Full text of Profitwise News and Views (Federal Reserve Bank of Chicago) : May 2012

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

May 2012
Published by the Community Development and Policy Studies Division

Also in this Issue
NCIF Annual Development Banking
Conference: The CDFI banking industry –
­­
raising the bar for mission and profit

Profitwise News and Views welcomes article
proposals and comments from bankers, community
organizations, and other readers. It is mailed (either
electronically or via U.S. mail) at no charge to state
member banks, financial holding companies, bank
holding companies, government agencies, nonprofit
organizations, academics, and community economic
development professionals.
You may submit comments, proposals, or request a
subscription by writing to:
Profitwise News and Views
Community Development and Policy Studies
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604-1413
or CCA-PUBS@chi.frb.org
The material in Profitwise News and Views is not
necessarily endorsed by and does not necessarily
represent views of the Board of Governors of the
Federal Reserve System or the Federal Reserve Bank
of Chicago.
© 2012 Federal Reserve Bank of Chicago
Profitwise News and Views articles may be
reproduced in whole or in part, provided the articles
are not reproduced or distributed for commercial
gain and provided the source is appropriately
credited. Prior written permission must be obtained
for any other reproduction, distribution,
republication, or creation of derivative works of
Profitwise News and Views articles. To request
permission, please e-mail or write to the address
indicated above.
Advisor
Alicia Williams
Managing Editor
Michael V. Berry
Assistant Editor/Production Manager
Mary Jo Cannistra
Contributing Editors
Jeremiah Boyle
Emily Engel
Steven W. Kuehl
Susan Longworth
Robin Newberger
Designer
Katherine Theoharopoulos
Production Specialist
Edwina Davis

Visit the Web site of the Federal Reserve Bank of Chicago at:

www.chicagofed.org

			

		

May 2012

In this edition of Profitwise News and Views, we present a summary of the most recent (2011)
Development Banking Conference organized by the National Community Investment Fund (NCIF). The theme
for the 2011 conference, which reflects the overall mission of the organization to promote sound banking
practices and social impact in disadvantaged communities, was “Mission and Profit: Raising the Bar.”
“Small business access to capital: Alternative resources bridging the gap,” by the Fed’s Robin Newberger
and Susan Longworth, looks behind the recent sharp decline in bank lending to small businesses to gain an
understanding of the sources of financing entrepreneurs are using to meet their credit needs in the current,
constrained environment.

1

Small business access to capital:
Alternative resources bridging the gap
by Susan Longworth and Robin Newberger

Introduction
Nationwide in the U.S. over the
past 15 years, small businesses
generated 64 percent of the net
new job growth. Small businesses
with fewer than 500 employees, a
definition used by the Small Business
Administration (SBA), represent 99.7
percent of all employer firms, and
employ more than half of private
sector employees in the United
States.1 Firms with fewer than 50
employees represent 95 percent
of all employer firms.2 Since the
recession that began in late 2007,
large bank lending to small
businesses has fallen by more 		
than 50 percent.3
A combination of forces have
contributed to this decline: devalued
collateral, especially of real estate,
damaged credit reports stemming
from financial hardship, reduced
cash flow due to diminished sales,
and general economic uncertainty.4
Tight standards on home equity
loans have precluded a widely used
financing method for small companies.5
Eroded balance sheets and declines
in revenue have increased the
possibility that bank loan applications
will be denied, and some businesses
that once qualified for bank loans no
longer qualify. Further, banks have
been tightening underwriting
standards in an effort to manage
risk, leading to reduced options for
2

those businesses still seeking
credit.6 Nevertheless, banks remain
the largest source of small business
credit, including term loans, credit
cards, credit lines, commercial
mortgages, and capital leases.7

Accion Chicago, a certified
Community Development Financial
Institution (CDFI)11 and microlender,
that provides evidence of a shift in
borrower credit profiles at a
nonbank provider. We find that:

Given this environment, it is
interesting to take a closer look at
some of the entities that are filling
the credit gap for small businesses.
While many business owners have
become more cautious about
seeking credit,8 and may be more
concerned about the strength of
their sales than access to credit,
some business owners have turned
to a variety of non-mainstream
credit sources.9 Depository lenders
held about 60 percent of the total
loans to small business borrowers
from traditional sources of credit
(excluding owner loans) in 2010. The
remaining 40 percent came from
finance companies, brokerage firms,
family, friends, and other
businesses.10

• many community development

In this article, we explore the
expanding role that nonbank, often
mission-driven, lenders are playing
in a period of constrained lending to
small businesses by regulated
depository institutions. We present
key themes from discussions with
over a dozen providers of small
business credit products and
services and other small business
experts, and include data from

business lenders are “antirecessionary” as they become a
viable alternative when banks
tighten lending standards;

• different underwriting metrics used

by these nonbank organizations
expand the meaning of the term
creditworthy borrower;

• while community development

lenders always play a key role in
redeveloping areas, the shift by
borrowers from banks to nonbank
entities demonstrates the
complementary role of nonbanks
when bank credit is very scarce.

The implication of these findings is
that investment in the capacity –
organizational and financial – of
these nonbank providers, and the
expansion of a nonbank
infrastructure – virtual or physical,
can be especially valuable during
times of tight credit.

Findings regarding nonbank
small business financing options
There are several commonly used,
formal and informal, options outside
of the banking system that small

businesses use to finance
operations and capital
expenditures.12 Credit cards, friends,
family, and personal savings are
important sources of financing for
small businesses, as is trade credit,
merchant cash advance, factoring,
microloans, and others. The findings
in this article are based on
interviews with over a dozen
providers of small business credit
products and services. We
interviewed nonprofit CDFIs,
microlenders (some microlenders
are CDFIs as well), and a community
development corporation that
provides SBA 504 loans. We also
spoke to entities on the for-profit
side, including factoring companies,
merchant cash advance providers,
and online credit intermediaries.
Together this information feeds into
our understanding of types of
businesses seeking credit and the
constraints they may face in
obtaining bank financing. Most of
these interviewees were local to the
Chicago market, although some
serve a national market. The three
main findings that emerge
underscore the role that nonbank
providers play during a time of
declining credit: nonbank lenders
are able to offer financing to small
businesses when bank lending is
not available; they use alternative
underwriting metrics to determine
creditworthiness; and they serve as
an auxiliary entity for businesses
that lose bank credit access due to
economic factors, more stringent
underwriting standards, or both. We
explain the operating methods and
profiles of each type of credit
provider in this article. The array of
nonbank entities discussed
represents examples that illustrate
the findings, but not the universe of
small business credit providers.

Finding 1: Many nonbank financing

from $50,000 to $5.5 million
explained that they had a backlog of
entities play an “anti-recessionary”
$90 million in loans that they had
role, as small businesses that used
approved but had not yet funded,
to qualify for bank loans before the
representing a strong appetite for the
financial crisis seek financing from
504 product. These examples
nonbank financing entities.
illustrate national trends. Data from
Interviews with community-based
the CDFI Market Conditions Report
providers and other experts suggest
from the Opportunity Finance
that nonbank small business lending Network shows that communityhas increased as banks have
based small business lenders saw
reduced the availability of products
increases in demand through the
and tightened underwriting standards recession with almost 80 percent
for small businesses. The increase is showing an increase in applications,
difficult to quantify with precision due compared to only 4 percent seeing a
to the fragmented and nonpublic
decrease14 (chart 2, page 4).
nature of many of the providers.
According to interviewees, many
Community-based business lenders
reported that they have been “busier banks no longer underwrite loans
where the primary collateral is real
than ever” since the onset of the
estate, as dire real estate market
recession. For example, Accion
conditions undermine banks’
Chicago, a CDFI microlender that
confidence in the security value and
offers loans up to $35,000 (but
their ability to appraise value in the
recently increased its loan limit to
first place. Many banks have done
$50,000), saw an 80 percent
away with credit-score-based lines of
increase in applications between
credit as well. Other products that
2008 and 201113 (chart 1). A
were targeted to small businesses
provider of SBA 504 loans ranging

Chart 1: Accion Chicago – loan demand and production 2008-2011

Source: Accion Chicago.
3

have also been eliminated, such as
the SBA Community Express loan
guarantee program, which insured
loans up to $35,000.15 Although the
SBA has maintained its 7(a) program
and developed two new programs,
Small Loan Advantage and
Community Advantage16, the size of
the average 7(a) loan has increased
by 130 percent, while the number of
loans has fallen by 44 percent (chart
3). A similar pattern emerges in 7(a)
loans to start-ups: the average loan
size has increased by 99 percent and
the number of loans fallen by 50
percent between 2007 and 2011.
These trends, according to
interviewees, reflect banks’
reluctance to do small-dollar lending,
even with guarantee levels of up 85
percent, further challenging the
financing needs of a business
needing a relatively small amount of
capital. The implication therefore is
that demand for small business

Chart 2: Percentage of CDFIs reporting increase/decrease in
applications received

Source: Opportunity Finance Network: CDFI Market Conditions Report (Second
Quarter 2011, Report II – Detailed Tables).

