership and credit counseling Individual development accounts for home ownership, college education and small business Financial literacy counseling 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 Home mortgage lending: 106 loans $11.1 million in 2002 Home improvement: $169 loans for $674,000 Individual loans: 1613 loans for $7.8 million in 2001 Small Business: 98 loans for $1.1 million Total lending: $20.8 million in 2002; 70 million for 8,700 loans over 14 years Banking services: 10,000 members with deposit accounts Self-sufficient from m interest and fees Low loan-loss rates of.5% Increased savings, better financial capacity and expanded personal and financial goals among low-income members

11 Partners and Capital Sources Total Assets of $21 million Long term low-interest deposits from religious organizations, foundations, financial institutional and individual social investors Local and national foundation support for new program development, research and operating support Partnerships managing lending programs for state and local governments, community action agencies Federal funds: SBA Microloan grant and CDFI Fund equity

12 Self-Help Credit Union For what purposes was Self-Help Credit Union created? What are its primary lending activities and markets? How have these evolved over time? What aspects of its organizational and operations expand its capacity to realize it goals and expand its impact? What are its primary sources of capital? How do these relate to and support its lending activities? What are the most important innovations and best practices from Self-Help s approach to development finance? Vermont Development Credit Union (VDCU) How does VDCU s history & structure differ from Self Help? What are VDCU s primary lending activities, services and markets? How do these compare to Self Help? What is unique about VDCU s approach to development lending? What specific products and services have they developed to address the needs of their low-income market? How does the personal credit and financial literacy focus of VDCU relate to economic development? Are there common strategies, lessons or best practices across the two credit unions? What does their experience suggest about the economic development potential and role of CDCUs?