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Interactions Between CDFIs and Mainstream Financial Institutions

We draw from our interviews with the participant group to present current examples of collaboration with banks, government-sponsored enterprises such as Fannie Mae, and investment banking organizations. While we identified a range of CDFI activities vis-a-vis mainstream institutions, we focus here on roles and activities that represent reasons for organizational success in attracting and deploying capital and on those that represent advancements or innovations with ramifications for the community development finance field. Several examples illustrate how CDFIs bring liquidity and more competitive pricing to credits targeted to lower-income populations. We also summarize ways CDFIs align interests of multiple actors, including lenders, investors, and government agencies, and thereby increase and better leverage resources that go to development projects in impoverished communities.

The CDFI roles are grouped into broad areas: (1) extend through diverse constructs the ability of mainstream institutions to lend beyond profitability constraints to nontraditional borrowers in the primary market; (2) expand capital markets to include community development credits; (3) develop new areas of lending that mainstream institutions eventually serve independently; (4) perform civic

Figure 2.1 Brief Descriptions of CDFI Organizations Interviewed

Nonprofit Finance Fund (NFF) provides loans, credit enhancements, and grants to nonprofits. Increasingly, the organization is moving away from facilities financing and toward lending (and other funding), training, and consulting services that build capacity of its nonprofit clients.

The Reinvestment Fund (TRF) is a national leader in the financing of neighborhood revitalization. TRF finances housing, community facilities, commercial real estate and businesses across the Mid-Atlantic. TRF also conducts research and analysis on policy issues that influence neighborhood revitalization and economic growth.

Community Preservation Corporation (CPC) is a nonprofit bank consortium that facilitates affordable housing development and redevelopment. CPC offers construction, rehab, and refinancing loans, and provides technical assistance to borrowers, which include public, private, and nonprofit developers. CPC is sponsored by eighty banks and insurance companies, and its geographic scope includes the states of New York, New Jersey, and Connecticut.

The Center for Community Self-Help (Self-Help) focuses on mortgage and small business lending to people of color, women, rural residential and low-wealth families, and communities that are not served adequately by other financial institutions. Self- Help operates the Center for Responsible Lending, a nonprofit created to explain and promote responsible lending advocacy at the national level. Self-Help is based in Durham, North Carolina. It operates offices in cities across North Carolina as well as in Washington, D.C. and Oakland, California.

The Community Reinvestment Fund (CRF) is the development finance industry leader in opening channels to capital markets. CRF operates a national secondary market for community development loans, more broadly connecting local development lenders with capital markets to increase their liquidity and impact.

The Low-Income Investment Fund (LIIF) provides capital and other assistance for affordable housing, child care, education, and other community building facilities and initiatives. LIIF finances all development phases, including permanent mortgages, as well as operating lines of credit for nonprofit organizations. LIIF operates mainly in three metropolitan areas: San Francisco, Los Angeles, and New York City.

ShoreBank Corporation was the first community development bank in the nation. It is a multistate banking and community development organization comprising two banks and seven nonprofit subsidiaries in Chicago, Detroit, Cleveland, and llwaco, Washington. Having pioneered the concept of community development banking and the "double bottom line” of both mission and profit goals, ShoreBank developed in the 1990s the concept of a “triple bottom line” that also encompasses environmental goals.

The National Community Investment Fund (NCIF) was established in 1996 as an independent fund to make investments in depository institutions around the country. These institutions are community banks, thrifts, and some credit unions that have a primary mission of community development.

ACCION New Mexico (ACCION-NM) provides business credit, microloans, training, and other resources to further the goals of emerging entrepreneurs in the state of New Mexico. ACCION-NM is part of an international network of independent ACCION organizations.

Note: More information about each organization can be found in an appendix at napawash.org.

intermediary functions by helping to contextualize public and private investments from regulatory and economic development viewpoints and capture public funds to attract mainstream participation in community development; and (5) help to build community (development) banking by leveraging existing infrastructure and capital, and increasing the number of CDFI banks. We explain the importance of each strategic area, and then provide examples that reflect the function at selected CDFIs. Many of these functions are common to more than one organization in our participant group. Some of the activities we describe illustrate several functions or roles in the same example. In addition, not all the broad strategic functions apply to all of the organizations in our study group. ShoreBank, the only (community development) bank in our sample, has larger banks as investors, but the relationship has little in common with that of loan funds or even the only other depository in the group, Self-Help.

