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July 2011
Published by the Community
Development and Policy Studies Division
of the Federal Reserve Bank of Chicago
Also in this Issue

Community Development
Financial Institutions:
At the Crossroads in Wisconsin

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INTRODUCTION

					

July 2011

The Chicago Fed has had a longstanding interest in the work of community development financial institutions (CDFI) and
the evolution of the development finance industry. In this edition of Profitwise News and Views, we provide overviews of two
conferences that addressed ways the industry is changing, organizing, and increasing its impact. In Milwaukee, CDFIs from
across Wisconsin met in December to consider forming a statewide association, and to hear ideas about shared resources and
collaboration from both researchers and practitioners. In Chicago, staff from the Reserve Bank and Board of Governors
worked with the Opportunity Finance Network (OFN) to stage a small business finance conference one day prior to OFN’s
annual Midwest regional meeting, which was also held at the Reserve Bank. Principal topics included aspects of the Small
Business Jobs Act passed in fall 2010 and key changes to SBA programs designed to facilitate increased lending to small
businesses in redeveloping communities.

Profitwise News and Views

July 2011

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COMMUNITY DEVELOPMENT

CDFIs and Banks: Addressing the Financing
Needs of Small Businesses
by Jeremiah P. Boyle
The Federal Reserve Bank of Chicago’s
Community Development and Policy Studies
division recently joined the Opportunity
Finance Network (OFN), National
Community Investment Fund (NCIF), and
Federal Reserve Board of Governors to host
the CDFI and Bank Small Business Finance
Conference in Chicago.
The purpose of the conference was to
explore the evolution of mission-driven
lending and community-level banking to
promote greater access to credit for small
businesses. The passage of the Small
Business Jobs Act in the fall of 2010, and
recent changes to programs at the U.S.
Small Business Administration (SBA)
provided the backdrop for discussing how
banks and CDFIs can help increase
lending to small businesses in
underserved communities.
Dan Sullivan, executive vice president
and research director at the Chicago Fed,
opened the conference, pointing out that
there are 94 certified Community
Development Financial Institutions (CDFIs)1
in the Seventh Federal Reserve District.
“The Chicago Fed has studied and
supported the work of the U.S. Treasury
Department’s Community Development
Financial Institution Fund since it began 15
years ago,” Sullivan explained. “Such
involvement with CDFIs supports the
mission of our division of Community
Development and Policy Studies, which is to
assist banks with CRA and fair lending
compliance, promote community
development and broad access to financial
services, and conduct research on
consumer and community development
issues that informs policymakers, advocates,
and the banking industry.”

2

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“Small businesses need to play an
important role in the economic recovery,
but they must have access to credit to do
so. In part for this reason, the Federal
Reserve has kept rates exceptionally low
for an extended period,” Sullivan said.
“And during the height of the crisis, we

For small businesses to
grow and thrive in our
communities, we will
need to promote private
sector lending and
investment, a welldeveloped network of
technical assistance
providers, and
innovative, hybrid
organizations like
micro-lenders and other
types of CDFIs...
also developed several innovative tools to
facilitate the flow of credit to small
businesses. For instance, the Term
Asset-Backed Securities Loan Facility, or
TALF, provided liquidity to the secondary
markets for business loans.”2
In 2010, the Federal Reserve hosted
more than 40 meetings exploring small
business credit supply and demand
during the financial crisis.3 The Fed’s

July 2011

Sullivan summarized one of the findings
of those sessions saying, “The need for a
more robust infrastructure of business
development and support has never been
greater. For small businesses to grow
and thrive in our communities, we will
need to promote private sector lending
and investment, a well-developed
network of technical assistance
providers, and innovative, hybrid
organizations like micro-lenders and
other types of CDFIs that can effectively
deliver funds and services to businesses.”

The CDFI-bank relationship
The first panel comprised four
nonbank CDFIs – three loan funds and
one investment fund – and focused on
how CDFIs have partnered with large,
regulated financial institutions and
community banks in the past; how those
relationships are holding up during the
financial crisis and recession; and how
those relationships need to evolve in the
post-crisis environment.
Calvin Holmes, president of the
Chicago Community Loan Fund (CCLF),
served as the panel’s moderator. CCLF is
a $30 million CDFI that provides credit
and pre-development financing to small
real estate developers. “There are
enormous opportunities ahead for banks
and CDFIs to collaborate, to expand, and
to improve the capital delivery system to
lower-wealth people and places that
support the creation of small businesses
and jobs, as well as other community
development projects,” he said.
Wisconsin Women’s Business Initiative
Corporation (WWBIC), a statewide

COMMUNITY DEVELOPMENT
economic development corporation and
certified CDFI, focuses on women and
minorities, and low- and moderateincome individuals. Their products and
services include business education,
micro-loans, small business loans, and
individual development accounts
supported by the “Make Your Money
Talk” financial education program.
Historically, WWBIC’s President
Wendy Baumann explained, banks have
participated in WWBIC’s classes,
workshops, and business financing
seminars, as well as serving on the
organization’s board and loan
committees. During the crisis, as banks
diminished their lending to small
businesses, WWBIC “took a whole
bunch of what the banks were not
doing, and we found those as really,
really great credit risks. They might go
back to the banks, or they might stick
with us,” Baumann said, “but I think the
banks are going to appreciate the CDFI,
and that we were there for those bank
customers.” Baumann also pointed to
the important grants and equity
investments that banks make to CDFIs
to support general operations.
IFF is a $190 million regional4 CDFI
that lends to all nonprofit sectors that
serve low-income or special needs
populations, including: child care, charter
schools, health care, all of the traditional
human services, and affordable housing.
IFF’s CEO Joe Neri highlighted IFF’s
Investor Consortium, a credit facility that
he said is, “indicative of where we have
been as a lender, and where we need to
go in the CDFI industry, and in our
relationships with banks.”
IFF makes long-term loans up to $1.5
million that the Consortium packages into
a collateralized note. The Consortium’s
participating banks buy the notes, making
long-term pledges that match IFF’s longterm notes. The Consortium’s 2 percent
cash reserve and long-term, limited
recourse notes allow IFF to continue to
grow and meet the needs of its
borrowers, an important element in the
sustainability of the model.

An IFF note may include loans to
child care and health care facilities,
charter schools, or other human
services, allowing participating banks to
invest in a diversified stream of various
kinds of nonprofit loans.
The Consortium is “an elegant
vehicle” for both IFF and its partner
banks, Neri said. “Banks get a diversified
portfolio, and IFF gets match-funded
capital that allows us to do capital
planning, and it is a limited recourse
vehicle. We all have capital ratios that
have been stressed in the last couple of
years because we’ve been meeting the
credit crisis,” Neri pointed out.
National Community Investment Fund
(NCIF) is a nonprofit private equity trust
that invests in small community banks
that work with low- and moderate-income
communities. NCIF has more than $150
million in assets under management,
including $27 million invested in 44
institutions nationally, and $128 million in
New Markets Tax Credits. NCIF has also
created a free, Web-based tool for
measuring the Social Performance
Metrics5 of community development
banks.
NCIF’s CEO Saurabh Narain pointed
out that 20 banks became certified as
CDFIs during 2010, perhaps motivated
by the CDFI Fund’s Community
Development Capital Initiative (CDCI),
“one of the largest infusions of capital
by the federal government to these
banks.”6 Nonetheless, only 86 of the
7,800 financial institutions in the country
are designated as CDFIs. “We’d like to
believe that there are many other
institutions doing great work,” he said.
Narain noted capital and liquidity
issues that community development
banks are facing as they emerge from
the crisis. As capital ratios decline,
regulated financial institutions are
forced to increase capital or reduce the
balance sheet by reducing lending. The
flight of deposits from some banks has
created a liquidity issue in some
instances, although CDFI banks have