Community development financial institutions (CDFIs)
CDFIs promote access to capital and local economic growth in urban and
rural low-income communities across the nation.17 CDFIs are mission focused
and generally target their services to disadvantaged populations and
communities, and therefore often serve a local market. These institutions can
be banks, credit unions, loan funds, venture capital funds, or other financial
service providers with community development as their primary objective.18
They are certified by the U.S. Department of the Treasury and have access to
resources available through the CDFI Fund. Through monetary awards and the
allocation of tax credits, CDFIs provide access to capital to spur local
economic growth in urban and rural low-income communities across the
nation.19 While CDFIs include banks and credit unions, this article focuses on
the nonprofit CDFI small business lenders and microlenders – an unregulated
segment of the small business market – covering a spectrum of small
business lending from under $1,000 to $250,000 or more. About 22 percent
of the dollar amount of outstanding CDFI financing went to small enterprises
in 2009 (most went to financing housing and real estate), and another 3
percent went to microenterprises, for a total of $5.2 billion in financing
outstanding to small businesses.20
4

capital is strong – at least for
relatively low loan amounts, which
banks (mostly) do not offer.

Finding 2: The rise in business at

nonbank lenders adds nuance to the
definition of a creditworthy borrower.
Nonbank providers underwrite
businesses that banks are not willing
or able to serve, often by applying
different measures of risk. Nonbank
financial intermediaries evaluate risk,
and therefore small business
creditworthiness, through a different
lens than banks. According to
interviewees, changes in credit
scores and credit score standards
have had perhaps the biggest impact
on whether someone gets financing
at a mainstream banking institution.
Anecdotal accounts indicate that the
credit score requirement used to be
600-650 at mainstream banks; it is
now above 700.

Microenterprise development organizations
Microenterprise development organizations help small business owners most at risk – namely low- and moderate-income
and other disadvantaged individuals who do not typically have access to the full range of mainstream financial services – to
create or expand their small business.21 Microenterprise is commonly defined as a business with five or fewer employees that
requires no more than $35,000 in start-up capital. Microenterprise development involves providing these business owners
with loans, capital, deposit accounts, budgeting services, tax preparation services, business-specific technical assistance,
and other support. Not all microenterprise development organizations provide financing. Because of the local nature of their
product offerings, most microlenders serve a localized market. Perhaps most well-known in the U.S. is the Accion “network”
of microlenders.22

In contrast, alternative lenders
base their decisions on other
variables besides (or in addition to)
balance sheets or the credit score of
the owner. They often consider
borrowers with good credit but no
collateral, or with collateral but no
business history. Nonbank entities
also evaluate small business
customers by weighing time in
business as an indicator of
sustainability, and considering
“global cash flow” – the financial
capacity of a family – when
considering a credit decision. Other
providers ensure that a business is

current on rent payments as a
determinant of business health. The
factoring industry (see profile)
removes the burden from the small
business entirely, extending credit
based not on their clients’ financial
condition, but on the financial
condition of their clients’ customers.
As a result, a company with
creditworthy customers may be able
to factor even if it can’t qualify for a
loan. Merchant cash advance (see
profile) underwriters typically
evaluate the past four months of
cash flow, rather than the three years
usually required by a bank, enabling

Chart 3: SBA 7(a) loans 2005-2011 – number of loans/average
loan size

Source: NAGGL.

a small business that is turning a
corner after a rough period to qualify
for some capital. Others, such as
online provider On Deck (see profile),
alter payment structures – offering
daily payments tied to cash flow, as
opposed to one monthly payment –
enabling a business to better manage
debt and other expenses. Missiondriven organizations – CDFIs (see
profile) and other nonprofit lenders –
generally consider the social impact of
a business, such as its ability to create
jobs in a distressed community, as well
as its solvency in the lending decision.
To be sure, the work of nonprofit
providers is often subsidized by public
(e.g., the CDFI Fund and SBA) and
private (e.g., foundations and
corporations) sources, which enables
these providers to absorb higher loss
rates than banks, ranging between 5
percent to 10 percent, whereas 1
percent to 2 percent is a general rule of
thumb for banks. The subsidy also
covers the costs of technical
assistance (TA) to unseasoned
borrowers, or those who need advice
as they work through challenging times.
As one microlender reflected, “For us
to do 300 loans, we need to raise $1.6
million in operating grants” – a subsidy
of almost $5,000 per loan, covering
the costs of administration as well. For
504 Certified Development
Companies, the financing comes from
SBA-backed bond sales. The 504
lenders are able to offer lower interest
5

Factors
Factoring, one of the oldest forms of business financing, is very common in
certain industries, such as the textile industry, where long-term (i.e., longer
than the 30-day cycle common to most businesses) receivables are part of
the business cycle. When using factoring, a business owner will sell accounts
receivable at a discount to a third-party funding source to raise capital. 23 In a
typical factoring arrangement, the client (the small business) makes a sale,
delivers the product or service, and generates an invoice. The factor (funding
source) buys the right to collect on that invoice by agreeing to pay the client
the invoice’s face value less a discount – typically 2 percent to 6 percent of
the invoiced amount (potentially leading to 24 percent to 30 percent APRs).
The factor pays 75 percent to 80 percent of the face value immediately to the
business and forwards the remainder (less the discount) when the customer
pays the invoice. According to one factor, the works better for businesses with
revenues under $500,00024 because a smaller company has a harder time
financing growth internally (due to a lack of available cash) and externally,
since their small size and fast growth increases their risk profile in the eyes of
a bank. A factor can finance this growth because the credit burden is on the
business that is buying the product, not on the (small) business that is
providing the product. Factoring is unsecured, and “nonrecourse.” If the
business doesn’t pay the invoice, then the factor has no recourse against the
supplying business.

Merchant cash advance provider
Merchant cash advances (MCA) provide capital in exchange for a share of
future credit card sales. MCA is most typically used by retailers, restaurants,
and other small businesses where a large number of customers pay with
credit cards, and may serve to replace a working line of credit. Advance
providers offer small business owners up-front, unsecured capital in
exchange for the right to collect a portion of their future credit card sales as
those sales are made. Most MCA providers are national in scope and many
offer the products online. Sixty percent of customers served by the MCA
industry are restaurants – a sector that the banking industry has struggled to
serve due to its perceived riskiness. MCA clients have an average credit score
of 650 – below what many banks are reportedly comfortable with today. 25
Average advances are small, approximately $20,000, and carry a discount
rate of approximately 30 percent over a six to 12 month term, reflecting that
these providers supply an amount of capital that is needed by businesses, but
not cost effective for banks to provide. Cash advances are not covered by
lending laws because they are structured as sales of future income. 26

6

rates because investors accept a lower
rate of return – the February 2012
504 20-year debenture rate was
2.63 percent.27 For-profit providers,
such as factors and merchant cash
advance lenders who do not benefit
from or have access to subsidy, often
charge high rates for their unsecured
capital – approximately 30 percent
for MCAs and 2 percent to 6 percent
of the invoice amount for factors.28
The nonbank, nonregulated entities
profiled in this article “price” the
increased risk and higher loss rates
into their business models by
charging higher interest or fees, or by
raising subsidy.
As much as alternative providers
use metrics that expand the
definition of “creditworthy,” they do
not finance everything that is within
their capacity to finance, and some
have altered their own tolerances for
risk. Some have turned down
borrowers that might have been
approved prior to the recession. For
example, some nonprofit providers
speak of looking more carefully at
businesses that are reliant on
disposable income (e.g., restaurants,
beauty salons, or car washes) whose
cash flow may be impacted during a
recession. Even some of the most
aggressive providers of capital, such
as merchant cash advance providers,
have become more conservative in
their underwriting, given that
advances are based on future credit
card sales, and in a recession there
is increased risk that those sales
may not materialize. And, nonbank
providers are quick to point out that
they do not lend to businesses in
distress. Although a business – even
in distress – may qualify for
financing, providers recognize that
putting such a business owner into
further debt or tying them into
commitments that may extend
beyond the life of their business is
not in anyone’s interests.

Finding 3: The shift of borrowers
from bank to nonbank institutions
suggests that nonbank entities play
an auxiliary role to banks when bank
credit is less available.