Primary Market

Extending the ability of regulated, mainstream financial institutions to lend and invest in community development beyond profitability and risk constraints through diverse CDFI/bank constructs is a classic CDFI function. CDFIs (more precisely, community development loan funds) borrow bank and other funds to lend at below-market rates to higher risk, less experienced, or unproven customers at a small profit. These loans are often smaller, riskier, more specialized, and comparatively less profitable than typical bank products; many banks cannot underwrite such loans on a continual, cost-effective basis. Borrowers include nonprofit organizations and developers who cannot meet underwriting criteria at conventional institutions.

Lending Consortia, Pools, Syndications

In addition to one-on-one relationships between CDFIs and mainstream financial institutions, CDFIs organize lending consortia, pools, syndications, and other risk sharing that use specialized lending, local/regional market, and policy expertise. These arrangements bring more capital for community development and enable CDFIs to generate more and larger loans. They allow banks to participate in and thereby spread risk across portfolios of community development loans, earn profit, and earn Community Reinvestment Act (CRA) credit. They extend further than one-on-one relationships the ability of mainstream financial institutions to lend and invest in community development beyond profitability constraints, potentially to a broader geographic area, and with greater impact.

CPC is one of the earliest examples of a loan consortium for community development purposes in the nation. Unlike other examples we cite, in which a nonprofit lender uses consortia as one of multiple strategies, its organizational structure is a loan consortium. CPC was founded in the 1970s in response to the long-term deterioration of the affordable housing stock in New York City boroughs. CPC traces its origins to a study conducted under the auspices of (David Rockefeller at) Chase Manhattan Bank in the early 1970s that looked to redress almost three decades of disinvestment in the housing stock of neighborhoods in Brooklyn and the South Bronx. After much earlier middle-class flight to the suburbs from these areas, banks had become leery of lending in them. Thrift institutions, which served some blighted areas, did not have the capacity or expertise to finance and carry out large rehabilitations. The study concluded that only a nonprofit funded with bank capital and dedicated to improving specific neighborhoods could turn around this long-term deterioration. A consortium of about sixty banks provided lines of credit to CPC. Today, these lines total about $460 million, are renewed every five years, and a single agent bank, Deutsche Bank, lends to CPC directly under a revolving credit arrangement.

Another example of a pioneering consortium was developed by the NFF in the mid-1990s. When wholesale banks came under CRA regulation in 1995, banks such as JPMorgan recognized that working with an intermediary was the best and perhaps the only way to meet CRA lending requirements. Wholesale banks were not structured to make small, customized loans. With an understanding that these loans would not be profitable for banks to do on their own, NFF structured a loan syndication with wholesale banks as funders. This arrangement was pivotal to NEF's growth; at the same time, it was a relatively straightforward relationship. All the banks lent with the same set of covenants. A single bank, JPMorgan, acted as the syndication agent. The terms of the consortium made NFF the underwriter. Banks lent to the consortium unsecured, without collateral, but with full recourse, meaning that NFF could be compelled to make good on (i.e., buy back) nonperforming loans. They made the loan decisions and decided the terms of the loans, incurring the related due diligence and servicing costs.

Variations of the pool/consortia model have allowed CDFIs to move away from making relatively small loans to one in which larger pooled arrangements facilitate financings that banks would still not underwrite alone, sometimes for specific purposes, such as construction, or for specific types of collateral, such as charter schools. In 1994, TRF organized a consortium of bank lenders, called the Collaborative Lending Initiative, to finance large construction projects – larger projects than TRF could finance using its own capital. The Collaborative Lending Initiative is a direct lender to housing, community facilities, and commercial real estate projects. Starting at $13 million and growing to $30 million, the Collaborative Lending Initiative marked the first time TRF turned ad hoc loan participations into a system. The consortium initially consisted of twenty-two different lines of credit managed by TRF. Small banks were most interested in participating because the consortium gave smaller institutions that did not have their own real estate departments a way to receive CRA credit. When the Collaborative Lending Initiative turned into a true syndication in 2002, larger banks joined with a different motive: to outsource the smaller deals (less than $500,000) that they could not do profitably on their own. Chase assumed the role of managing these credit lines in 2002.