done reasonably well maintaining their
deposit bases. “But as we think about
the future,” Narain said, “we’ll need more
stable sources of deposits, more
liquidity available apart from capital, so
that these institutions can continue
doing great work.”
As the panel’s discussion segued to
looking to the future of the bank-CDFI
relationships, Narain raised a concern
about what he called “regulatory
arbitrage.” CDFIs have been focused on
ensuring a continuing flow of credit to
their communities and customers. All of
the panelists noted that, as the financial
crisis peaked, CDFIs saw a significant
increase in both the volume and quality
of their lending. “And then it stopped,”
Narain said, “primarily because of this
capital issue.”
He went on to talk about the two
ways to address capital issues. One is to
raise capital from the capital markets.
While it is an equity investor, NCIF did
not make a single capital investment in
a bank during 2010, in part because, “I
don’t want to risk putting money into an
institution that may be shut down the
next day.”
The second way to address the
capital issues is to reduce the
institution’s asset size. “We should avoid
a situation where banks and other
CDFIs are forced to sell those loans at a
significant discount. I’d like to save that
value, because that value will come back
into CDFIs.”
As a potential solution to preserve the
future value of assets that need to be
removed from a bank’s balance sheet,
Narain offered the following example.
One of the banks in the NCIF portfolio,
which had been taken over by a private
equity investor, transferred all of its “bad
loans” into a distressed loan pool out of
the bank and into the holding company,
improving its standing with the FDIC. In
similar scenarios, Narain continued, it
might be the role of CDFIs’ large bank
partners to help create the structures
wherein those distressed asset pools
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July 2011

3

COMMUNITY DEVELOPMENT
Figure 1: Potential for common organizational infrastructure

Source: National Community Investment Fund.
could be retained under a separate
equity structure, providing the expertise
to help regain the value embedded in
those assets. “I want to make sure that
equity is the most important thing in the
future,” he emphasized.
Narain also asserted that the industry
is “entering into an era of strategic
collaboration now.” Pointing to the matrix
in Figure 1, he suggested that community
development banks and CDFIs might
benefit from collaborating on a “shared
service platform.” “Not every institution
needs to have mortgage processing,
check cashing, and compliance systems.
Could we consider creating a shared back
office for the CDFI banking sector in
collaboration with the larger banks?”
Narain asked. Such back office support
would help CDFIs do more loans in local
communities and create jobs.
Addressing the future of bank/CDFI
relationships, IFF’s Neri emphasized
4

Profitwise News and Views

CDFIs’ intermediary function with their
partner banks in nontraditional credit
markets. Both IFF and WWBIC reported
the surge of higher quality credit
applicants that they were seeing at the
height of the crisis – a group of
borrowers that had moved from the
traditional to the nontraditional credit
markets. CDFIs stepped in to provide
credit to these borrowers, leaving some
constrained in their ongoing lending by
limited access to capital.
“If you look at our balance sheets,
we’ve used a lot of our capital and
assets solving the problems of the last
two years and meeting the needs of
those very good customers.”
Emphasizing the flexibility and
sustainability of the Investor Consortium,
Neri stated that IFF intended to seek
additional investors to expand that
model as a regional tool to meet capital
needs across its five-state market.

July 2011

Another interesting development, Neri
observed, is that some of the largest
financial institutions have been working
with CDFIs for an extended period. Those
large institutions understand CDFI
balance sheets, and what has happened
in the last two years. He noted specific
initiatives recently announced by Goldman
Sachs, JPMorgan Chase, and Bank of
America. Those institutions were
combining their recent investments with
grants specifically designed to address
CDFIs’ capital issues, and increasing
CDFIs’ net assets to facilitate more
lending volume.
“So these are two trends that I think
will impact our future discussions on
CDFIs and banks,” Neri concluded.
“One is more flexibility around limited
recourse, or off-balance sheet vehicles
for capital to flow through CDFIs to
access our expertise; the other is outand-out grants of capital, so that we
can accommodate further lending.”

COMMUNITY DEVELOPMENT
Figure 2: At a glance: the Small Business Lending Fund (SBLF) for community banks
Overview

Eligibility

Through the Small Business Lending Fund, the U.S. Department of the Treasury provides Tier 1 capital to community banks and
other eligible institutions. Each institution pays dividends at rates that go down as its small business lending goes up.
- Insured depository institutions with assets of less than $10 billion, not controlled by a holding company or an entity with assets
of $10 billion or more (as of the end of the fourth quarter of calendar year 2009)
- Bank and savings and loan holding companies with consolidated assets of less than $10 billion
- Treasury will publish separate terms for mutual institutions, Subchapter S corporations, and community development loan
funds; this guidebook does not apply to these institutions
Institutions currently or recently on the FDIC problem bank list (or similar list) are ineligible.
Senior perpetual noncumulative preferred stock (or equivalents) qualifying as Tier 1 capital

Amount of Funding

Depository
institutions:

- Up to 5% of risk-weighted assets (RWA), if assets are $1 billion or less
- Up to 3% of RWA, if assets are more than $1 billion, but less than $10 billion

Holding
companies:

- Up to 5% of RWA, if consolidated assets of all depository institution subsidiaries are
$1 billion or less
- Up to 3% of RWA, if consolidated assets of all depository institution subsidiaries are
more than $1 billion, but less than $10 billion

Treasury may require matching private capital and limit SBLF funding to 3% of RWA, even if assets are $1 billion or less.
Qualified Small Business Lending for purposes of the Small Business Lending Fund is defined as follows:

Qualified Small Business Lending

Qualified Small Business Lending includes all:
1. Commercial and industrial loans
2. Loans secured by owner-occupied
nonfarm, nonresidential real estate
3. Loans to finance agricultural
production and other loans to farmers
4. Loans secured by farmland

so long as:
- the original principal and commitment amount is $10 million or less
- the loan is not to a business with more than $50 million in revenues
and excluding loan portions guaranteed by the U.S.
government or for which a third party assumes risk.

An institution that receives capital from the Small Business Lending Fund will supplement its Call Report with a supplemental
report that identifies Qualified Small Business Lending.

Dividend rates upon funding and for the
following nine calendar quarters,
adjusted quarterly (based on outstanding
loans at the end of the second previous
quarter):
Dividend Rates
Dividend rate for the tenth quarter after
funding through the end of the first four
and one-half years:

Lending Increase

Dividend Rate

Less than 2.5%

5%

2.5% or more, but less than 5%

4%

5% or more, but less than 7.5%

3%

7.5% or more, but less than 10%

2%

10% or more

1%

If lending has increased at the end of the
eigth quarter after funding

Rate set as above for the tenth quarter

If lending has not increased at the end of
the eighth quarter after funding

7%

Dividend rate after four and one-half years
(if funding has not already been repaid):

Entry and Exit

9%

- The application deadline for C Corporation banks is May 16, 2011. Treasury encourages eligible institutions to submit their
application as soon as possible to allow sufficient time for processing.
- Provide a small business lending plan, approximately two pages in length, to the institution’s regulator (not
directly to Treasury).
Repay SBLF funding at any time with regulatory approval.

More Info

For general inquiries and questions, please call the Small Business Lending Fund information line at (888) 832-1147. For
communications pertaining to a specific institution, please e-mail SBLFInstitutions@treasury.gov, a Treasury e-mail address.

Source: Small Business Lending Fund: Getting Started Guide for Community Banks. Available at www.treasury.gov/
resource-center/sb-programs/Pages/Small-Business-Lending-Fund.aspx.
WWBIC’s Wendy Baumann related
stories of two restaurants in Milwaukee.
Both had existing loans called, despite
profitable operations and a spotless
record of repayment. Each of the
restaurants survived, thanks to
WWBIC’s intervention. Both restaurants
had been clients of the same bank
which, coincidentally, was also a
significant investor and supporter of
WWBIC’s lending and technical

assistance programs. Her point is that a
well-developed referral and
communication system between the
banks and the CDFIs can avert “panic
searches” for credit, especially for
clients with healthy businesses.
Summarizing the panel discussion,
Chicago Community Loan Fund’s Calvin
Holmes emphasized that “CDFIs and
banks are again rolling up their sleeves
and designing products and programs

together to intentionally serve the full
marketplace, including specific segments
of the community.”