Online resources

Most alternative providers are
accustomed to absorbing clients that
banks would see as high risk, based
on credit score, collateral levels, cash
flow, time-in-business, and other
factors considered during a bank
underwriting process. These include
businesses in particular industries,
like restaurants, that make up 60
percent of the businesses using
merchant cash advances.29 Or they
include businesses with irregular
payment cycles, such as those that
experience quick or seasonal growth,
or have long payment cycles, such as
textiles businesses, which comprise
many factoring company
customers.30 In addition, many
nonbank lenders lend amounts much
lower than banks can profitably lend.
The nonprofit lenders interviewed
provide loans ranging from as little as
$500 to $100,000. While SBA will
insure 504 loans as high as $5.5
million, they will also go as low as
$50,000 for commercial real estate
– a level that is under the lower limit
of most banks. The average
merchant cash advance is
$20,000.31 Banks are an important
source of referrals for nonbank
providers who work with customers
that do not qualify for bank
underwriting. This symbiotic
relationship is especially important
during credit contractions when
banks wish to retain a depository
relationship, but are unable to
provide financing, and the alternative
providers do not have the capacity to
individually source deals.

flow patterns of the small business borrower. On Deck started in 2006 as a

In some cases, businesses fall
outside of banks’ lending guidelines
because of a lack of business
training or experience on the part of

Online resources have emerged as a new piece of “infrastructure” that
exists outside of the banking system. For example, On Deck has an
underwriting model that works to match the payment capacity to the cash
financial technology lending platform with the potential to aggregate data to
provide a more accurate cash flow assessment, resulting in a daily loan
payment servicing system. A typical On Deck borrower is a community-based
business – a florist, restaurant, car repair shop, gas station, or doctor’s office,
for example – with strong cash flow but little collateral. Most of On Deck’s
borrowers have been in business more than nine years, have around $1
million in revenue, and have credit scores above 600. When using its own
capital, On Deck offers unsecured loans in amounts ranging from $35,000 to
$150,000, terms ranging from three to 18 months, a turnaround time of
about a week, and rates similar to a credit card.32 On Deck increasingly works
as an intermediary leveraging their proprietary underwriting platform to help
banks and other providers, including CDFIs, underwrite difficult deals.
Biz2Credit (B2C) is an online financial intermediary, established in 2007 to
match prospective borrowers with an appropriate form of credit, including
alternative providers. The business originally targeted minority and immigrant
business owners. With the onset of the recession, B2C’s market expanded
dramatically, and they currently process between 8,000 and 9,000 funding
requests a month ranging from $25,000 to $3 million.33 Functioning similarly
to a broker, B2C serves exclusively small businesses, linking them to
traditional sources of credit – both large and small banks – as well as
alternative providers, including CDFIs, credit unions, factors, merchant cash
advance providers, and others.

the loan applicant, in addition to
subpar credit scores and collateral.
Bankers recognize that many small
businesses benefit from TA in
addition to financing. Alternative
lenders often provide TA beyond what
banks can offer. Many banks do not
have the expertise or cannot bear the
development and other costs of
special small business finance
programs, especially those focusing
on reinvestment areas. Going a step
further, some banks assist
neighborhood nonprofit organizations
and community-based development
corporations by funding operating
costs for TA to small businesses in

their communities. The motivation is
both the Community Reinvestment
Act (CRA) and the efficiency gained
by offloading counseling to an entity
that can access subsidy and has
local market familiarity. According to
the 2008 CDFI Data Project, 65
percent of capital raised by nonprofit
loan funds is borrowed; the vast
majority of that capital derives from
banks that ostensibly receive CRA
credit for the investment.34
Since the financial crisis, the
characteristics of small businesses
financed through the banking
system, versus those that are
7

The Chicago Microlending Institute
In an effort to increase access to business credit, a group of institutions
recently came together to create a citywide network of community-based,
nonprofit, small business lenders. Accion Chicago joined the City of Chicago,
Citibank, and the Searle Funds at The Chicago Community Trust to create the
Chicago Microlending Institute (CMI). CMI – the first entity of its kind – is a
partnership of public, private, and nonprofit organizations that leverages
Accion’s microlending expertise to provide technical assistance and start-up
capital to build a small business lending infrastructure in Chicago. CMI will
provide training and start-up capital to two nonprofit organizations to begin
microlending in the first year of this initiative. CMI will also provide best
practice consulting to other nonprofit organizations interested in microlending
and/or improving their existing lending operations.
Small businesses with five employees or less employ over 20 percent of
Chicago residents. These businesses have the potential to create jobs in the
neighborhoods they serve, but often lack the financial resources needed for
growth. Without a capital infusion, many of these small businesses will fail to
reach their full potential. However, Accion estimates that it currently reaches
only 5 percent of the demand for small business microloans in the Chicago
market. Thus, the training and capital provided by CMI will be instrumental in
expanding the capacity of organizations that work with small businesses which
are creating jobs throughout the city’s communities.
The $1 million investment from the city of Chicago, along with funding from
Citibank and the Searle Funds at the Chicago Community Trust, is projected to
result in a combined 280 business loans totaling $2.8 million over the next four
years, creating or maintaining an estimated 850 jobs and providing more than
$14 million in payroll to employees.

financed by nonbank entities, have
become less distinct. Businesses
that used to seek credit at
mainstream banks are working with
nonbank providers. Microlending
portfolios used to comprise almost
entirely “mom-and-pop,” homebased, and start-up businesses have
expanded their lending to business
owners with higher credit scores and
more experience in business. These
are business owners who formerly
qualified for bank financing. The
evidence comes from both anecdotal
8

accounts, as well as from data
collected by alternative lenders. For
example, the online intermediary
Biz2Credit (B2C) (see profile) reports
that, “Initially we were getting people
who couldn’t get financing anywhere,
now we are getting people who would
normally get financing from banks,”
and that most borrowers were
rejected by the primary bank before
they came to B2C.35 In addition, the
percentage of approved borrowers at
Accion Chicago with credit scores
over 700 increased from 2 percent to

20 percent between 2006 and 2010
(before falling to 16 percent in 2011).
Data provided by Accion shows the
percentage of borrowers with credit
scores under 600 fell from 49
percent to 27 percent (chart 4).
Accion Chicago is also serving an
increasing number of existing
businesses. The median time in
business of a borrower has increased
from 1.5 years in 2008 to 2.4 years in
2010, an increase of 56 percent,
indicating that even businesses that
might be able to provide the financial
history required by banks have
migrated to other sources. Average
time in business of online
intermediary B2C applicants is slightly
more than two years with an average
credit score of just above 680.36
This casts nonbanks in a
complementary role in terms of their
interaction with traditional banks. To
the extent that resources allow, they
pick up small business customers
when bank underwriting tightens and
credit is in shorter supply through
traditional institutions. To be sure, the
aggregate lending from nonbanks is
much less than that from the banking
system: the largest microenterprise
lender in Chicago closed 301 loans in
2011, totaling just over $2 million.
The merchant cash advance industry
amounts to $750 million a year in
purchased receivables (over 60
percent of which would never have
been funded by banks due to low
credit scores or industry risk,
according to industry leaders). They
help fill the gap between $25,000 and
$125,000. Some nonbank entities
also report to the credit bureaus to
build the credit scores and
“bankability” of their customers,
supporting the longstanding premise
that part of the mission of CDFIs is to
move their clients toward access to
mainstream financial services. Finally,

none of the providers interviewed for
this article seek to supplant the
depository relationship between a
bank and a small business owner,
reinforcing the complementary
relationship that exists between
nonbank providers and mainstream
financial institutions.

Chart 4: Accion Chicago percentage breakdown in borrower
credit scores – 2006-2011

Implications
A key implication of our findings is
that more support could flow to small
businesses if more nonbank small
business intermediaries had more
resources. The largest
microenterprise organization in
Chicago estimates that it reaches
just 5 percent of the market for
microloans. The number of deals it
can process is based entirely on how
many loan officers it has, and its
ability to either hire or develop skilled
staff depends on securing sufficient
operating subsidy.

Source: Accion Chicago.

Private initiatives, such as the
Goldman Sachs 10,000 Small
Policymakers involved in the wave of Businesses program, provide both
new small business initiatives
training and capital to small, existing
understand that nonbanks are
businesses through CDFIs and local
important sources of credit for small
community colleges.40
businesses. Much of the recent
But additional resources are not the
federal support for small business
only thing alternative providers need
lending is aimed at nonbank entities.
The U.S. Department of the Treasury’s to enhance the amount of credit they
can offer to small businesses. An
Small Business Lending Fund made
loan capital available to both nonprofit overarching challenge to helping small
businesses is the condition of the
community development
greater social and environmental
37
organizations and community banks.
context for small business
The Treasury’s CDFI Fund has
remained a constant provider of both development and growth. In order for
small, community-based businesses
capital and TA support for (nonbank)
to thrive, they must be part of a viable
CDFIs, including those that serve
local market, with busy commercial
small businesses, and received
corridors, stable home prices, and
unprecedented additional support
quality employment for residents.
through the American Recovery and
A significant impact can be made in
38
Reinvestment Act. In addition, the
weak economic times by investing in
SBA, through its microloan,
community infrastructure, as well as
community advantage and 504
programs, has successfully channeled people and technology, but in the
current economic climate, resources
additional funds and guarantees to
remain scarce.
nonprofit community lenders.39

Importantly, technology and the
Internet have allowed alternative
lenders and TA providers to leverage
significantly their ability to deliver
credit and services. Online credit
intermediaries catering to small
businesses gained visibility through
the recession with their ability to use
technology to link small businesses
with sources of capital. With excess
capacity, these resources, available
only through the Internet, may serve
as models to expand small business
credit (and TA) delivery, especially in
rural or other underserved markets.
In the future, capacity building may
become less of an issue at
community-based entities if the field
moves in the direction of online
providers, although national
providers do not share the local
knowledge of community-based
entities, and do not offer the TA
component that community-based
lenders provide to small businesses.