Deploy Off-Balance-Sheet Capital

The broad goal of community development loan funds to grow their lending and impact has in some cases pushed individual institutions past the point where it remains practical to borrow and then deploy money. Two principal obstacles inhibit lending growth among loan funds: they have finite core capital (and sources of funding available to grow capital have diminished), and bank funding above a certain level is too costly. Banks can often underwrite credits that in the past required an intermediary, reducing their incentive to lend at any discount to market. Some CDFIs accordingly engage in “off-balance-sheet” lending, deploying funds of other institutions directly. This model enables the CDFI to increase its lending impact in an environment where growing internal capital has become more difficult. It also enables a mainstream partner to leverage the local market knowledge, expertise, and high-touch servicing of a CDFI, but usually with some level of recourse.

LIIF provides an example of this type of arrangement. Within the past few years, LIIF determined it could realize its goal of increasing its lending capacity more efficiently by lending funds of other entities that it need not control directly. LIIF originates and services loans for mainstream financial institutions, which are held on the books of the mainstream institutions. For example, LIIF originates and underwrites charter school loans for Royal Bank of Canada, one of the most active banks in the California charter school financing market. Another source of off-balance-sheet capital for LIIF is the Fannie Mae American Communities Fund. Fannie Mae reviewed and approved LIIF's underwriting standards, and LIIF sells loans to Fannie Mae without review, but with 5 percent recourse, meaning Fannie Mae can compel lenders to buy back that portion of (nonperforming) loans sold to the fund. Currently, about 60 percent of the $300 million in capital LIIF has available to finance community development projects is not on its balance sheet but under the CDFI's (sole) purview. LIIF's CEO described the organization's role as moving toward one of supplying intellectual capital (market expertise) in isolation versus expertise coupled with financial capital that it raises and deploys.

Employ Variations of Traditional Partnership Roles to Facilitate Broader CDFI Reach

A very different way of extending the reach of CDFIs is the ACCION-NM model. In 1999, after five years of operation, ACCION-NM expanded its geographic footprint from the greater Albuquerque area to the entire state of New Mexico. ACCION-NM recognized that small-business lending and microlending were badly needed among cash-starved entrepreneurs with blemished credit histories or none at all, but traveling great distances to originate and close very small loans would create too much expense for ACCION-NM to survive. Therefore, ACCION-NM became adept at using the network of offices of banking institutions around the state (Wells Fargo; First State Bank, a First Community Bank subsidiary; and more recently First National Bank of

Santa Fe) to identify borrowers, often would-be bank customers, who do not meet bank underwriting criteria. These banks have become the principal distribution system for ACCION-NM, even representing the organization at loan closings. In some instances, credit is extended without any face-to-face contact between ACCION-NM staff and actual borrowers; the bank office serves as a communication and funding channel, but ACCION-NM underwrites and funds the loans. These relationships between ACCION-NM and the banks set up the opportunity for ACCION-NM's customers to “graduate" to a direct relationship with the bank at a later time.

Secondary Market

The secondary market promotes open channels to capital markets for community development loans to facilitate greater liquidity and reliable funding sources for community development lenders. Much of the dialogue related to scaling and to some degree mainstreaming the development finance field revolves around the topics of liquidity and access to reliable, stable, and predictably priced sources of capital. Capital markets create liquidity and reduce pricing once risks associated with an asset type are identified and quantified, and the CDFI industry has made significant inroads toward accessing secondary market capital on a continual, if not yet broad, basis. There are still numerous challenges to this endeavor. Many of the loans originated by CDFIs do not fit normal secondary market criteria, loan volume is insufficient to attract interest among investment bankers, and there is a scarcity of data to inform risk-management models. To the extent CDFIs can adapt their lending practices, capital markets represent an efficient and ready funding source for an industry that has historically depended on uncertain government and foundation funding and specialized relationships with banks.