The Small Business Jobs Act and
other federal small business
programs
The next panel brought together
representatives of the U.S Treasury
Department and the Small Business

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COMMUNITY DEVELOPMENT
Figure 3: Sample SSBCI program structures
Loan participation programs (co-lending participation or purchased participation)

Other Credit Support Programs: Loan guarantee
programs and collateral support programs

State

Loan Guarantee or
Collateral Support
(=Deposit)

Financial
Institution
Loan

Small
Business

Other Credit Support Programs: Typical Capital Access Program (CAP) Structure

Administration (SBA) to address recently
created programs and the evolution of
existing programs at the federal level. The
Small Business Jobs Act (Act), signed into
law in September 2010, created the Small
Business Lending Fund (SBLF) and the
State Small Business Credit Initiative
(SSBCI), and updated many of the SBA’s
small business lending programs. This
panel covered each of the Act’s elements
in turn.

State

Provides a matching
contribution
Portfolio
protection

Originating
Lender’s
Reserve Fund

Originating
Lender
Up-front
insurance
premium

Up-front insurance premium

Business
1

Business
2

Business
3

Source: U.S. Department of Treasury.

6

Profitwise News and Views

July 2011

Business
4

Business
5

Jason Tepperman, director of the
Treasury Department’s $30 billion Small
Business Lending Fund, began: “We are
all working as hard as we can to get
small business lenders back to
extending credit to creditworthy
borrowers in a responsible way. The
SBLF is an initiative designed exclusively
for community banks and community
development loan funds as part of the
effort to help further this goal.”
We know that small businesses are
more dependent on local sources of
credit, often from community banks and
loan funds, than their larger counterparts
who have access to capital markets. The

COMMUNITY DEVELOPMENT

Wisconsin’s Capital Access Program
Wisconsin’s CAP program, as implemented by the Milwaukee Economic
Development Corporation, was presented as a case study.
Carol Maria works for Wisconsin Business Development Finance Corporation
(WBD), a 30-year-old SBA 504 lender that originates about 150 SBA 504 loans, and
assists borrowers with accessing about 100 SBA 7(a) loans each year. WBD has
320 members, of which 55 serve as advisors and 12 serve as board members. The
organization’s leadership “made it our mission to provide the knowledge and services
and resources that help job creation and build communities,” Maria said. Recently,
WBD received its certification as a CDFI.
Maria spoke about the Milwaukee Economic Development Corporation’s (MEDC)
CAP program as “a unique tool” for WBD’s member banks. She said, “It is a selffunded insurance program that is very easy to use.” Under the program, participating
banks sign a “participation agreement” that sets the “rules under which banks can
participate in the loan-loss funding.” Thereafter, the bank originates loans as it
normally would and can enroll a borrower in the CAP program, using a one-page
enrollment form, within 10 days of extending the loan. MEDC then matches the
contribution made to the loan guarantee fund by the bank and the borrower.
A unique feature of the Wisconsin CAP program is that the CAP program
administrator is allowed to fund the match at higher than a one-to-one match. “In our
CAP program,” Maria explained, “we’ll match nonbank lenders at 1½-to-1 because
those organizations’ access to loan-loss capital is more constrained than that of a
regulated financial institution.”
MEDC’s CAP program has supported 900 loans, with the CAP funds being
leveraged at a rate of 38-to-1. About 90 percent of the CAP loans went to
businesses employing 50 or fewer workers. The average loan size is $50,000 and
the charge-off rate is roughly 5 percent. There are currently 12 banks participating
in the program, and MEDC intends to double the number of participating institutions
in the calendar year.
A participating bank is required to hold the reserve (both the premium collected
from the borrower and the CAP match) at their institution. If it’s a nonbank lender, the
CAP administrator designates a depository to hold the reserve.

SBLF will provide capital to community
banks – defined as institutions with
assets of $10 billion or less. Institutions
under $1 billion in assets can receive up
to 5 percent of their risk-weighted
assets7 from the fund. Banks between $1
billion and $10 billion of total assets can
receive up to 3 percent of risk-weighted
assets. Those banks receive all of the
money from Treasury up front.
The dividend rate – the bank’s cost of
funds under the program – will start no

higher than 5 percent, and it may be
lower. The more small business lending
that a bank does, the lower the cost of
the funds will be. The rate goes down as
small business lending goes up. This
gives banks a simple but compelling
incentive to lend more.
The Treasury Department measures
the bank’s total increase in small
business lending each quarter against
the baseline. The baseline is defined as
the average of the four quarters, ending

June 30, 2010. “What matters is the
volume of loans outstanding,
irrespective of whether that comes from
new production or renewals. There is no
quarterly growth level that is required as
part of the program,” noted Tepperman.
The SBLF enables community banks
to access Tier 1 capital8 at rates as low
as 1 percent. For banks that increase
their small business lending over the
baseline levels by 10 percent, their cost
of funding will be 1 percent. For
increases less than 10 percent, banks
can receive rates between 2 percent
and 4 percent.
This rate is adjusted each quarter so
that as a bank increases its lending, it
can benefit from the lower rates. Two
years after a bank enters the program,
the rate is then locked in for the next
two-and-a-half years based on the level
of lending at the end of the second year.
“That is because we want institutions to
make their best effort to find
creditworthy borrowers and extend
credit to them in the near term, when
local businesses need it most,”
Tepperman explained.
The SBLF defines small business
lending to cover much of the business
lending that community banks engage
in, including commercial and industrial
loans, owner-occupied commercial real
estate loans, loans to finance
agricultural production, and loans
secured by farmland. “This is a different
definition of small business lending than
is used in call reports or for the purpose
of calculating SBA loans,” Tepperman
emphasized. “Our hope is that with this
capital and these incentives, the Small
Business Lending Fund can help prime
the pump for lending from Main Street
banks to Main Street businesses.”
Nonbank loan funds may also receive
up to 5 percent of their assets in capital,
and this will likely take the form of an
equity-equivalent type investment, and
will carry a flat rate of 2 percent that will
continue for eight years before it
increases to 9 percent. These
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COMMUNITY DEVELOPMENT
differences, both in incentive and
duration, are intended to reflect the
unique market conditions and
circumstances that loan funds address.
The Act also sets out minimum eligibility
criteria that loan funds need to meet.
The SBLF is designed to enable
community banks and loan funds to
continue operating the way they do
today while expanding their capacity to
extend more credit to creditworthy
small businesses.
The one-page application is available
at www.treasury.gov/sblf. Banks must
also submit a two-page small business
lending plan to their regulators. Applying
does not create an obligation to
participate. After they receive approval
from Treasury, institutions can decide
whether they would like to participate.
There are no prepayment penalties or
fees or other conditions that require
continued participation. Reporting

requirements take advantage of
information that banks already report on
their quarterly call reports to minimize
the reporting obligations associated with
the program.
Cliff Kellogg, director of the Treasury
Department’s State Small Business
Credit Initiative, discussed the Small
Business Credit Initiative, designed to
fund state capital access and other
credit support programs. Many states
operate innovative programs to promote
small business lending and investing,
the types of programs threatened by
state budget cuts during the crisis.
SSBCI is designed to provide federal
funds to states to support their small
business lending programs. Both new
and existing state programs could be
eligible for the program.
In all, $1.5 billion is available for all
states and territories and the District of
Columbia. The Act requires states to

demonstrate that for every dollar of
federal funding, 10 dollars in new private
sector lending is originated by all types
of institutions that can participate in the
state programs supported. A state’s
application for SSBCI funding must also
explain outreach efforts to communities
and populations with low penetration by
the traditional financial sector.
There are two general categories of
eligible state programs. The first are
called Capital Access Programs (CAP);
20-25 states currently operate CAP
programs. Other Credit Support
Programs (OCSP) is the second
category, encompassing an array of
collateral enhancement and credit
insurance programs (see figure 3).
“I think CAP programs are the most
elegant programs for encouraging small
business lending that is slightly higher
risk than normal credit standards might
tolerate,” Kellogg said.

