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Implications for the Scale and Sustainability of CDFIs

Funding Innovations Impacting Scale

While this chapter highlights a diverse set of institutions, ultimately our examples look at partnerships and relationships that enable these organizations to operate at a greater scale. The idea of greater scale is difficult to define precisely but might broadly be characterized as serving more people and communities and having a larger impact. Collaboration with large mainstream financial institutions allows CDFIs to have a greater financial, geographical, and political reach. Beginning with lending consortia, CDFIs have developed a series of innovations to attract funding from banking institutions for community development purposes. Off-balance-sheet financing – brokering loans for banks and others while still bringing market and program expertise to bear – has become a way for CDFIs to increase lending impact when they cannot grow internal capital rapidly enough to pace their own lending goals. The expanding use of secondary market mechanisms to fund community development loans is an important, more recent industry trend. It is one way that CDFIs work to institute efficient, reliable funding sources that ostensibly will lead to, in addition to greater scale, less reliance on customized, one-off financial relationships between CDFIs and banks. For CDFI depositories, the link between the financial mainstream and CDFI expansion follows a different model. Self-Help has forged key relationships with banks and Fannie Mae, but banks make up the distribution system more than the funding base. ShoreBank's integration of nonprofit and for-profit entities and support of the community banking industry have ramifications for the growth of development finance.

Some of these measures, particularly efforts to use capital markets, are intended to grow not only the capacity of individual CDFIs but community development lending capacity, broadly speaking. Indeed, CDFIs often position themselves to help mainstream institutions expand their customer base as well as meet their CRA obligations. A number of the CDFIs in this study market themselves as organizations with a high caliber of talent, large balance sheets (that carry sufficient loan loss reserves), and the know-how to ensure that projects get completed. Similarly, CDFIs highlight their ability to act as the community development face for large financial institutions. As large banks have grown even larger, resources and personnel devoted to affordable housing and other community development activities have decreased relative to the increasing size of these institutions. CDFIs offer themselves as partners to mainstream financial institutions, to develop “hand-crafted" deals based on specialized market knowledge and qualitative personal relationships with customers. CDFIs play the role of “retailers" who complement the role of large-bank “wholesalers.” The most efficient partnerships are viewed as organizations that can deliver broad impact at a regional or national scale.

Importance of CRA

There is nothing inevitable about this collaboration. As noted in various parts of study, the CRA is a primary motivator for banks to work with CDFIs. Most large institutions look to earn a top CRA grade through a combination of in-house lending and investment and lending through CDFI intermediaries. CRA does not compel banks to support CDFIs, but its requirements motivate banks to seek efficient methods to meet credit needs. For CDFIs situated in places that are not big-bank CRA markets, however, CRA and bank support may never really be a factor for achieving scale. Put differently, where local conditions diminish the CRA incentives – areas with low population density outside of large-bank service areas – mainstream financial institutions may not be the path to scale and impact at all. Mandates within the socially responsible investment industry may bring more institutional funding. Among the CDFI depository organizations we interviewed, for example, socially responsible investors are an important source of capital not derived from CRA.

Similarly, the influence of CRA will wax and wane over time with the vagaries of politics and alternating trends within the financial system. Revisions to the CRA passed during the Clinton administration led banks to pull ahead of insurance companies in their support for community development finance institutions. In the past five years, the broad view of consumer advocates is that enforcement of CRA has been less stringent, and there are fewer banks seeking out CDFI partnerships. With the slowdown of merger activity in the mainstream financial sector, there is also less incentive in the banking sector to focus on the punitive consequences of a low CRA grade. CRA enforcement – more than simply the existence of the regulation – may affect the propensity of banks to seek out relationships with intermediaries.

Challenges to Sustainability

An additional issue to consider with respect to collaboration between CDFIs and mainstream financial institutions involves the goal of sustainability. Diverse organizations in our study have made tremendous strides in developing sustainable business models. They represent, largely, a segment of the CDFI industry that has become adept at financial management and that has moved closer to a mainstream financial institution model than ever before. Many of the organizations have adopted risk-management and administrative practices that closely resemble those of mainstream institutions. They hired former bank officials as chief financial and lending officers. Among the organizations in our study, ability to deploy community development assets in a prudent way is another reason they have attracted mainstream financial institution support. When financial institutions supported CDFIs in the mid-1990s, they tended to see these relationships more as philanthropic gestures than profit-making ventures. Now, mainstream institutions impose gradations of performance screens on community development.

These changes notwithstanding, CDFIs have expenses that mainstream institutions do not – counseling, technical assistance, high-touch loan servicing – which they cannot always cover in the pricing of their loans. CDFIs also need another type of low-cost (or no-cost) funding for credit enhancements to achieve endpricing goals for lower-income borrowers and meet the risk-management needs of large financial institutions investing in essentially unstable or unproven assets. NMTCs have been used creatively and efficiently for this purpose but may not be available in sufficient quantity or at all at some later time to facilitate bringing the community development finance field to greater scale. In addition, CDFIs cannot always extract or recapture the value they create for mainstream financial institutions. Despite the direct and indirect assistance that CDFIs provide to mainstream financial institutions, many institutions do not always recognize, let alone pay for, these services. Part of the problem may derive from the nonprofit culture. CDFIs, like many nonprofits with a mission to help people, are not as cost conscious as for-profit ventures. If CDFIs don't know their unit costs, their value, they cannot convey the value to others nor expect to recover these costs (although some organizations in our participant group, such as TRF and CPC, have worked to quantify and recover their costs and/or remained aggressively in lending markets that banks serve independently). Community development depositories such as Self-Help and ShoreBank have a funding and thereby a sustainability edge in the form of deposits. ShoreBank's Development Deposits, drawn from individuals and organizations worldwide, make up almost half of the bank's deposits.

In addition, in the current climate, banks would rather avoid giving below- market-rate money to CDFIs and often screen development loans – even those for which banks receive CRA credit – for performance metrics and profitability. At many institutions, the community development borrower is compared to every other customer. A bank's treasury desk is the same for all departments. For the mainstream financial institutions that still provide below-market loans, internal discussions on pricing is increasingly controversial. Arguably, CDFIs would need less subsidy if they were properly compensated and more adept – industrywide – at quantifying their various costs, or phrased differently, their added value.


The CDFIs in our sample have managed to survive, and even thrive, in the changing financial services environment. The idea of change is so much a part of the environment in which CDFIs work that one CDFI describes it not as of changing ground but as a river. Banks that might have stood on a far shore at one time now stand on the same ground where development finance entities once stood, offering similar products potentially at much greater scale. However, nothing prevents them from retrenchment – market conditions or bank reorganizations may indeed precipitate banks' abandoning product lines and services. The future of the community development finance industry more broadly hinges on determining the appropriate relationship(s) with the mainstream financial industry, perhaps a more symbiotic association not entered into (or maintained) because of regulatory requirements. Our goal was to explore the work that has occurred and is ongoing to move the development finance industry that approaches this ideal. The overriding goal for development financial institutions is to produce organizations that can reach more people, tap into economies of scale, become more sustainable, and ultimately do more to redevelop low-income communities.

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