Create Capital Markets Channels for Non-SBA-Qualifying Small Business Loans

As an organization founded on the principle of bringing capital to community development lenders through the secondary market, the CRF works to demonstrate and develop secondary markets for loans that do not fit current secondary market criteria. For many years, the Small Business Administration (SBA)-insured portion of qualifying loans was the only secondary market for business loans. Lack of similarity between business loans was a barrier to secondary market sales. CRF saw a niche in devising ways to pool non-SBA-insurable loans – loans to small business owners originated through revolving loan funds whose growth would otherwise be constrained because of the slow return of funds to relend to subsequent borrowers. CRF purchases loans under specified agreements from nonprofit or publicly sponsored small business lenders around the country and packages them into securities. These loans are secured by real estate, but typically their loan-to-value ratios are too high or the collateral has a second lien, and therefore they do not qualify for

SBA 504 guarantees. CRF sells these securities predominantly to banks investing for CRA purposes. In 2004, CRF reached an important milestone, receiving a Standard and Poor's rating for its roughly $50 million securitization, 87 percent of which was AAA (highest) rated. Buyers included institutional money managers and insurance companies. Another rated security followed in 2006. Banks seeking CRA credit continued to invest in the lower rated tranches of these issues.

Securitize Nonconforming Mortgages

Another important innovation for accessing the secondary market is one developed by Self-Help. Self-Help began its secondary mortgage market program in 1994 to address the need for greater liquidity in the lending market to nonconventional mortgage customers. In Self-Help's secondary mortgage market program, the supplier network is mainstream financial institutions. Self-Help purchases nonconforming “CRA-qualifying" mortgage loans and securitizes them through Fannie Mae. These are high-loan-to-value mortgage loans to households that may have blemished credit histories and/or difficulty documenting income and do not qualify for conventional (“A credit”) mortgage financing.[1] This program began with Self-Help's purchase of Wachovia's $20 million nonconforming portfolio. The terms of the transaction required Wachovia to relend the sale proceeds of its portfolio in low- and moderate-income communities. Funding from the Mac Arthur Foundation in 1997 allowed Self-Help to buy additional loans from Wachovia and other institutions. In 1998, this pilot led to a national program to sell nonconforming loans to Fannie Mae. Fannie Mae made a $2 billion dollar commitment to securitize the loans originated by twenty-two financial institutions. Self-Help obtained a $50 million Ford Foundation grant to serve as a loss reserve. The $2 billion mark was reached in 2003, and the commitment was renewed at $2.5 billion with a new five-year term. Presently, the mortgage-backed securities derived from these loans (issued by Fannie Mae) account for about two-thirds of Self-Help's portfolio.[2]

Expand Loan Securitization to New Types of Assets

An even more recent development in CDFI secondary market activity is exploratory work on securitizing charter school loans. CDFIs have been making charter school loans since 1997. Planning is under way among members of the Housing Partnership Network (HPN), a consortium of affordable housing developers, lenders, and other development finance organizations, to explore the feasibility of a bond securitization program for charter schools. Five of the CDFIs involved in HPN are among our participant group: CPC, CRF, TRF, Self-Help, and LIIF. Under the direction of Minneapolis-based consultant Wilary Winn, which also advises CRF individually, the group has assembled data about its loan portfolio and is working with potential investors and partners. The expected launch of a pooled transaction is the second half of 2007.[3]

Innovator/Pioneer

An innovator/pioneer is one who develops new areas of lending that mainstream institutions can eventually take on with or without intermediaries, in part by identifying and helping to address related risks. Over the years, a case has been made that a key role of CDFIs relative to mainstream financial institutions is that they demonstrate the viability of the community development finance market. Indeed, CDFIs often see themselves as laboratories and regularly adapt their products in response to economic, social, and institutional changes. They make the case for lending and investment in underserved communities, demonstrating the value of the collateral they are creating, so that a part of this market can later be taken over by mainstream financial institutions. CDFI innovations are shared or “spun-off' to larger, often private, financial players that are better able to commercialize fully a promising new product or service. Some in the industry have a goal of changing the behavior not just of lenders in the primary market but of investors in the secondary market as well.

Mortgages to Lower-Income Households

A classic example of this “demonstration effect" is nonconforming and subprime mortgages. Community development banks and credit unions, as well other intermediaries, began underwriting mortgages to lower-income households as early as the mid-1970s. Although the subprime market is currently in crisis because of overly relaxed underwriting standards and aggressive marketing of nontraditional (e.g., low/no documentation, interest-only, 2/28[4]) subprime loans to inappropriate borrowers as of spring 2007, CDFIs were among the first to demonstrate that nongovernment-insured mortgages could be extended to lower-income households that do not qualify for prime, conventional loans. The secondary market for subprime mortgages expanded in the 1990s, and Government Sponsored Enterprises (GSEs) began purchasing the least risky (“A-minus” credits) of these loans. Today, mainstream institutions have overtaken mission-oriented organizations in providing mortgage loans to low- and moderate-income borrowers. Construction and permanent financing for affordable multifamily housing comes from banks and less often from CDFIs.