Table 1: State Small Business Credit Initiative (Seventh Federal Reserve District states)
State

Credit initiative allocation

Expected new lending (10:1 match)

Illinois

$78,365,264

$783,652,640

Indiana

$34,339,074

$343,390,740

Iowa

$13,168,350

$131,683,500

Michigan

$79,157,742

$791,577,420

Wisconsin

$22,363,554

$223,635,540

$227,393,984

$2,273,939,840

Total

Source: www.treasury.gov/press-center/press-releases/Documents/document5tg896.pdf.
Table 2: Fourth quarter SBA loan volume (national)
2009
Number
7(a)

9,070

Dollar

Dollar

14,644 $3,873,816,000

$214,536

$264,533

1,384

Average
Loan Size

$841,786,000
$608,227

Source: U.S. Small Business Administration.

8

Number

2011

$1,945,846,000

Average
Loan Size
504

2010

Profitwise News and Views

July 2011

1,993

$1,156,021,000
$580,041

Number
19,574

Dollar
$9,091,822,000
$464,485

2,344

$1,350,614,000
$576,201

COMMUNITY DEVELOPMENT
In a CAP program, the borrower pays
a small insurance premium matched by a
state contribution; the bank controls all
of the loan decision-making, and that
insurance premium goes into a reserve
fund that is used to protect the bank
from loss due to default for the entire
portfolio of loans. “It is a very nice
alignment of incentives in the sense that
banks receive top-loss coverage for up
to the amount of the cash in the reserve
fund; but if losses are greater than that,
then the bank must absorb them as they
would in their conventional portfolio,”
Kellogg said.
The second category of programs
eligible for SSBCI funding includes a
variety of state programs that have
differing requirements. The businesses
may be larger than CAP participants, and
there are special requirements for the
state to prove that they have the capacity
to supervise their programs effectively.
States must have applied by June 27,
2011. The amount of the award for each
state is determined by a formula set forth
in the statute, so it is not a competitive
award. The amount for which each state is
eligible is posted on the Treasury
Department Web site. Once the
application is received, it is reviewed
quickly and funds are dispersed to the
states as rapidly as possible. “The goal is
to strengthen the state programs quickly
and efficiently. Once the states are
funded, then the action will shift to the
lending community to make sure that
banks and loan funds use the state
programs to the fullest extent possible,”
Kellogg concluded.
Jim Hammersley, deputy assistant
administrator for the Office of Policy and
Strategic Planning for the U.S. Small
Business Administration (SBA) presented
an overview of “What’s new at SBA?”
Table 2 shows SBA’s national loan
volumes in the fourth quarter for each of
the last three years.
The number of loans funded by the
SBA’s 7(a) program increased by 135
percent, and the 5049 program increased

by 70 percent during the crisis. The dollar
volume of 7(a) loans increased by 379
percent. A little less than half of all SBA
loans (the insured portions) are sold to the
secondary market and ultimately to
investors. For a lot of lenders, the liquidity
afforded by the existence of that
secondary market is important. During the
crisis, this market effectively ceased to
function. “That gave us a scare,”
Hammersley said.
As a part of the Obama Administration’s
goal to double exports in five years, SBA
has several initiatives in place or under
development to help businesses export
goods. There are about 250,000 small
businesses that export, out of an estimated
29 million small businesses nationwide.
SBA programs that support exports
include the 7(a) International Trade Loans
and Export Working Capital Loans,
offering a 90 percent guarantee for loans
up to $5 million. Export Express also
offers a 90 percent guarantee and
streamlined application process for loans
up to $350,000 and a 75 percent
guarantee for loans between $350,000
and $500,000. And finally, SBA provides
$90 million in grants for states to help
small business exporters.

percent “skin in the game;” and the lender
holds 15 percent.
Congress also adopted an “alternative
size standard” for defining small business.
Now, to qualify for an SBA loan, the
maximum net worth of the applicant cannot
exceed $15 million, and the average net
income after taxes of the applicant cannot
exceed $5 million. That makes the size
standard much simpler than in the past.
Hammersley also noted that SBA
lending for new equipment seems to be
responding to tax law changes. Specifically,
the stimulus bill allowed 100 percent
depreciation on equipment up to $500,000
for 2011. SBA lending for equipment
spiked up following enactment of that
provision.
The Small Business Jobs Act enacted
further changes to SBA programs.
Historically, the SBA 504 loan program
could not be used for refinancing, because
the 504 program is supposed to be a job
creation program, not strictly a real estate
program. The Jobs Act authorized
refinancing in the 504 program for two
years. It is intended to prevent foreclosures
and keep people working.

With this new authority to allow
refinancing in the 504 program and the
The SBA’s 504 program is a commercial
support for the secondary market,
real estate-secured product in which there
participating bank lenders can offer small
is a 50 percent first mortgage from a
businesses with commercial real estate
conventional lender, a 40 percent loan
related issues an opportunity for the bank
made by a certified development company,
to do a 504 first mortgage. If liquidity is an
and 10 percent from the borrower. The
issue, the lender may be able to sell it. A
secondary market for those first mortgages
local certified development company can
disappeared and, unlike the secondary
make a 40 percent second mortgage at
10
market for the 7(a) loans, it has not
rates that are currently below 6 percent –
recovered. The American Recovery and
historic lows. “Now is the time to be
Reinvestment Act (known as the stimulus
locking in these rates, it’s a 20-year fixed
bill) allowed the SBA to intervene in that
rate; it’s quite a deal,” Hammersley said.
secondary market to provide the necessary
“[Banks’ clients] will be able to stay in their
liquidity to support this kind of lending to
building and hopefully continue to live
small businesses.
happily ever after.”
SBA has done approximately $100
The Small Loan Advantage Program
million in pools. Under the 504 Secondary
recognizes that for smaller loans – loans up
Market Program, the investor picks up 80
to $250,000 – lenders don’t necessarily
percent and that investor gets a full faith
always need a complete credit analysis.
and credit and a timely payment guarantee
The Small Loan Advantage Program is
from the SBA; the pool originator (typically
available to banks participating in the SBA’s
a broker/dealer) is required to hold 5
Profitwise News and Views

July 2011

9

COMMUNITY DEVELOPMENT

Community Advantage Program
Q&A with SBA’s Jim Hammersley
“I would like to talk with you about Community Advantage,” said Jim Hammersley, deputy assistant administrator at
SBA. “Our impetus in developing this program was recognizing that CDFIs, CDCs, and other nonbank lenders in many
cases have better access to groups that typically were not able to access the traditional banking channels,” Hammersley
explained. “One of our core missions is to help those folks get financing. I’m not saying the private banking community
isn’t doing their best to do that. This looks like an opportunity to reach those folks in a way that doesn’t currently exist.”
Questions and answers regarding the Community Advantage pilot program are summarized below.
Mr. Hammersley: I thought we could chat a little bit about whether you think this is a good fit for what you already do…”
Attendee response: We are already an SBA micro-lender, so we already have experience with the SBA and the types
of regulations that come with being in that program. So I think it’s a natural extension for us to be interested in finding out
more. We are doing small loans, so if it’s a very extensive process it might end up being more difficult than it’s worth.
Q: Can CDFIs use CDFI [Fund] capital to make the loans? As we understand it, there’s a general prohibition against pairing
SBA capital with other programs. How is Community Advantage going to work with CDFI capital or micro-lending capital?
Mr. Hammersley: CDFIs may use CDFI capital to make SBA loans. We anticipate that they will be using some of
these funds for the reserve accounts required under Community Advantage. The federal funds that may not be used in
connection with SBA loans are SBA micro-loan proceeds and SBA Intermediary Lender Program (a new program in the
jobs bill) funds.
Q: The program provides CDFIs a guarantee they otherwise are not able to obtain and it’s also going to provide them
that secondary market. So I think for the CDFI small business lenders, it’s an exciting development. For micro-lenders it’s
more complicated. Then there’s this whole CDC community that doesn’t have capital available to them. Will there be a
tool offered along with the license that makes capital acquisition for the CDC community easier?
Mr. Hammersley: That’s an interesting point. In fact, this will not happen right away. But we have securitization
regulations for the unguaranteed portions and, conceivably, someone could pool a whole bunch of CDC unguaranteed
portions together and use that money to fund that and use the premiums off the guaranteed portion to fund the reserve.
Q: I do think that access to capital to fund these types of loans on the nonguaranteed portion may be somewhat
difficult. Obviously, if you’re going to sell them on the secondary market, you can recoup that and re-loan that out, but you
have to have a bridge there.
Is there any way to streamline the application process? I worked for a bank for 13 years and we did a lot of 7(a) loans,
so I’m familiar with the standard operating procedures. There are a lot of application regulations that you have to go
through. Is it going to be the same process as what the banks are looking at?
Mr. Hammersley: It’s going to be the same procedures. We did redo the basic procedures a couple of years ago and
dropped it down substantially in size. Our E-Tran process is an electronic application that is available 24/7/365, and it’s
literally just a drop down menu, fill in the blank process. If you put an answer in that doesn’t work, it won’t let you go
anywhere. We anticipate requiring use of E-Tran for Community Advantage.
CDFIs may have an advantage versus banks. A bank has to make a determination that you wouldn’t make a loan on
conventional terms. So the first step is usually that the applicant fills out your standard bank application. Then, if it turns
out they need SBA, they start filling out the SBA paperwork, which, if they’re using our basic application package, is a
separate set of paperwork that asks the same questions.
In the Community Advantage Program, we’re using a simplified package. The idea is that once you’ve got this
information you don’t need to get it again. You just take it off of that document and put it into E-Tran. So it’s definitely
intended to be a little bit easier than a standard 7(a) loan from a community bank, using all the standard processes.