9

SBA 504 Loan Program

Conclusion

The SBA CDC/504 loan program is a long-term financing tool, designed to
encourage economic development within a community. The 504 program
accomplishes this by providing small businesses with long-term, fixed-rate
financing to acquire major fixed assets for expansion or modernization. The
504 program serves small businesses requiring “brick and mortar” financing.
Access to the SBA 504 program is provided through a Certified Development
Company (CDC), a private, nonprofit corporation set up to contribute to
economic development within its community. The typical structure of a 504
loan is 50/40/10: the bank provides 50 percent of the capital, the CDC 504 is
in second position providing 40 percent of the capital, and the business
owner must contribute 10 percent equity. As a result, the bank’s exposure is
reduced and the business owner is only required to contribute 10 percent, as
opposed to the 20 percent or more in a standard structure41 (chart 5). In
addition, the interest rate on the 40 percent second lien provided through the
504 program is well below market (2.63 percent in January 2012), further
improving the cash flow position of the borrower. The 504 program also
contains a statutorily-mandated job creation component, a community
development goal, or a public policy goal achievement component, to help
facilitate job creation.42 SBA 504 loans range between $50,000 and $5.5
million to finance projects usually between $250,000 and $15 million.43

Chart 5: Structure of a 504 loan – typical example ($1 million project)
Conventional Financing

Financing with 504 Program

Conventional
Lender

$750,000

75%

Conventional
Lender

$500,000 50%

Borrower
Contribution

$250,000

25%

SBA 504
Loan

$400,000 40%

Total

$1,000,000

100%

Borrower
Contribution

$100,000 10%

Total
Source: SomerCor 504 Inc.

10

$1,000,000

1%

This article presents some of the
key themes from discussions with
over a dozen providers of small
business credit and services, and
other small business experts, and
considers the roles of these nonbank
financial entities in the current credit
contraction. When mainstream
institutions tighten credit
qualifications for small businesses
and lending volume falls, a variety of
alternative financial service providers
fill credit gaps, either directly or
through participations and
guarantees with bank lenders.
Drawing from the data and
interviews, it is clear that nonbank,
alternative providers of capital are
seeing an increase in formerly
bankable clients. These providers
employ various alternate methods to
determine creditworthiness, and
apply different underwriting metrics,
pricing the risk into their credit
products or raising subsidy to offset
it. Nonbanks offer a back-up option
for at least a segment of the market,
enabling small businesses to
potentially transition to mainstream
institutions in the future. Ultimately,
the extent to which small business
credit and TA intermediaries can
grow their human and financial
capital (and thereby capacity) to help
small businesses get financing – in
both good and bad economic times –
depends on how public, private, and
philanthropic resources can be directed
to craft meaningful interventions.

Notes
1 Small Business Administration: http://
www.sba.gov/content/what-sbasdefinition-small-business-concern. SBA
defines a small business concern as one
that is independently owned and
operated, is organized for profit, and is
not dominant in its field. Depending on
the industry, size standard eligibility is
based on the average number of
employees for the preceding 12 months
or on sales volume averaged over a
three-year period.
2 Bureau of Labor Statistics. See http://
www.BLS.gov.
3 The National Bureau of Economic
Research defines the most recent
recession as lasting from December
2007 through June 2009. According to
CRA data, loans to businesses with less
than $1 million in revenue fell by 53
percent in dollar amounts and 71
percent in total number of loans
originated between 2007 and 2010.
4 “Addressing the Financing Needs of
Small Businesses: Summary of Key
Themes from the Federal Reserve
System’s Small Business Meeting
Series,” July 21, 2010.
5 Lenney, William, “The Business of
America Is Small Businesses,” available
at http://www.fedpartnership.gov/
federal-reserve-resources/business-ofamerica-is-small-businesses.pdf.
6 “Federal Reserve Board Senior Loan
Officer Opinion Survey on Bank Lending
Practices,” available at http://www.
federalreserve.gov/boarddocs/
SnloanSurvey.
7 Congressional Oversight Panel, 2010,
“The Small Business Credit Crunch and
the Impact of the TARP,” May 13.
8 National Federation of Independent
Business, “Small Business Economic
Trends Survey,” available at http://www.
nfib.com/research-foundation/surveys/
small-business-economic-trends.
9 “Addressing the Financing Needs of
Small Businesses: Summary of Key
Themes from the Federal Reserve
System’s Small Business Meeting
Series,” July 21, 2010, available at
http://www.federalreserve.gov/
newsevents/conferences/sbc_small_
business_summary.pdf.			

10 Small Business Administration Office of
Advocacy, 2010, “Small Business Lending
in the United States, 2009-2010,”
February, p. 19, available at http://www.
sba.gov/sites/default/files/files/
sbl_10study.pdf.
11 See http://www.CDFIFund.gov.
12 “Report to the Congress on the
Availability of Credit to Small Businesses,”
October 2007, available at http://www.
federalreserve.gov/boarddocs/
rptcongress/smallbusinesscredit/
sbfreport2007.pdf.
13 Data provided by Accion Chicago.
14 CDFI Market Conditions Report, Second
Quarter 2011, available at www.
opportunityfinance.net. (Data not
collected prior to Q4 2008.)
15 With the implementation of two new loan
initiatives – Small Loan Advantage and
Community Advantage – the Community
Express Program ended on April 30,
2011. See SBA’s December 15, 2010,
press release for more information.
16 Small Business Administration,
“Advantage Loan Initiatives,” available at
http://www.sba.gov/advantage. “SBA and
U.S. Department of Commerce studies
have shown the importance of low-dollar
loans to small business formation and
growth in underserved communities…. In
line with that, SBA is rolling out two new
initiatives on February 15, 2011, aimed
at increasing the number of loans in
these communities.” Because these two
loan products were launched in 2011,
data is not yet available. Both loan types
offer loans up to $250,000.
17 The CDFI Fund enables locally based
organizations to further goals, such as
economic development (job creation,
business development, and commercial
real estate development); affordable
housing (housing development and home
ownership); and community development
financial services (provision of basic
banking services to underserved
communities and financial literacy
training). To learn more about CDFIs, visit
www.CDFIFund.gov.
18 “Report to the Congress on the
Availability of Credit to Small Businesses,”
2007. See http://www.federalreserve.

gov/boarddocs/rptcongress/
smallbusinesscredit/sbfreport2007.pdf.
19 CDFI Fund: What We Do, available at
http://www.cdfifund.gov/what_we_do/
overview.asp.
20 Opportunity Finance Network, Inside the
Membership, FY2009, available at http://
www.opportunityfinance.net/store/
downloads/insideTheMembership.pdf.
21 “Microenterprise Development: A Primer,”
available at http://www.fdic.gov/bank/
analytical/quarterly/2011_vol5_1/FDIC_
Vol5No1_Article_1.pdf.
22 Accion Chicago is a member of the
Accion U.S. Network, the largest
microfinance network in the U.S., whose
members have collectively lent $305
million to small business owners since
inception in 1991. See http://www.
accionusa.org.
23 See www.entrepreneur.com.
24 2011, interview with Prairie Business
Credit, August 30.
25 2012, interview with North American
Merchant Advance Association, January 20.
26 North American Merchant Advance
Association, available at http://www.
northamericanmaa.org/index.html.
27 National Association of Community
Development Companies, available at
http://www.nadco.org/i4a/pages/index.
cfm?pageid=3335.
28 Tozzi, John, 2009, “How Merchant Cash
Advances Work,” Small Business
Financing, January 9, available at http://
www.businessweek.com/smallbiz/
content/jan2009/sb2009018_234392.
htm. Factor rates as reported by
interviewees. These rates are not APR.
29 2012, interview with North American
Merchant Advance Association, January 20.
30 Udell, Gregory, 2004, Asset Based
Finance: Proven Disciplines for Prudent
Lending, Commercial Finance
Association, p. 83.
31 2012, interview with North American
Merchant Advance Association, January 20.
32 2012, interview with On Deck, January 6.
See http://www.ondeckcapital.com.

11

33 2011, interview with Biz2Credit, December
1. See http://www.biz2credit.com.

Biographies

34 “Community Development Financial
Institutions,” The CDFO Data Project,
Fiscal Year 2008, eighth edition, available
at http://www.opportunityfinance.net/
store/downloads/cdp_fy2008.pdf, p. 32.

Susan Longworth is a business economist in the Community

35 2011, interview with Biz2Credit,
December 1.

Development and Policy Studies Division at the Federal Reserve Bank
of Chicago.