Loans to Charter Schools

A more recent example is loans to charter schools (see also Chapter 4, “CDFIs 'Make the Market' for Charter School Facilities Financing”). In the early days of charter schools, there was no connection made to CRA by banks or, formally, by bank regulators. Banks moved slowly into the field through participations organized by CDFI intermediaries. Later, CDFIs noted that some of the banks they worked with started making these loans directly. For example, Citibank was one of the banks to help CRF negotiate its first charter school loan pool. It took that knowledge and then made five or six charter school loans as the sole lender. Despite some idiosyncrasies, the larger loan sizes (some over $5 million) help banks clear at least one profitability hurdle common to community development loans.

The concept of CDFIs as being fundamentally demonstration organizations can be oversimplified, however. Often, CDFIs do not exit a market after mainstream banks have joined. As TRF explains, it does not cede lending markets to banks once the related risks and idiosyncrasies are commonly understood. TRF remains a player, financial and otherwise, and works to inform and integrate aspects of public policy, civic involvement and awareness, and related development and services to the betterment of its local markets. For some CDFIs, the justification for remaining in a market relates to sustainability; the time and energy to understand and develop a lending market represents a significant investment, and CDFIs seek a return on that investment. Others question whether it is in the best interest of the community development borrower to hand over the market to mainstream financial institutions. In Wilary Winn's view, the charter school market is still an emerging, inefficient market, and CDFIs have a duty to consider whether a bank loan of five to seven years is necessarily the best type of funding for a charter school.

CDFIs also consider the permanence of mainstream institutions in these niches. As profit-motivated institutions, banks may temporarily or permanently vacate a product line if a certain margin is not met or if the bank changes its orientation after a restructuring or merger. CDFIs have seen this as an argument for staying in a particular market or product line to ensure that certain types of credit remain available. Leaving a market when banks move in during strong economic times creates the risk of leaving a lending vacuum not easily filled during weaker economic times if the CDFI has divested itself of the infrastructure and capacity to operate in that niche. ShoreBank, for example, competes with mainstream banks for market share in the rehab loan market and remains the dominant lender in the bank's original market, Chicago's South Shore neighborhood, even as other banks have entered and left the market.

Civic Intermediary/Aggregator of Public Funds and Resources

Civic Intennediary/Aggregator of Public Funds and Resources capture and manage available public moneys to enable and/or enhance community development finance. By virtue of their social missions and nonprofit status, as well as their expertise and market awareness, CDFIs are positioned not only to attract subsidy capital but also to provide input on government subsidy program design and deployment. Generally, to bring deals or programs to fruition, CDFIs must assemble subsidy, nonfinancial commitments, and community support and must form long-term (and informed) relationships with government officials, investors, and clients. CDFIs often assume the role of subordinate lender and take the first-loss risk and/or apply for and bring public, foundation, or other ancillary funding to bear to provide loss reserves and mitigate risk to their mainstream partners. The CDFI intermediary assumes the role of trustee (of sorts), and must not only assure the highest level of integrity and skill in deploying public (subsidy) resources but also use them efficiently, leverage private capital, and align the interests of all parties toward achieving the desired outcome. In most CDFI deals, banks would not otherwise lend or invest.

As CPC explains, one of its roles is to devise finance structures that dovetail private finance with tax incentives, grants, or low-interest loan subsidies. CPC has also addressed barriers to investing in multifamily housing by, for example, aligning guidelines common to city subsidy programs with its own underwriting criteria, eliminating the need for developers to meet multiple criteria and benchmarks, and providing technical assistance and support for borrowers/developers and building residents. These efforts have attracted more private-sector investors in affordable housing.

CDFIs also help to shape policy priorities. For example, NFF played a major role in broadening the types of loans for which banks receive CRA credit beyond housing finance. A breakthrough aspect of NFF's initial loan syndication in the 1990s was that it brought together bank funds to support community development activities outside of the housing sector. Prior to the early 1990s, banks did not expect to earn CRA credit for funding things like a nonprofit's operating credit line or arts facilities. NFF argued that nonprofits that support homeless shelters, drug treatment centers, community centers, and the like, should all be included in CRA. With some help from the New York and San Francisco Federal Reserve Banks, which held forums to raise awareness of NFF's efforts, the definition of CRA-qualifled loans was extended beyond mortgages. NFF's advocacy led to increased bank lending to nonprofits in New York and across the country.