10

Profitwise News and Views

July 2011

COMMUNITY DEVELOPMENT

Q: Do the CDFIs or mission lenders have to apply to be certified to do
these loans?
Mr. Hammersley: Yes. Some of you are up to speed on doing 7(a) loans.
Some of you probably have never done a 7(a) loan. While it is just a standard
credit, you do have to comply with the statutory requirements of the program,
including disclosures. It is a federal program and it carries all of the
requirements that tend to come with them.
Q: In addition to the application, a lot of CDFIs and micro-lenders will
have to get used to the authorization process. Maybe you want to describe
that requirement.
Mr. Hammersley: A “Loan Authorization” includes a menu of authorization
provisions that you pick from. For example, there’s a paragraph that, if it’s this
type of interest rate, you pick this; if it’s that type of interest rate, you pick that.
It becomes the driving document. It has all of the requirements that you need
to settle this loan properly. And if you follow the boilerplate documents and
you follow the loan authorization, you’re going to be in pretty good shape.
Audience follow up: So for CDFIs, that translates into you’ll become more
uniform in your closing documents. The authorization, to be shorter, requires
more uniformity.
I think CDFIs have a tendency to pool loans in different classes. So that’s
one of the barriers I think that SBA has to recognize.
Q: What’s the certification process for those who have not been approved
as an SBA lender?
Mr. Hammersley: It’s a series of questions that allow you to tell us your
story in effect. I do small business loans. Here’s the resume of our people. Our
typical customer is “X.” And our market area is “Y.” Our servicing personnel
include . . . things like that.
Q: Is there a requirement that CDFIs have a third-party credentialing entity?
Mr. Hammersley: No, you’ll apply to us and we’ll make a decision one way
or the other. We’ll be looking at the information and making a decision
internally.
Q: Are there any ongoing reporting requirements related to the program?
Mr. Hammersley: The 7(a) Program has ongoing reporting requirements
for anyone making 7(a) loans (not just CDFIs). You, as a lender, submit a
monthly status report on your borrower(s). Ninety-six percent of what gets
reported comes in electronically. What we look for every month is the interest
paid to date and whether the borrower made a payment or not, how much was
P&I, those types of things.
To find out more about the Community Advantage Program, visit the SBA
Web site at http://www.sba.gov/advantage.

Preferred Lender Program. It allows
streamlined loan approvals and carries the
7(a) program’s 85 percent guarantee up to
$150,000, and 75 percent guarantee on
loans up to $250,000. It is intended to
make smaller loans a little easier to
originate and underwrite.
Finally, Community Advantage is
SBA’s newest program. Community
Advantage allows nontraditional lenders
– CDFIs, CDCs, and other lenders
serving traditionally underserved markets
– to originate loans eligible for the SBA
7(a) guarantee.

Conclusion
The SBA’s Community Advantage
Program is one of several recent additions
to the array of programs and resources that
Community Development Financial
Institutions (CDFIs) bring to their mission of
providing access to credit in low- and
moderate-income communities. The Small
Business Lending Facility for Community
Development Loan Funds was specifically
designed to help nonbank loan funds in the
same way that the Small Business Loan
Fund was designed to help community
banks. The CDFI Bond Program that was
also authorized in the Small Business Jobs
Act could help fund the ongoing programs
and operations of mission-focused lenders.
The missions of both banks and CDFIs
converge around small business
development and job creation. The
consensus at the meeting is that the
partnership between CDFIs and banks is
quite valuable, with room to evolve into a
much more robust driver of community
stability and revitalization.
The Treasury Department, the Small
Business Administration, and state
programs will continue to promulgate rules
and regulations to implement the programs
discussed at this conference. The Federal
Reserve, National Community Investment
Fund, and Opportunity Finance Network
will continue to help efficiently and
effectively implement these programs.
These entities will also continue to
encourage and support efforts to leverage
the unique strengths and capabilities of
banks and CDFIs working in tandem to
improve fair and equal access to credit in
historically underserved communities.

Profitwise News and Views

July 2011

11

COMMUNITY DEVELOPMENT
Notes
1 “A certified Community Development Financial Institution (CDFI) is a specialized
financial institution that works in market niches that are underserved by traditional
financial institutions. CDFIs provide a unique range of financial products and services in
economically distressed target markets, such as mortgage financing for low-income and
first-time home buyers and not-for-profit developers, flexible underwriting and risk
capital for needed community facilities, and technical assistance, commercial loans, and
investments to small, start-up, or expanding businesses in low-income areas. CDFIs
include regulated institutions, such as community development banks and credit unions,
and nonregulated institutions, such as loan and venture capital funds.” Accessible at
http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=9.
2 For a discussion of the TALF Program, see Sumit Agarwal, Jacqueline Barrett, and
Mariacristina De Nardi. 2011. “The Asset-Backed Securities Markets, The Crisis and
TALF,” in Profitwise News and Views, Community Development and Policy Studies
division of the Federal Reserve Bank of Chicago. April 2011. Accessible at http://
chicagofed.org/webpages/publications/profitwise_news_and_views/2011/pnv_
april2011.cfm.
3 For a summary of those meetings, see Jeremiah Boyle. 2010. “Addressing the Financing
Needs of Small Businesses in the Seventh Federal Reserve District” in Profitwise News
and Views. Community Development and Policy Studies division of the Federal Reserve
Bank of Chicago. December 2010. Accessible at http://chicagofed.org/digital_assets/
publications/profitwise_news_and_views/2010/PNV_Dec2010_ReEd_FINAL_web.pdf.

and Risk Management), p. 87. Available at
http://kansascityfed.org/publicat/
bankingregulation/RegsBook2000.pdf.
9 The SBA 504 Program is “designed to
encourage economic development within
a community . . . by providing small
businesses with long-term, fixed-rate
financing to acquire major fixed assets
for expansion or modernization.” Details
of how the SBA 504 loan product works
can be found at http://www.sba.gov/
content/cdc504-loan-program.
10 “The SBA guarantees that these loans will
be repaid, thus eliminating some of the risk to
the lending partners. So when a business
applies for an SBA loan, it is actually applying
for a commercial loan, structured according
to SBA requirements with an SBA guaranty.”
For details about the 7(a) program and all the
other SBA programs, visit the SBA’s Web site
at http://www.sba.gov/content/
what-sba-offers-help-small-businesses-grow.