36 2011, interview with Biz2Credit,
December 1.
37 U.S. Department of the Treasury, “Small
Business Lending Fund” (enacted as part
of the 2010 American Jobs Act), available
at http://www.treasury.gov/resourcecenter/sb-programs/Pages/SmallBusiness-Lending-Fund.aspx.
38 CDFI Fund: Impact We Make, available at
http://www.cdfifund.gov/impact_we_
make/overview.asp.
39 Small Business Administration, “SBA
Loan Programs,” available at http://www.
sba.gov/category/navigation-structure/
loans-grants/small-business-loans/
sba-loan-programs.
40 “Goldman Sachs 10,000 Small
Businesses,” available at http://www2.
goldmansachs.com/citizenship/10000small-businesses/index.html.
41 SBA, “CDC/504 Loan Program,” available
at http://www.sba.gov/content/
cdc504-loan-program.
42 SBA’s FY 2008 Annual Performance
Report, p. 11, available at http://archive.
sba.gov/idc/groups/public/documents/
sba_homepage/serv_abtsba_2008_
apr_001-040.pdf.
43 SomerCor 504 Inc. See http://www.
somercor.com.

12

Development and Policy Studies Division at the Federal Reserve Bank
of Chicago.

Robin Newberger is a senior business economist in the Community

NCIF Annual Development Banking Conference:
The CDFI banking industry – raising the bar for mission and profit
By Saurabh Narain and Joe Ferrari

Introduction
The National Community
Investment Fund (NCIF) held its
Annual Development Banking
Conference on November 2 and 3,
2011, at the Federal Reserve Bank
of Chicago. The conference brought
together 160 CEOs, investors,
regulators, and other stakeholders
from the Community Development
Financial Institution (CDFI) banking
industry to share knowledge and

under heightened, post-crisis
regulatory scrutiny.
NCIF convenes the Annual
Development Banking Conference
in order to share information on
new ideas, opportunities, and
challenges within the CDFI banking
industry to its key stakeholders.
This effort is intended to help
shape a path forward for an
industry that has significant and
measurable impact in many of the

“I believe that at times like these—especially at
times like these—when we are filled with doubt
and hesitation, and can hardly make out the road
before us, we cannot just stop and wait for the
way to become clear. We will never move forward
if we simply stand still.”
- Director, Donna Gambrell, CDFI Fund

discuss issues around the theme of
“Mission and Profit: Raising the
Bar.” There were seven panels over
two days that centered on topics
addressing how these institutions
can continue to serve their
community development mission
while operating in an increasingly
challenging economic climate and

nation’s poorest communities.
These effects are not broadly
understood by those outside of the
communities in which CDFI banks
serve, so the conference in part
offers the opportunity to “tell the
story.” As this message becomes
more focused and targeted, it
increases the potential to grow the

development banking industry and
by extension the capacity of CDFI
banks’ to serve low- and moderateincome communities.
NCIF’s conference is also
designed to stress the need for
collaboration within the areas
critical to the CDFI banking
industry, specifically capital raising,
governance, best practices,
technology, and sharing information
about successful ideas, products,
and practices.
This article highlights themes
from the panels, as well as the
major takeaways from the
conference for stakeholders in the
CDFI banking industry. There is also
a section discussing the major
ideas from keynote speeches
provided by: Sandra Thompson,
director, Division of Risk
Management Supervision at the
FDIC; John Hale III, deputy
associate administrator, Office of
Capital Access, Small Business
Administration; and Donna
Gambrell, director of the CDFI Fund.

Conference opening and
themes
Michael Berry, director of policy
studies at the Federal Reserve
Bank of Chicago, opened the
conference by stressing that as the
lead sponsor of the NCIF
conference for six straight years,
the Chicago Fed is committed to
13

assisting NCIF in its mission to help
grow and strengthen the CDFI bank
sector. He highlighted the
community development activities
of the Chicago Fed, such as providing
technical assistance on the
Community Reinvestment Act (CRA)
and other regulations, research on
government policy and trends
impacting disadvantaged
populations, and assistance in
creating products and services for
low- and moderate-income
communities. The Community
Development and Policy Studies
department has focused a good deal
of research on policy and economic
conditions related to CDFI banks, and
they have recognized the significant,
positive impact these institutions
have in their communities. Mr. Berry
emphasized the commitment of the
Chicago Fed to help grow the number
of CDFI banks in the coming years.
Saurabh Narain, chief executive of
NCIF, gave a presentation on the
current state and probable future of
the CDFI banking sector that focused
on six strategic goals and one
aspiration. These goals were
determined based on industry
engagement of 46 participants via
interviews, surveys, and a day-long
strategic planning workshop.
Taking the CDFI banking industry to
substantial scale is a key aspiration
for the sector. The six strategic goals
that were cited are:
• Elevate recognition across

stakeholder groups – investors,
regulators, public and private
partners – that CDFI banks are
double bottom line (i.e., having
both mission and profit goals)
financial services leaders;

• Build a CDFI banking industry

advisory/transactional service

14

Figure 1: The CDFI bank ecosystem

provider or investment banks to
support the sector;
• Promote social performance

impact measurement standards
and CDFI certification;

• Create high performance

collaborations to address various
key, distinct issues;

• Enhance the CDFI brand; and
• Implement leading-edge

technology, both customer facing
and back office.

Continuing, Mr. Narain presented
a vision of the probable future of
the CDFI banking sector that arose
from the strategic planning process.
This “probable future” includes a
highly networked industry, working
together to form collaborative
business models for capital raising,
operations, impact measurement,
and communications. An initial step

towards this future will involve the
upcoming CDFI Bond Guarantee
Program. This program has the
potential to inject enormous liquidity
into the sector. Mr. Narain
emphasized NCIF’s desire to facilitate
collaboration between CDFI banks to
leverage the program, which was
explored in more detail during a later
panel. Mr. Narain provided some
background on the current CDFI bank
ecosystem, which is an intricate web
of relationships between the bank,
regulators, nonprofits, and others.

The CDFI bank ecosystem
In the current environment, CDFI
banks are working in silos, diligently
focused on their own communities,
their own mission, and operating
profitably. Mr. Narain stressed that
through collaboration and effective
networking, CDFI banks can help
develop economies of scale and

foster innovation, build shared
knowledge and effective best
practices, while covering areas of
common concern, including capital
raising, risk management, finding
liquidity for investors, government
funding, impact measurement and
brand building, technology, shared
services, and research.

Collaborative business models
in action
Due to the geographical
distribution of CDFI banks, and their
relatively small service areas, they
rarely compete directly with one
another. Collaboration offers
geographically diffuse but likeminded institutions the opportunity

for higher visibility, greater financial
strength, and more social impact. Mr.
Narain stressed that NCIF welcomes
the chance to work with CDFI banks
(and aspiring CDFI banks) for the
betterment of the industry.
Finally, he focused on the idea of
“telling the story” of CDFI banking,
which is that the industry needs to
work cooperatively to achieve the
strategic and aspirational goals he
set forth. Mr. Narain discussed the
need for CDFI banks to work together
to measure and communicate the
impact they have in their
communities in a clear, transparent,
and efficient manner to investors,
regulators, and other stakeholders.
At the median, CDFI banks rate three

times higher on NCIF’s DLI-HMDA1
(Development Lending Intensity –
HMDA) metric compared to banks
generally (denoted as “all domestic
banks”), and four times for DDI2
(Development Deposit Intensity)
when compared to banks generally.
This implies that, at the median, the
CDFI banks have three times more
housing lending originated in lowand moderate-income areas, and
have many more branch locations
providing very scarce savings and
lending related services in these
same areas.
He stated that the CDFI banking
sector should commit to collecting
data for these and other metrics that
illustrate their significant, positive

The CDFI bank collaborative business model

15

Chart 1: Ten-year quadrant chart CDFI banks and peer groups

These institutions generate
reasonable financial returns in
normal times, and the panel stressed
that creating a compelling story that
captures both social and financial
outcomes will help attract investment
to fuel the growth and impact of the
CDFI banking industry.

Equity and deposits: Capital
raising

Source: DDI based on 2010 Summary of Deposits and Census data, available
from www.fdic.gov and www.ffiec.gov. DLI-HMDA based on 2010 Home Mortgage
Disclosure Act data, available from www.ffiec.gov.

impact in low-income communities.
For example, chart 1 details how for
the past 10 years, when plotting the
Social Performance Metrics of CDFI
banks compared to all banks and the
top 10 (“Top-Ten”) banks by assets,
CDFI banks have routinely
maintained a significantly higher level
of social impact performance.

The story and the plan for CDFI
banks
The first panel focused on the idea
of “telling the story” of CDFI banking,
featuring Raj Gupta, professor at the
Kellogg School of Management, as
moderator, and panelists: William
Farrow, president and CEO of Urban
Partnership Bank, IL; Deborah C.
Wright, chairman and CEO of Carver
Federal Savings Bank, NY; Preston D.
Pinkett III, CEO of City National Bank
of New Jersey, NJ; and Leigh Anne
Russell-Jones, treasurer of United
Bank, AL. The panelists discussed
their experiences as CDFI banks in
16

the current economic climate, what
challenges they face as the sector
grows, and how they are taking
advantage of new opportunities and
organizing behind shared goals and
strengths. Some themes that came
out of that discussion were that
investors and regulators do not
recognize the double bottom line of
CDFI banks and often do not fully
understand the business model.
There is a lack of knowledge about
the work that CDFI banks are doing,
and how the regulators view them
versus traditional banks, and what
types of financial – versus social –
return investors can expect from
these institutions. All of the
institutions that were represented on
the panel operate in economically
distressed communities, serving
those often most affected by the
current economic climate in a
responsible manner, and doing so
under the same regulatory
restrictions as traditional banks.