CRF's work to open capital markets to community development finance provides another illustration. As a secondary market investor, CRF envisioned ways the New Markets Tax Credit might be used as part of a strategy to enable capital markets funding. Its strategy reduced costs to end borrowers and produced loans suitable for investment-grade securitizations. Even though CRF's National New Markets Tax Credit Fund Inc. (the entity that receives the tax credits) is a for-profit institution, and it purchases loans from public loan funds (not uniquely nonprofits), it qualified for New Markets funding because it sought and received a private letter ruling that allows CRF to buy loans from non-community development entities (CDEs) as long as they are subject to an advance commitment (i.e., CRF reviews the loans and issues commitment letters).[5] New Markets enabled CRF to raise subordinate capital by applying for tax credit allocations and selling the credits to persons or organizations with sufficient federal tax liability. CRF became the first multi-investor fund in the marketplace to use the credit in this way. (CRF has been allocated roughly $400 million in credits in three rounds.) The fund creates capacity to purchase loans, and the structure allows CRF to improve pricing to end borrowers by roughly 150 basis points compared with market-rate pricing for the typical borrower. The New Market Tax Credit (NMTC)-financed limited partnership facilitates investment- grade ratings for the largest portion of CRF's securitizations.

Further, CDFIs see themselves as having a responsibility to protect consumers or play a watchdog role in the community development finance field. For example, Self-Help launched a subsidiary, the Center for Responsible Lending, to counter predatory lending practices through research, studies, and policy work. More recently, to counter predatory lending in the subprime market, two prominent organizations in the development finance industry are rolling out new subprime mortgage programs positioned as alternatives to predatory lenders that include secondary market components and fair pricing policies. The HPN is forming a conduit for "responsibly priced” subprime mortgages, and the Opportunity Finance Network, a trade association for CDFIs, is planning to offer a "turnkey” mortgage lending platform for CDFIs that wish to participate. TRF's self-described role as a civic intermediary goes to the heart of CDFIs as gatekeepers for community development projects in their service areas. From city and state politicians to local venture capitalists, local leaders seek TRF's advice and participation based on TRF's network of civic and policy relationships as well as its expertise and experience.

Demonstrate Community Banking Models and Expand the Development Banking Industry

The relationship between the community development bank in our sample, Shore- Bank, and mainstream institutions, is distinct from that of other examples, which are primarily community development loan funds. Even banks such as ShoreBank that identify themselves as “community development” institutions do not get funding from or cofinance with larger, mainstream banks and may compete with mainstream banks in the same market for certain credits. If one metaphor for a CDF! is a bridge that connects community development borrowers to capital, CDFI loan funds start on one side of the river and CDFI banks on the other. CDFI banks are regulated depositories attempting to create a new business model for community banks. In effect, they are redesigning the financial system for low- and moderate-income populations and places from the inside. They serve customers who may find traditional banks intimidating or not welcoming and who may need some counseling or technical assistance to use the banks' account services and borrow and repay loans successfully. Community development banks are organizations with mission goals as well as profitability goals. ShoreBank has a triple bottom line of profit, community development, and the environment.

For ShoreBank, a bank is a very different “change agent” from other types of community development intermediaries. All banks must comply with an array of regulations relating to their liquidity, management, earnings, and exposure to market and interest rate risk (as well as CRA and consumer regulations). However, once these criteria are met, a community development bank can leverage capital to a far greater degree than a loan fund. From the bankers' perspectives, this allows community development banks to have greater overall impact. Leverage is seen as an important tool to operate at scale.

ShoreBank operates with a distinct philosophy as well. According to its theory of change, the individual and the private sector, not the nonprofit, are the most important agents of change. Few bank borrowers identify themselves as "community developers." They usually have a profit motive. Therefore, ShoreBank does not generally consider whether or not a prospective borrower is engaged in a textbook definition of economic development. If a loan can give people the opportunity to own a home that they might otherwise not be able to finance, and the bank can make the underwriting work, ShoreBank will provide it. Through its purchase/rehab lending in South Shore, ShoreBank has helped to create substantial wealth for some of its clients.