4 IFF is an active lender in Illinois, Indiana, Iowa, Missouri, and Wisconsin.
5 For information about NCIF’s Social Performance Metrics, visit http://www.ncif.org/
index.php/services/spm.
6 For details about the CDFI Fund’s Community Development Capital Initiative, visit the
U.S. Treasury Department’s Web site at www.treasury.gov/initiatives/financial-stability/
investment-programs/cdci/Pages/comdev.aspx.
7 “For the total and Tier 1 risk-based capital ratios, the capital components are compared
to a risk-weighted assets base, thereby providing a closer link between a bank’s capital
needs and its risk profile. In computing this asset base, the capital standards assign
bank assets and off balance sheet items to one of four general categories of credit risk,
as determined by such risk factors as the type of obligor on each asset and the
existence of any collateral or guarantees. Each category receives its own risk – weight
0, 20, 50, or 100 percent – and the greater weights are applied to those items generally
thought to pose more risk to a bank. The dollar amount of items a bank has in each risk
category is then multiplied by the appropriate risk weight, and the resulting figures are
added across the categories to derive the bank’s overall risk-weighted assets measure.
As a result, higher risk assets will make a more prominent contribution to this riskweighted base and, thus will require greater capital backing.” Kenneth Spong. 2000.
Banking Regulation: Its Purposes, Implementation, and Effects, Fifth Edition. (Federal
Reserve Bank of Kansas City, Division of Supervision and Risk Management), pp. 88-90.
Available at http://kansascityfed.org/publicat/bankingregulation/RegsBook2000.pdf.
8 “Tier 1 capital represents the most permanent form of capital and the highest quality of
capital that is available to absorb losses. The components of Tier 1 capital consist of:
common stockholders’ equity; noncumulative perpetual preferred stock; and minority
interests in the equity accounts of consolidated subsidiaries. Tier 1 capital thus
represents the most stable and readily available form of capital for supporting a bank’s
operations.” Kenneth Spong. 2000. Banking Regulation: Its Purposes, Implementation,
and Effects, Fifth Edition. (Federal Reserve Bank of Kansas City, Division of Supervision

12

Profitwise News and Views

July 2011

Biography
Jeremiah P. Boyle is managing
director of Economic Development for
the Federal Reserve Bank of
Chicago’s Community Development
and Policy Studies Division. Mr. Boyle
has served as an advisor to the
Milwaukee Urban Entrepreneur
Partnership and as a member of the
Governor’s Advisory Council on
Financial Literacy in Wisconsin. Before
joining the Fed, Mr. Boyle served in
Chicago Mayor Richard M. Daley’s
administration as an assistant
commissioner of Planning and
Development. He has served as
economic development coordinator for
the Village of Arlington Heights,
Illinois; and held several positions with
the North River Commission, a
nonprofit housing and economic
development group in Chicago.
Mr. Boyle holds a BA in political
science and a master’s degree in
urban and regional planning from the
University of Illinois at UrbanaChampaign, and an MBA from North
Park University in Chicago.

COMMUNITY DEVELOPMENT

Community Development Financial Institutions:
At the Crossroads in Wisconsin
by Steven Kuehl

Wisconsin has 21 community
development financial institutions
(CDFIs). Collectively, approximately $1.5
billion has been allocated to these
organizations since the inception of the
CDFI Fund at the U.S. Treasury.1 In
addition, Wisconsin community
development organizations have been
awarded approximately $1.3 billion in
New Markets Tax Credits; 41 percent of
this amount went to CDFIs. 2
In December 2010, the Federal
Reserve Bank of Chicago’s Community
Development and Policy Studies division
and the Helen Bader Foundation
convened a workshop that brought
together Wisconsin’s CDFIs. This
occasion marked the first group meeting
of CDFIs from across the state. During
the day-long event, participants
discussed issues of common concern
and explored opportunities for the
industry to move forward through
collaborative efforts, and potentially
form an association.
The workshop featured panel
discussions on approaches to CDFI
sustainability and on the benefits and
drawbacks of CDFIs taking a unified
approach to matters of mutual interest.
The highlight of the workshop was the
keynote address provided by Donna
Fabiani of the Opportunity Finance
Network (OFN). This article summarizes
the presentations and proposals made by
panelists, as well as Ms. Fabiani’s remarks.

Panel discussion: approaches to
CDFI sustainability
Mike Berry, director of Policy Studies
at the Federal Reserve Bank’s
Community Development and Policy
Studies (CDPS) division, moderated the
panel discussion, noting the Fed’s longterm interest in the work of CDFIs and
partnership with the other institutions
represented on the panel, the Aspen
Institute, and the National Community
Investment Fund.
Robin Newberger, a senior business
economist in CDPS and the first
speaker, began by defining what is
meant by CDFI “sustainability.”3 A series
of research projects involving the
Chicago Fed and the Aspen Institute
have sought to address this question in
different ways by: analyzing available
data; conducting surveys; and
interviewing organization (CDFI)
principals to develop representative
case studies. Findings from these
efforts revealed nuanced approaches to
CDFI sustainability, differing across
organizations, but sharing, at their core,
the successful balancing of mission,
organizational capacity, and
capitalization to achieve maximum
sustainable impact. Among CDFIs
studied, about 60 percent defined
sustainability as 100 percent recovery
of the organization’s costs. Conversely,
30 percent of the CDFIs surveyed that
cost recovery is not a goal, and rely on

varying forms of subsidy to meet mission
goals. Those CDFIs that highly valued
cost recovery pursued several
strategies, including scaling up loan
volume, increasing efficiencies, and
striking strategic alliances and
partnerships. They also introduced
profitable products and services, and
then cross-subsidized between those
that were profitable and those that were
not. For CDFIs not pursuing cost
recovery, often the markets served are
the most difficult to serve. Subsidy is not
simply a means to balance revenue and
expenses; the markets they serve often
require training and technical
assistance, and they experience greater
underwriting and servicing costs than
more developed (credit) markets. They
also use grants and other subsidy to
develop technology innovations, and to
explore and open new markets.
Newberger concluded that, for the
majority of CDFIs, sustainability and
subsidy are not opposites; subsidy is an
integral part of sustainability, and
organizations must manage both (well)
to achieve mission goals and remain
viable entities.
Kirsten Moy, from the Aspen Institute,
discussed collaborative approaches to
CDFI sustainability.4 She noted that
there are many advantages to CDFI
collaboration, such as greater scale,
more efficiency, lower costs, and
benefits gained from forming strategic
alliances; however, true collaboration

Profitwise News and Views

July 2011

13

COMMUNITY DEVELOPMENT
among diverse peers associated
through a loose alliance is difficult to
achieve. Collaborations take many
forms: joint fund raising, group
purchases, shared operational
infrastructure, and management
expertise, as well as shared training
platforms. Collaborations can result in
broader and deeper experience and
knowledge, notably in policy expertise,
which translates into the potential for
more regulatory influence through
shared advocacy, as well as, usually,
greater local control of smaller
organizations. Moy remarked that
collaboration, aside from business
motivations, often stems from necessity,
enabling organizations to survive by
changing fundamental business
practices. Often, forming a collaborative
results in turning an unsustainable
organization in chronic stress into a new,
vibrant organization ready to pursue
more rewarding opportunities.
Moy noted the fragmented nature of
the CDFI industry, which comprises
mostly small, locally focused
organizations. Consolidation in the
mainstream financial industry
underscores the contrast between

partnerships, the industry can create
intermediaries and statewide platforms
that make sense. An effective
collaborative network would likely have a
larger impact on regulation, policy, and
more success in attracting capital.
Impact measurement is critical to
furthering the mission of CDFIs,
commented Saurabh Narain of the
National Community Investment Fund
(NCIF), an organization that promotes
and facilitates the work of CDFI
depository institutions (banks and credit
unions). Narain noted that depository
institutions must be self-sustaining,
profitable, in fact, to meet regulatory
requirements. Mission-focused
depositories are not exceptions, even if
there are benefits to be realized by
collaboration at some levels. NCIF has
developed a practical methodology that
identifies depository institutions with a
community development mission, even if
they do not have the Treasury
designation. NCIF’s Social Performance
Metrics tool uses publicly available data
to measure the social impact of
depository institutions. The tool
measures the degree of lending and
deposits attributable to low- and

Often, forming a collaborative results
in turning an unsustainable
organization in chronic stress into a
new, vibrant organization ready to
pursue more rewarding opportunities.
mainstream and mission-focused
financial institutions. Accordingly,
collaboration holds real payoffs for
CDFIs; small institutions working
individually at the margins have greater
difficulty attracting (large) bank partners,
as well as public resources, and thereby
risk diminishing their impact even further.
Through collaboration and strategic
14

Profitwise News and Views

moderate-income (LMI) census tracts.5 It
provides a way to recognize institutions
that impact LMI communities and
thereby, in theory and practice, channel
more funding and resources to them.
Through collaboration and by providing
high quality and accurate metrics,
institutions that work in low- and
moderate-income communities can show

July 2011

to funders (e.g., government, foundations,
angel networks) that their impact is
demonstrably increasing. Narain stated
that building the economic vitality of LMI
areas depends on jobs. Institutions that
lend in low-income communities to
businesses and other potential employers
need to collaborate in order to move
beyond making relatively few isolated
loans if the goal is sustainable (and selfsustaining) communities.