The second panel consisted of
investors, and focused on capital
raising and the investor perspective.
Laura Sparks, director of
Development Finance Initiatives at
Citi Community Development,
moderated the panel. She framed
the session by picking up on issues
raised in the previous panel,
specifically focusing on unique
business models, and distinguishing
the industry from the wider banking
and investment community with
regard to raising capital. Scott J.
Budde, managing director of Global
Social and Community Investing at
TIAA-CREF, Ommeed Sathe, director
of Social Investments at Prudential
Financial, Inc., Dan Letendre,
managing director of Global Social
and Community Investing at Bank of
America, and Frank Blanco of Keefe,
Bruyette & Woods were the panelists.
A key theme from this panel was that
despite foundational interest in the
sector due to its impact, there is a
lack of private sector investment into
CDFI banks due to liquidity and
return issues. It was also clear that
the compelling story of CDFI banking
is still not widely known among
potential investors, and that this is a
major hurdle in trying to gain the
attention of institutions seeking
double bottom line returns. However,
there was considerable discussion on
services and products that
mainstream institutions provide in
(continued on page 18)
			

Keynote speeches
NCIF was also very thankful to have three esteemed
keynote speakers, including Sandra Thompson of the
FDIC, John Hale III of the Small Business Administration,
and Donna Gambrell, director of the CDFI Fund, who all
reiterated their organizations’ support for the CDFI
banking industry.

Sandra Thompson, director, Division of Risk
Management Supervision, Federal Deposit Insurance
Corporation
Ms. Thompson opened the conference and focused on
how the FDIC takes particular interest in issues impacting
the CDFI banking industry. She talked about goals, and how
she wants to see the status of the community banking
sector as key to providing financial services in low- and
moderate-income communities. As she put it: “CDFIs are
catalysts for community development, and this economic
climate is an opportunity to expand impact. New products
and services represent an opportunity to recapture the
business of unhappy customers. No one understands
communities better than local banks.”

John Hale III, deputy associate administrator, Office of
Capital Access, U.S. Small Business Administration
Mr. Hale gave a keynote address stressing that the

Mr. Hale said there was a high cost to becoming involved
in SBA lending, so an economy of scale and utilizing shared
resources would be helpful for the industry. CDFI banks who
have successfully leveraged the program would be good
leaders within the CDFI banking industry in collaborative
efforts for more banks to become involved. He said that in
the future there would be increased SBA lending and
support for the CAP program, which will grow resources for
mission based CDFI banks.

Donna Gambrell, director of the Community Development
Financial Institutions Fund at the U.S. Department of the
Treasury
Ms. Gambrell opened the second day of the conference by
offering guidance and support for the CDFI banking industry
that is weathering one of its most difficult years and
witnessed the failure of several CDFIs. She focused on the
resiliency of the industry by encouraging institutions to
embrace their unique position to continue to create
considerable impact in the communities that have been
most affected by the crisis, and to take advantage of new
opportunities for growth that the economic landscape offers.
She suggested that the worst of the crisis was over, but
the impact on LMI communities, such as rapid deterioration
as a result of widespread foreclosures, remain considerable
challenges that the CDFI banking industry is positioned to

central theme of the SBA is job creation and the ARRA,

address. She accepted that there are fundamental

SBA, and the American Jobs Act have all focused on and

questions around the balance of mission and profit, to

are determined to press the economy forward. He

looking ahead or to simply hold on, to survival or raising the

highlighted that 200 lenders have returned to the SBA

bar. She said that there must be transformation from

program and they have exhausted their $17 billion authority

something that is merely possible into something that is

for the first time in history. The SBA relies on community

real, enduring, and sustainable. She recognized that NCIF

banks to reach this goal, and he reported that of the 86

provides a forum for discussing practical steps to achieve

CDFIs that are SBA microlenders, 75 are CDFI banks. Both

that transformation.

of those numbers are too low, and he believes there is
tremendous opportunity for collaboration.
He discussed several SBA programs that CDFI banks
might be able to leverage, including the microloan program,
which has a maximum loan limit of $50,000, and the
Community Advantage Program (CAP), which allows CDFIs
to access 7(a) loan funds.

Despite the difficulties facing the CDFI banking industry,
she provided three reasons to be optimistic:
• Power of innovation. The industry is creating a new road
map by developing a capacity for innovation to face new
challenges. CDFI banks are improving capital raising,
recruiting, and developing management. Ideas from last
year’s NCIF conference, like shared services and

17

backroom offices are an example. At Urban Partnership

CDFI banks play. Their Capacity Building Initiative provides

Bank, the ShoreBank legacy is being carried on, while

training and assistance to CDFIs. The BEA, FA, and NMTC

developing a new business network, microbranches, and

programs are essential for CDFI banks, and the new CDFI

a financial service center for nonprofit customers only

Bond Guarantee program will be a game changer.

one year after the acquisition.

She recognized that issues affect CDFI banks differently

• Power of collaboration. The difficult work that NCIF is

than other organizations for financial assistance grants.

doing via the Social Performance Metrics focuses the

Only two were awarded last year, but they want to make

strengths, financial position, and trajectory of the CDFI

sure there is geographic and institutional diversity. Each

banking industry message. When expertise and resources

year they are dealing with different dynamics, but she urged

are combined, reach is extended, and impact is multiplied.

the industry to continue to apply for these programs.

NCIF has been a leader in facilitating this collaboration.
• Power of vision. Capital can be an instrument of

She concluded by saying that the vision of the industry is
its life blood, its strength, and what communities and their

compassion. It can be an uplifting way for communities

own employees embrace. She said that even in difficult

to achieve self-sufficiency. People bring this idea into

times there is a way out and way up. Ms. Gambrell is proud

their communities and that vision has spread.

of the work being done and emphasized that it was a key

Ms. Gambrell said that the CDFI Fund will support

time for collaboration.

organizations that represent those three powers. They will
continue to advocate for increased funds for the critical role

NCIF Social Performance
Metrics and impact of CDFI
banks

Chart 2: Number of CDFI banks
90
80
70

Number of institutions

low- and moderate-income (LMI)
communities versus what CDFI banks
provide. The speakers suggested that
CDFI banks could experiment with
models of collaboration and strategic
partnerships with the larger
institutions to address this gap. A
synergistic model will help the banks
grow, and as a more cohesive story
develops surrounding the impact
CDFI banks are having in these
communities, there is potential to
increase investments from
stakeholders in these communities.

60
50
40
30
20
10
0

The next panel focused on the
Source: NCIF, CDFI Fund.
impact CDFI banks are having, and
what metrics can be used to articulate
this message to a broader audience.
analyst at the CDFI Fund, and Robin
Joe Schmidt, vice president of NCIF,
Newberger, senior business
moderated the panel, which consisted economist at the Federal Reserve
of James Greer, senior research
18

Year

Bank of Chicago. They each discussed
their research on CDFI bank impact,
and highlighted the need for more

collaboration within the CDFI banking
industry to collect and disseminate
data that shows how impactful the
banks are. Mr. Greer’s research
showed the CDFI programs that CDFI
banks leverage, including New
Markets Tax Credits, Bank Enterprise
Awards, and Financial Assistance, are
concentrated in the most highly
distressed communities. This
indicates that CDFI banks are an
effective conduit for these programs
to reach financially underserved
populations. Ms. Newberger focused
on how the CDFI banking sector
changed with the addition of the newly
certified banks following the
introduction of the Community

Development Capital Initiative (CDCI),
and the impact of, by definition strong
– given screens to qualify for CDCI –
institutions on the industry overall.
Ms. Newberger’s analysis (see chart
2) showed that the sector is stronger
with the addition of the recently
certified banks, but that many of the
new banks are still struggling to
reconcile the new mission focus with
their traditional business models.
However, Ms. Newberger found that
there is a lot of overlap with the
traditional products and services
many of the new institutions offer with
the types of services other CDFI
banks provide to low- and moderateincome communities, so this could

indicate that many of these
institutions are already meeting
double bottom line goals.
Mr. Schmidt drew attention to the
Development Impact Dashboard that
NCIF has created with the input of
many CDFI banks (see page 24 for
details on metrics). NCIF created a
publication containing Dashboards
for 16 institutions that was provided
to all attendees. The Dashboard is a
profile of a participating institution
that provides a uniform report of
data most important for presenting
return and impact to investors. NCIF
hopes to expand this work to many
other institutions, and hopes that
19

other CDFI banks would look to
partner with NCIF to further increase
the visibility of the impact CDFI banks
have in their communities. Above,
and on the previous page, a sample
dashboard is provided for Carver
Federal Savings Bank.