Another key aspect of ShoreBank's strategy is that it bundles nonprofit affiliates within a larger holding company structure. The ShoreBank structure includes nonprofit and for-profit affiliates that complement the bank work, much like nonprofit CDFIs complement the work of mainstream financial institutions. ShoreBank's management recognized early on that regulatory requirements would constrain the bank from extensive lending to nontraditional borrowers with blemished (or no) credit profiles and/or insufficient assets. Establishing affiliates within the same bank holding company enables ShoreBank to reach deeper into low- and moderate-income populations. ShoreBank's affiliates have complementary roles to those of the bank and exist to help the bank achieve its mission goals as opposed to simply facilitating community development lending to meet regulatory requirements. The nonprofits raise grants and supplemental funding for redevelopment projects, provide technical assistance and training to entrepreneurs and others, and provide financing that the bank could not (easily) make directly. The nonprofits also benefit from the expertise, infrastructure, and underwriting discipline that come from affiliation with a regulated bank.

Finally, ShoreBank's effort to remodel at least a segment of the mainstream financial system is evident in its mission to create examples of profitable products and services that other banking institutions can emulate. ShoreBank is the principal advisor and trustee to NCIF, which makes investments in community banks serving low-income populations and underinvested communities nationwide. ShoreBank has no ownership interest in NCIF but helped create the organization after NationsBank (now Bank of America) approached ShoreBank in the mid-1990s for ideas about how to invest in community banks. NCIF looks to leverage the existing infrastructure and delivery system of community development banks to have greater community impact but, like ShoreBank, is focused on profitability and disciplined management as well as mission goals.[6] The rationale is that many community banks around the country already have many characteristics of community development-focused and mission-focused institutions, even if they do not identify themselves as such. As financial institutions with existing funding infrastructure, insured deposits, and delivery systems, these institutions have higher barriers to entry and are accordingly fewer in number but control a much larger collective pool of assets than other CDFI types.[7] NCIF makes direct investments in community banks and encourages them to seek CDFI certification from the U.S. Treasury's CDFI Fund, thereby availing themselves of resources. In addition to direct investment, NCIF, which is a U.S. Treasury-designated CDFI and an NMTC CDE, also aggregates NMTCs on behalf of banks and credit unions with a community development focus. NCIF conducts workshops and extensive training for community banks that wish to pursue the CDFI designation. Research efforts by NCIF and others are ongoing to demonstrate the impact of community banks in community development lending, whether or not they identify themselves as having a mission focus.

  • [1] Traditionally, a conforming loan had a loan-to-value ratio of not more than 80 percent. Over time, the GSEs have purchased and securitized higher loan-to-value loans, with proper documentation and mitigating (underwriting) factors.
  • [2] This arrangement illustrates how access to the secondary market can reduce the cost of capital to a CDFI. Rather than sell the securitized loans to Fannie Mae for cash, Self-Help takes the mortgage-backed securities (MBS) themselves – a highly liquid form of collateral that allows Self-Help to borrow from the Federal Home Loan Bank (system) at the most favorable rates. With rated MBS, Self-Help can obtain relatively low-cost financing through the repurchase (“repo") market. Under a typical repo transaction, an investment bank accepts the securities as collateral for a loan of a specified term. At the end of the term, Self-Help “repurchases” the security for the amount of the loan plus interest.
  • [3] See Housing Partnership Network Webpage at housingpartnership. net/lending/mortgage_conduits/ (Accessed 2-5-08.)
  • [4] Low- or no-documentation loans have terms that do not require borrowers to fully document income and/or assets; interest-only loans do not require borrowers to pay down principal on an ongoing basis, and in some cases borrowers can pay less than interest due, causing the loan balance to increase by amounts of unpaid interest; 2/28 loans have an initial low rate but adjust sharply upward after two years.
  • [5] NMTC legislation awards credits to taxpayers who make qualified equity investments in privately managed investment vehicles called community development entities (CDEs).
  • [6] CDFI banks represent about 8 percent of all CDFIs but over 50 percent of CDFI assets. Additional information is available from the National Community Investment Fund Web site: ncif.org/aboutus.php?mainid=2&id=27 (accessed 2 May 2007.)
  • [7] See the CDFI Fund Web site (cdfifund.gov) for a numerical breakdown of CDFIs by type.
 
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