Perspective from the Opportunity
Finance Network
Donna Fabiani, executive vice president
for Knowledge Sharing, provided the
keynote address. The Opportunity Finance
Network (OFN) is a CDFI membership
organization that identifies and invests in
opportunities that benefit low-income and
low-wealth people in the United States. Its
180 CDFI (primarily loan funds) members
represent a diverse set of organizations by
type, size, markets served, and products
offered. OFN’s membership spans the
country, serving urban, rural, and native
communities often overlooked by
traditional financial institutions. Only a
small minority of members are banks,
credit unions, or venture capital funds.
OFN members have a range of asset
sizes: 23 percent have assets below $5
million, and about 50 percent have assets
below $15 million. The remainder of its
membership has assets above $15 million;
several members have assets in the
hundreds of millions of dollars. OFN
serves its markets by offering all types of
lending to all sectors served by CDFIs,
such as business, housing, community
facilities, and some consumer loans. OFN
has a proven track record of success, with
cumulative net charge-off rates of less
than 1.6 percent for FY 2009.6
OFN currently provides a range of
products and services to build the
capacity and scale of the CDFI industry.
OFN also developed its own rating
system, known as known as the CDFI
Assessment and Ratings System (CARS).
CARS is a CDFI assessment and rating
system, managed by OFN, that provides

COMMUNITY DEVELOPMENT
an assessment of a CDFI’s impact and
financial performance. It helps potential
investors to identify CDFIs that match
their social objectives and risk
parameters, making it easier for investors
to underwrite CDFIs and likewise easier
for CDFIs to attract investor capital.
Further, Fabiani pointed out that the
CARS evaluation process also helps
CDFI management itself, by providing
in-depth analysis of its own portfolio,
operations, and management, and
helping to identify the institution’s
strengths and weaknesses. Such a
rigorous and thorough evaluation takes a
penetrating look deep into a CDFI and
provides incisive information that makes
the organization stronger. Aside from
supporting CDFIs in direct ways, OFN
also conducts policy work focused on
increasing funding for CDFIs and tries to
increase the visibility and awareness of
CDFIs in the media and through other
avenues. It also collects data, conducts
industry research, and annually publishes
a survey on CDFI market conditions.
Fabiani discussed OFN’s Strategic
Plan for 2011–2026. She mentioned
that planning for such a distant time
horizon was difficult, but thought
provoking and useful nonetheless. The
plan was formulated through a year-long
process and included input from
hundreds of CDFIs (both members and
nonmembers), funders, investors,
researchers, policymakers, and others
with industry insight and concern for its
long-term health. The purpose of the
plan is to set forth how OFN will lead
the community development finance
industry forward over the next 15 years.
The plan focuses on broadening
membership to include more regulated
CDFIs, such as banks and credit unions,
as well as more venture capital funds.
The plan also emphasizes increasing the
different types of lending that CDFIs
underwrite, especially consumer credit.
Fabiani remarked that larger financial
institutions are deciding to downsize
their consumer lending activities, citing
expected increases in expenses
associated with this type of lending.

The plan notes that this trend
represents a growth opportunity for
CDFIs, and OFN will assist them with
expanding consumer lending to meet
the needs in low-income communities.
The new plan also refined OFN’s
mission, which is to lead CDFIs and their
partners to insure that low-income and
low-wealth people and communities
have access to affordable responsible
financial products and services. The
refined mission assumes a leadership
role for OFN, but it also assumes a
leadership role for CDFIs in their
communities. Fabiani pointed out that
the new mission also added the word
“services.” Consequently, OFN will seek
to provide not only financing products,
but services as well. The OFN strategic
plan envisions the CDFI field expanding

...collectively,
CDFIs can
accomplish more
together than
each can
individually.
to fill in the gaps left by more traditional
lenders, and that by 2026, CDFIs will
serve many more communities and
much broader and deeper markets with
a more complete set of products and
services than they do today. Fabiani
stated that OFN is committed to helping
lead the way by assisting CDFIs to
accomplish their own missions through
fostering an operating environment that
is truly helpful to broadening the impact
of CDFIs within their communities.

Panel discussion: do we all play in
the same sandbox?
How different are Wisconsin’s CDFIs
from each other? Do they approach

funders, underwrite risk, share risk,
obtain and service customers in
completely different ways? Can
Wisconsin’s CDFIs learn things from one
another and from other states? Are
there any economies of scale to be
found? Panelists discussed these
questions as well as the benefits and
drawbacks to taking a collective
approach to issues of common concern
facing CDFIs operating in Wisconsin.
Melanie Stern, of the National
Federation of Community Development
Credit Unions, serves as the coordinator
for the New York Coalition of
Community Development Financial
Institutions (NYC-CDFI).7 Ms. Stern
discussed how the NYC-CDFI started,
its successes, and gave some examples
of failures and challenges faced along
the way. She stated that the whole is
bigger than the sum of its parts; i.e.,
collectively, CDFIs can accomplish more
together than each can individually. She
then discussed what the NYC-CDFI is
currently doing and its plans for the next
few years.
As an organization, the NYC-CDFI
comprises community development
banks, community development credit
unions (CDCUs), nonprofit loan funds
and venture capital loan funds. There
are about 100 members, with about 45
being CDCUs; however, not all members
are certified by the CDFI Fund
(approximately 80 percent are certified).
By assets, the venture capital funds are
the smallest; the largest are the
nonprofit loan funds. However, among
the organizations represented in the
federation, community development
banks lend the most dollars, followed by
nonprofit loan funds. The NYC-CDFI has
managed to engage all of these types of
organizations in the coalition primarily by
coalescing around funding and
particular kinds of issues.
In 1986, the idea of a New York
Corporation for Community Banking
was being developed, but the National
Neighborhood Banking Corporation did

Profitwise News and Views

July 2011

15

COMMUNITY DEVELOPMENT
not come about until 1990. The group
seeking to form the coalition comprised
leaders from loan funds, CDCUs, microfinance groups, venture capital funds
and community banks. By 1994, this
group had successfully pressed for the
creation of a federal CDFI Fund, and
only one year later they established the
New York Coalition of CDFIs. Stern
stated that because a core group of
dedicated people came together to push
the idea for a CDFI Fund at the federal
level, it was much easier to overcome
barriers to a state coalition in New York
by building on the prior federal success.
Since 1995, the NYC-CDFI has
engaged key partners and funders. The
Empire State Development Corporation
(ESDC), which is a quasi-governmental
development agency, as well as the New
York State Banking Department and
New York State Credit Union League,
have all partnered with NYC-CDFI.
Recently, a new statewide microfinance
organization has also participated in a
number of activities. Most funding
comes from banks and foundations.
A key to the success and viability of
the NYC-CDFI was having a paid time
staff person. Stern explained that
serving as coalition coordinator was only
a small portion of her job at the
federation; nevertheless, she was not a
volunteer. NYC-CDFI does have a
volunteer steering committee, but paid
staff allows the organization to address
more issues and projects.
NYC-CDFI members see themselves
as essentially united, despite
differences on specific issues and
sometimes competing for outside
funding. Stern commented that
competition for funds between members
has been mitigated by trying to expand
the pool of available funds. The first big
victory was the 1995 creation of a pool
of funds administered exclusively by
CDFIs that was a grant program for
women and minority-owned businesses.
Despite turbulent budget times since its
creation, the fund has doubled in size

16

Profitwise News and Views

from approximately $1.5 million to $3
million. Currently, this is the biggest pool
of funds ever made available and its
recent growth is largely due to the 2009
addition of stimulus funds. Stern also
mentioned that a state revolving loan
fund attracts federal dollars, and thereby
provides a mechanism for distribution to
CDFIs on a large scale.