Governance, board composition,
and human capital for CDFI
banks
Charles Van Loan, director of
Independent Bancorporation and a
trustee of NCIF, moderated the
fourth panel on governance, board
composition, and human capital.
Panelists, M. Anthony Lowe, regional
20

director of the FDIC, and W. Ronald
Dietz, director and chairman of the
Audit and Risk Committee for the
Capital One Financial Corporation,
discussed the importance of
management and board composition,
especially during bad economic times.
Mr. Van Loan discussed the need for
board members to have familiarity
with banking and financial markets,
even if they are brought on as a
specialist in an area such as
information technology. He suggested
those types of roles might be better
filled by consultants. He supported
stringent criteria for board
membership and strict codes of
conduct for members, especially

important in the event a board
member needs to be removed. Mr.
Van Loan also suggested that board
members are good sources for
business referrals for banks, but
that they should avoid directly
sourcing loans.
Mr. Lowe focused on the skills that
the FDIC looks for when evaluating a
bank’s board, such as integrity,
relevant skills, experience, time and
focus devoted to the board, personal
financial stability, and the willingness
to dissent when necessary. Mr. Dietz
discussed the need for risk
management procedures and
policies, especially at several

levels within the organization. This
has become increasingly important
at small banks given the current
economic climate. He suggested
that organizations with more
formal and effective risk
management systems will
demonstrate better financial
performance in the future and gain
support from regulators as they
expand.

Opportunities, new issues, and
challenges for CDFI banking
The final panel on day one focused
on opportunities, new issues, and
challenges for CDFI banking. Joe
Ferrari, senior analyst at NCIF,
moderated this panel with John
Moon, assistant director of Capital
Formation at Living Cities, and Jodie
Harris, policy specialist at the CDFI
Fund as panelist. Mr. Moon
presented findings on the Integration
Initiative, a part of Living Cities
launched in 2010 to build an ongoing
cross-sector program that tackles
problems to improve the lives of lowincome people in their cities through
grants and below-market-rate loans
and commercial debt. Living Cities is
looking for more partners to be
involved at the project level, and
emphasized that CDFI banks could
take advantage of this opportunity.
Ms. Harris discussed the upcoming
CDFI Bond Guarantee Program,
which is a part of the Small Business
Jobs Act in 2010. Under the program,
the U.S. Treasury provides a 100
percent guarantee of bonds issued
by CDFIs, and will guarantee up to 10
issues a year for a maximum of $1
billion (minimal bond issuance is
$100 million). The Federal Financing
Bank will purchase the guaranteed
bonds, and they will not be sold in
the open market. Ms. Harris

compared the program to the
Historically Black Colleges and
Universities (HBCU) Bond Guarantee
program. While there has been some
delay, Ms. Harris stressed that the
final regulations should be
announced very soon.3
Regarding the issue of allowing
flexibility when institutions are facing
capital issues and want to partake in
the program, Ms. Harris noted that
the program will have that flexibility.
It will be sensitive to reduce the level
of work that goes into administering
the issuance of bonds so that the
cost of issuance remains minimal.
The focus is on making this work for
CDFIs and determining the best
structure for CDFIs. Currently they
are looking into recommendations on
structuring, and she mentioned that
NCIF is actively working with CDFI
banks to develop and implement
workable structures.

the intersection of community
development and financial
technology with Sunrise Bank’s
program, the Underbanked
Empowerment Journey. The program
was considering both technology and
mission with a central purpose to
bank one million un- or under-banked
people. It involves technologies and
services such as prepaid cards, and
has been a resounding success.
Other panelists included: John Davis,
senior vice president of FiServ;
Steven Doctor, COO of Chexar; Sarah
Livnat, senior director at Progreso
Financiero; and Steven Reider,
founder and CEO of Bancography.
Each demonstrated a piece of their
technology offerings that could be
useful to CDFI banks.

Mr. Davis started by discussing
how the unbanked are working
primarily in cash because of the
need for liquidity. He suggested that
using prepaid technology could
Mr. Narain concluded by pointing
leverage that relationship into other
out that this will be the single biggest programs, products, and services
source of liquidity for the CDFI sector. that would transfer the customer
The CDFI Bond Issuance Working
from transactions to financial
Group that NCIF is forming will
planning activities. This technology
constitute an important voice in the
can also extend functionality beyond
development of this program. He
bricks and mortar. He then
encouraged CDFI banks and other
introduced his colleague, John
stakeholders to contact NCIF to get
Lovelet, who demonstrated Popserv,
involved in this initiative.
a technology that allows electronic
client database construction, which
Intersection of financial
reduces transaction time (from 45
technology and community
days to three to five days in some
development
cases), and can reduce back office
Mr. Narain opened the first panel of costs for CDFI banks.
day two by stressing the need to
Mr. Doctor discussed Chexar’s
implement state of the art technology
check cashing services and the
into CDFI banks as a way to achieve
success that Carver Bank – a CDFI
cost reduction, better product
bank – has had with their product.
delivery, and attract investors as
He led a demonstration of this
technologies increase profitability. He
technology, and emphasized that
introduced David Reiling, CEO of
CDFI banks have an advantage over
Sunrise Banks, to lead the session.
check cashers because of their
Mr. Reiling began by demonstrating
21

location and their connection to the
communities they serve.
Ms. Livnat demonstrated the
interface for Progreso Financiero’s
Small Installment Loan program that
allows loan officers to quickly assess
and provide small credit loans to
underserved populations, and is
available to other financial
institutions such as CDFI banks. This
offers a clear example of utilizing
technology to improve the customer
experience, a lesson that can be
learned by CDFI banks.
Mr. Reider concluded with a
presentation on a design-centered
solution to operating branches with
lower costs. The Bancography
concept stresses that bank
branches are an essential part of
the urban context, and discussed
how Urban Partnership Bank has a
microbranch that they just opened
in Chicago using many of these
small-branch concepts. His
conclusion was that through smaller
formats, instead of in-store
branches, more sites become viable
for banks like CDFI banks that
operate in low-balance markets.

New Markets Tax Credits and
NCIF’s three-way partnership
program
The conference concluded with a
panel on the New Market Tax Credits
and NCIF’s three-way partnership
program. Joe Schmidt, vice president
of NCIF, moderated and gave a short
presentation on the NMTC program
and the three-way partnership
developed by NCIF that is structured
so that it directly benefits CDFI Banks
and allows them to gain experience in
the program and develop internal
NMTC programs. Blondel A. Pinnock,
president of Carver Community
Development Corporation, Alden J.
22

McDonald, president and CEO of
Liberty Bank and Trust, Steven
Kramer, senior vice president of NMTC
& HTC Investments U.S. Bancorp, and
Aaron Seybert, of Chase Community
Equity, served as panelists. They
discussed several projects that their
institutions had undertaken as part of
NCIF’s three-way partnership to great
success, both financially and in terms
of social impact in low- and moderateincome communities. Two examples
of note were the 4469 Broadway
project in New York between NCIF and
Carver, and the Pikeville College
School of Osteopathic Medicine
project in Kentucky between U.S.
Bancorp and NCIF.
The 4469 Broadway development
is located in Washington Heights/
Inwood and is a mixed-use, mixedincome project, with 17 of the 85
apartments reserved for low-income
families. The project has the
additional impact of helping to
establish a commercial corridor and
childcare service center for the
community. This project financing
closed in January 2012.
The medical school project was
built in a distressed, rural area near
Pikeville, Kentucky. The medical
school offers a free clinic to increase
capacity to 4,000 annual patient
visits in an area where there is a
shortage of medical services. It also
will help expand the current medical
school to provide training for new
doctors that can serve in the area.
The project financing closed in 2011,
and construction has begun.
The session concluded by putting
an emphasis on partnerships for
high-impact projects. CDFI banks are
the eyes and ears on the ground in
many of these projects. Mr. Narain
reminded participants that the
program is up for reallocation and

stressed that communities should
tell their congressional
representatives of the benefits of the
program and seek support for it.

Conclusion
The 2011 Annual Development
Banking Conference was designed to
discuss topical issues among the
broader CDFI banking industry and its
key stakeholders. It is focused on
helping the industry define a path
forward. To increase the visibility and
understanding of the sector, the
conference helps stakeholders
recognize the need to communicate
the impact these banks have – to “tell
the story.” As this message becomes
clear and spreads, it will help
strengthen the industry and increase
the ability of CDFI banks to continue
their work in low- and moderateincome communities.
NCIF’s second objective is to stress
the need for collaboration within the
CDFI banking industry, not only
around impact and documenting
successes, but around issues
stressed in all the panels, such as
capital raising, governance, best
practices, and technology. The CDFI
banks have shown how they can
individually have significant impacts in
their local communities, but to
achieve scale and further increase the
visibility and impact of the sector in a
meaningful way, they will need to work
together to make that future a reality.
NCIF would like to thank the Federal
Reserve Bank of Chicago for its
leadership in helping convene the
conference. Also, we would like to
thank our other sponsors whose
support made this conference possible
and affordable – Bancography, Bank of
America, JPMorgan Chase, Keefe,
Bruyette & Woods, Urban Partnership
Bank, U.S. Bancorp, and Wells Fargo.