Historically, ESDC has been a small
business lender; having a new pool of
CDFI-targeted funds to address needs,
such as affordable housing, creates new
opportunities. Stern believes that NYCCDFI’s drafted report, which
underscored to the legislature the
impact that CDFIs have on job creation,
is what led directly to its passage.

Stern stated that the NYC-CDFI has
become the “Go-to Group for all things
CDFI in New York State.” NYC-CDFI has
built a reputation that allows it to be the
preeminent organization for issues
surrounding CDFIs and economic
development. Stern is constantly getting
calls from organizations, the press, and
government, asking for her opinion or
advice on issues such as the design of
products or services, underwriting
guidelines, or drafts of legislation
affecting the industry. NYC-CDFI also
conducts consumer advocacy work, such
as galvanizing coalition members to
oppose bills it deems are not consumerfriendly. Further, it conducts its own
impact data survey, publishes a quarterly
newsletter, conducts training, and hosts
an annual conference to coalesce around
issues of common concern. Building such
a respected reputation enables NYCCDFI to exert influence and to help
shape important factors that affect the
outcome of the industry.

Karl Pnazek, from CAP Services,
stated that Wisconsin’s CDFI community
would benefit greatly from educating the
rest of the state’s financial community
about the fundamentals of community
development financial institutions and
the role they play in the state. 8 He noted
that many bankers, businesses, funders,
local governments, and legislatures
simply are not familiar with CDFIs;
consequently, CAP Services spends
much time educating about CDFI basics,
particularly to lenders who often
mistakenly view CDFIs as potential
competitors. Pnazek has found that
despite much awareness of the mission
and impact of many CDFIs throughout
the state, there is a failure to recognize
that these same organizations are
actually CDFIs. Lacking such
knowledge, Wisconsin’s financial and
legislative communities do not yet
understand that CDFIs are efficient
entities for leveraging private capital and
for using (New Markets and Lowincome Housing) tax credits to increase
economic development.

Since 1995, the NYC-CDFI has
pushed hard for the creation of a New
York State CDFI fund separate and
distinct from the federal CDFI fund. It
was an enormous task that took more
than ten years; but in 2007, through the
coalition’s advocacy, the New York State
legislature passed and the Governor
signed a bill creating a New York State
CDFI Fund. However, the bill carried no
appropriation. Notwithstanding the lack
of money, Stern considers the creation
of a state fund a big legislative victory,
as it provides a mechanism for funders
to know with certainty how those funds
will be disbursed and targeted. The state
fund will be housed at ESDC.

July 2011

Salli Martyniak, of Forward
Community Investments (FCI), sees
much value in Wisconsin’s CDFIs
coming together to form a statewide
alliance or association. 9 She began to
form this belief during the depths of the
financial crisis, when she found that FCI
was experiencing great difficulty
gathering investments in more stable
economic times. She discovered FCI
was not alone. Martyniak believes that a
collective organization comprised of the
state’s CDFIs, had it existed at the time,
would have been a much quicker and
more efficient mechanism to understand
and communicate information about the

COMMUNITY DEVELOPMENT
difficult economic environment in which
CDFIs were then operating. Further, such
a statewide organization would have
many recurring benefits today, including:
robust communication of information
quickly to all members; educational
components both inside and outside of
the CDFI community; increased investor
awareness; and serving as a resource for
advocacy focused around issues of
common interest.

Conclusion
In the aftermath of the financial crisis,
Wisconsin’s relatively small CDFI
community came together for the first
time to discuss the industry’s
sustainability and how the state’s CDFIs
may wish to work cooperatively to
promote community development, and
address matters of mutual interest. To
be sustainable, a CDFI must price and
deliver services to meet mission goals
and earn some level of return. This
conference explored a few ways to
consider collaboration across CDFIs to
address organizational sustainability
from different perspectives, but also to
address how CDFIs might take a greater
role in policy development and advocacy
as a more unified set of organizations.
Measuring the impact of CDFIs is also
critically important to ensuring that
mission goals are achievable and
meaningful; NCIF, OFN, and NYC-CDFI
presented details on the ways that they
measure performance and help to shape
the future of the CDFI industry, but also
the advantages of CDFI associations.
Collaboration among diverse peers is
difficult to achieve, but offers many
promising benefits. To date, Wisconsin’s
CDFIs have operated more or less
independently and locally. The panel
sessions and speakers offered some
potential benefits to be realized by
taking a broader view, working in
collaborative ways to share technology,
information, training, and other
resources, and forming consensus and a
collective voice around key policy topics.

Notes
1 United States Department of the Treasury, CDFI Fund, Certified Community Development
Financial Institutions – Alphabetical By State and City as of 2/28/2011, p. 36. Available
at http://www.cdfifund.gov/docs/certification/cdfi/CDFI%20List%20-%20By%20
State-%202-28-11.pdf.
2 Detailed information about the CDFI Fund’s New Markets Tax Credit awardees can be
found on their searchable Web site at http://www.cdfifund.gov/awardees/db/
basicSearchResults.asp.
3 For a more detailed examination of the sustainability of the CDFI field within the context
of increasing industry scale and the use of subsidy, see Moy et al., Approaches to CDFI
Sustainability, The Aspen Institute, Economic Opportunities Program, prepared for the
Community Development Financial Institutions Fund, U.S. Department of the Treasury,
July 2008. Available at http://www.aspeninstitute.org/sites/default/files/content/docs/
CDFISustainabilityStudy11.08.pdf.
4 Ms. Moy also helped launch AssetPlatform.org, which is a new resource for staff at
nonprofit organizations that provides financial education, coaching, and asset
development services. The AssetPlatform delivers high quality products and services
(including training, calculators, assessment tools, consumer-friendly financial products,
and links to experts) to the desktops of front-line staff, so they can more effectively serve
their communities.
5 NCIF seeks to identify Community Development Banking Institutions (CDBI) and drive
socially responsible investment to them. They have developed a comprehensive CDBI
screening system that provides key information about the community development
mission of banks. To learn more about NCIF Social Performance Metrics, visit their Web
site at http://www.ncif.org.
6 For more detailed information, visit the Opportunity Finance Network’s Web site at http://
www.opportunityfinance.net/about/about.aspx.
7 For more detailed information, visit the New York Coalition of Community Development
Financial Institution’s Web site at http://www.cdcu.coop/i4a/pages/index.
cfm?pageid=1287.
8 For more detailed information, visit the CAP Services Web site at http://www.capservices.org.
9 For more detailed information, visit the Forward Community Investments Web site at
http://www.forwardci.org.

Biography
Steven W. Kuehl is the economic development and Wisconsin state director for
the Community Development and Policy Studies Division of the Federal Reserve
Bank of Chicago. Mr. Kuehl conducts seminars and workshops, and prepares
articles and other written materials dealing with economic development, the
Community Reinvestment Act (CRA), and fair lending laws and regulations. Since
joining the Reserve Bank in 1995, he has been a commissioned senior examiner on
consumer compliance and CRA examinations, as well as manager for Consumer
Complaints, HMDA Processing, and the Advisory Service Program. Mr. Kuehl holds
a BS in finance and economics from Carroll University, and a Juris Doctor from
Chicago-Kent College of Law. He is admitted to practice in Illinois and the United
States District Court for the Northern District of Illinois.

Profitwise News and Views

July 2011

17

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