CDFI Bond Guarantee Program
The CDFI Bond Guarantee Program is a part of the Small
Business Jobs Act in 2010. This program will provide much
needed capital for CDFI banks. Some highlights include:
•

The U.S. Treasury will guarantee bonds issued in
support of CDFIs.

•

Up to 10 issuances per year will be allowed, each at a
minimum of $100 million with a maximum $1 billion
per year.

job creation, provision of financial services, community
stability, commercial facilities, and development in lowincome or underserved areas. At a minimum, 90 percent of
the proceeds must be invested as loans to CDFIs.
The CDFI Fund announced that they expect the draft
regulations to come out soon – in the spring – and soon
thereafter the application materials will be made available.
However, due to the short time frame, the first set of
guarantees is unlikely to be issued until fiscal year 2013.
The following graphics illustrate two possible alternatives

•

There is a 3 percent maximum loss rate allowed.

•

The Federal Financing Bank (FFB) will purchase

for how the pool might be structured to work for CDFI

the bonds.

banks. Alternative 1 is a liquidity vehicle, whereby CDFI

Bond issuer must be a certified CDFI or designated by a

banks originate loans to the pool, while alternative 2 is a

CDFI to serve as issuer.

capitalization vehicle, whereby CDFI banks directly borrow

•

Proceeds from the bonds can be used to originate or
refinance loans to CDFIs for eligible community development
purposes. These include, but are not limited to, loans used for

from the pool. As the regulations are yet to be announced, it
is not clear exactly what structure will be allowed, but in
either case, the program promises to provide critical
support for the vital CDFI banking industry.

23

NCIF Social Performance Metrics – at a glance
In 2007, NCIF developed a methodology for identifying
depository institutions with a community development mission.
The resulting NCIF Social Performance Metrics initially utilized
publicly available census data, branch location data, and Home
Mortgage Disclosure Act (HMDA) lending data to measure the

• DLI-HMDA low income					
The percentage of an institution’s HMDA reported loan
originations and purchases, in dollars, that are provided to
borrowers that have a household income that is below 80
percent of the relevant geographic area.
• DLI-HMDA equity						

social output and performance of banks and thrifts. Institutions

The ratio of an institution’s HMDA reported loan

that score highly on the metrics are those banks that are

originations and purchases to the institution’s total equity.

focusing on serving the needs of low- and moderate-income
communities. NCIF has mined the data on all 7,300+ banks in
the country since 1996, and is able to analyze institution level
performance as of a certain year, over a period of time in the
past and against customized peer groups.

DLI – CRE, DLI – Agribusiness, DLI- Small Business, etc.,
based on reporting on all loan origination and purchase
activity that is provided by CDFI banks. The addition of these
DLI metrics allows stakeholders to comprehensively measure

Core metrics

and communicate the impact of the banks. NCIF investee

• Development Lending Intensity – Home Mortgage
Disclosure Act (DLI-HMDA)		

In addition to the housing focused DLI-HMDA, NCIF creates

banks provide this information, and many non-investees are

also reporting to distinguish themselves from the rest.
			

The percentage of an institution’s HMDA reported loan

NCIF’s full suites of Social Performance Metrics have already

originations and purchases, in dollars, that are located in low-

proven highly valuable to investors. For more information on

and moderate-income census tracts.

the NCIF Social Performance Metrics, please visit the NCIF

Web site at www.ncif.org.
• Development Deposit Intensity (DDI)				
The percentage of an institution’s physical branch locations
that are located in low- and moderate-income census tracts.

Additional metrics
• Adjusted DLI-HMDA					
The percentage of an institution’s HMDA reported loan
originations and purchases, in dollars, that are located in LMI
census tracts, not including loans classified by HMDA as highrate loans.
• DLI-HMDA highly distressed				
The percentage of an institution’s HMDA reported loan
originations and purchases, in dollars, that are located in
census tracts that exhibit a median family income that is 70
percent, 60 percent, 50 percent or 40 percent of the relevant
geographic area.

24

Notes

Biographies

1 DLI-HMDA: The percentage of an
institution’s HMDA reported loan
originations and purchases, in dollars,
that are located in low- and moderateincome census tracts.

Saurabh Narain is chief executive of National Community Investment

2 DDI: The percentage of an institution’s
physical branch locations that are
located in low- and moderate- income
census tracts.
3 At the CDFI Institute (CDFI Coalition
Policy Conference) held in March 2012,
the CDFI Fund announced that the
regulations will likely be announced
soon but that the first issuance will not
occur until FY 2013.

Fund. He is involved in policy and advocacy for the industry through his
board positions in the CDFI Coalition, and memberships of the Federal
Reserve Board’s Consumer Advisory Council (2008-10) and the Minority
Depository Institutions Advisory Council of the Officer of Thrift
Supervision (2009-11). Narain is a graduate of the BA Graduate Stonier
School of Banking, holds an MBA from the Indian Institute of
Management in Ahmedabad, and a bachelors of arts in economics from
St. Stephens College, University of Delhi, India.

Joe Ferrari is a senior analyst at National Community Investment Fund

(NCIF). Before joining NCIF, he attended the University of Illinois at
Chicago’s (UIC) graduate program in urban planning and policy and
focused on economic development and development finance. He
received both bachelor of science and master of science degrees in
general engineering from the University of Illinois at Urbana-Champaign.

25

ConneCTing To MaRkeTs seRies

Exploring Low-Income
Neighborhoods in the
Regional Context
Neighborhoods throughout metropolitan areas function very differently from one
another: some are primarily residential neighborhoods that, in effect, export labor;
others contain industrial, commercial and retail districts where goods and services
are produced and consumed. Lower-income neighborhoods often fail on both counts,
neither exporting labor nor acting as production centers that draw employees and
consumers from other parts of the metropolitan area.
Over the past decade, researchers have called attention to a variety of ways in which
lower-income neighborhoods participate in the regional economy, including discovery
by retailers of the untapped market potential of lower-income neighborhoods,
emergence of clusters of arts and cultural activity, and the role of anchor institutions
as employers and service providers.
Please join our national and regional panelists as they take on some of the hard
questions around low-income neighborhood connections to the regional economy.
How effective are these strategies on the ground? Taken together, can they produce
a meaningful increase to the contribution of urban core neighborhoods to regional
economic activity? How have community developers taken advantage of neighborhood
assets to advance their economic presence?

June 20, 2012
10:00 a.m. to 2:30 p.m. (Central Time)
national convening at the Federal Reserve Bank of Chicago
230 South LaSalle Street, Chicago, Illinois 60604-1413
The national panel discussion will be streamed live to all satellite locations and
will be followed by a regional discussion at each satellite location.
For updates on this event, please visit: http://www.instituteccd.org/calendar/4212

The Community Development and Policy Studies (CDPS) Division of the Federal Reserve Bank of Chicago supports
the Federal Reserve System’s economic growth objectives by promoting community and economic development.
To help further our mission and inform you about our work, we have created a blog on the Federal Reserve Bank of
Chicago’s Web site, http://cdps.chicagofedblogs.org. The blog started in October 2011 as a way to communicate
our progress on the Industrial Cities Initiative, and has transitioned into a team forum to address a wide variety of
research topics and community economic development issues addressed by CDPS. Often our research projects
have multiple stages and are conducted over a long period of time. That is also true of programs we undertake. We
plan to use the blog to inform you about findings at various stages of our research and programmatic work.
The CDPS division would appreciate your feedback on these blogs. To provide feedback, click on “leave a
comment” at the bottom of each blog entry. You may also subscribe to the blog by entering your e-mail address and
clicking the “subscribe” button on the right hand side of the Web page. You will then receive an e-mail alert every
time we post a new blog entry.

Published by Community Development and Policy Studies
Subscription is FREE. To subscribe or view current and past editions, please visit the Web site of the Federal
Reserve Bank of Chicago at: www.chicagofed.org/profitwise or fill out this form and send it back to us, and we
will add you to our mail list.

Name:
Company:
Address:
Phone:
E-mail:
Address Change
Please check your subscription preferences:

Print only		
Print & E-mail

E-mail only

NO POSTAGE
NECESSARY IF
MAILED IN THE
UNITED STATES

POSTAGE WILL BE PAID BY ADDRESSEE

ATTN: PNV - CDPS 12TH FLOOR
FEDERAL RESERVE BANK OF CHICAGO
PO BOX 834
CHICAGO IL 60690-9975

This issue of Profitwise News and Views is
printed on 100% PCW
PLEASE RECYCLE AFTER READING

Community Development and
Policy Studies Division
P.O. BOX 834
CHICAGO, IL 60690-0834

RETURN SERVICE REQUESTED
Attention:
Executive Officers
Board of Directors
CRA Officers
Community Lenders
Community Representatives
Profitwise News and Views is published by the
Community Development and Policy Studies
Division of the Federal Reserve Bank of Chicago
230 S. LaSalle Street
Chicago, IL 60604-1413

PRESORTED
STANDARD
U.S. POSTAGE PAID
CHICAGO, IL
PERMIT NO. 1942