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NATIONAL COMMUNITY CAPITAL ASSOCIATION Chicago, Illinois November 5, 2004  .....................................................................  Lessons for Community Development Financial Institutions In leading a national network of community development financial institutions (CDFIs), NCCA has defined best practices in the field and helped meet a wide range of financial needs in rural and urban communities. The theme of your conference, “Growth through Change,” is particularly relevant. We are at a major crossroad in several areas of public policy and banking. Continued consolidation of the banking industr y, potential changes to the Community Reinvestment Act, and an evolv ing immigration policy are issues we all face. In any field, successful organizations must cope with change, consistently improve efficiencies, and recognize and seize opportunities. The question for you is: How can you increase the impact and reach of your financial institutions while dealing with these env ironmental changes? Today I want to discuss some topics to consider as you tr y to answer this question. I will talk about some lessons I lear ned 30 years ago in my for mer job at HUD in funding Neighborhood Housing Ser v ices of America, which still prov ides mortgage financing and related ser v ices to low-income people and communities. I will also discuss some practices and ideas used successfully by other financial institutions, including some of your competitors. And finally, I will talk about the Federal Reser ve’s efforts to promote full access to the nation’s financial system, including our support of the CDFI network. Looking at recent developments, there are some promising trends in your industr y. From 2000 to 2002, CDFI assets grew by an estimated 13 percent annually—that is an impressive record considering the slower economic growth early in the period. During fiscal year 2002, CDFIs financed 12,500 businesses and about 37,000 housing units, opened over 36,000 transaction accounts, and had total outstanding loans of $2.3 billion.  252  Michael Moskow Speeches  2004  In our financial world, growth matters, but that is not your principal goal. The most important goal of CDFIs is to continually move consumers once considered ‘high-risk’ or ‘unconventional’ into the financial mainstream, and we at the Federal Reser ve fully support this goal. To remain v iable and relevant as specialized financial institutions, you must constantly re-evaluate your ability to deliver ser v ices at the community level competitively and cost-effectively. Moreover, the financial products that you offer must prov ide a retur n, they must be in demand, and your ability to deliver the products must be sustainable. That takes careful planning, assessment, and cooperative, infor med efforts among funders and inter mediaries at ever y level. But, to succeed at your main goal, commitment and market awareness at the local level are critical. When I was an assistant secretar y at HUD in the mid 1970s, we prov ided special funding to a new organization—Neighborhood Housing Ser v ices of America—that effectively balanced local market awareness and growth. There are parallels between NHSA and NCCA. Both organizations are affiliated with a broad network of small, independent institutions that offer financial ser v ices to underser ved markets. And both have achieved ver y low default rates while doing so. NHSA grew out of the joint work of the Federal Home Loan Bank Board and Neighborhood Housing Ser v ices of Pittsburgh. They had established training for loan officers ser v ing older Pittsburgh neighborhoods in order to show lenders how to make safe, effective mortgage loans to nontraditional borrowers. Their objective was to preser ve neighborhoods, rather than tearing them down under programs like Urban Renewal. The Federal Home Loan Bank committed to offering similar training in other parts of the countr y. Often, these training workshops for med the basis for new NHS chapters, now known as NeighborWorks organizations. Thanks to the network of NeighborWorks offices and the commitments of many national and local organizations, financial institutions, and gover nments, NHSA continues to stimulate neighborhood rev italization efforts around the countr y. At first, the local NHS loan pools were funded almost exclusively by foundations. As demand grew, the foundations could not meet it alone. To help address the shortage of funds, the Oakland NeighborWorks, led by Mar y Lee Widener, implemented a national loan-purchase resource, NHSA. The funds that we prov ided when I was at HUD supported the creation of this secondar y market for NHS loans; in fact, we were the first group to prov ide funding for the program. NHSA bought loans from local NeighborWorks offices, securitized them, and sold the securities to investors at a moderate discount to market rate. This secondar y market was critical for NHSA’s expansion in two ways. First, it created a renewable funding resource for the revolv ing loan funds of NeighborWorks. Second, it prov ided cash flow for NeighborWorks to conduct homebuyer counseling and “hands-on” loan ser v icing. One important lesson of the NHSA model is that when you prov ide full-cycle ser v icing and counseling, you lower the default rate, which enables you to prov ide affordable financing. Over the years, these efforts have yielded extremely low default rates, even lower than default rates in the conventional mortgage market. These low default rates keep capital markets interested in the securities and that keeps the cost of capital low. To achieve similar success, CDFIs must also demonstrate that its borrowers can repay loans, and may even have to arrange credit enhancements beyond customary norms. For the inexperienced borrowers that CDFIs target, intensive services such as initial borrower training; dynamic, hands-on loan servicing; ongoing counseling; and even the ability to intervene if a borrower experiences a crisis may be necessary.  Michael Moskow Speeches  2004  253  A second lesson from the NHSA stor y is the importance of relationships with various organizations. NHSA’s early successes stemmed from its partnership w ith the Federal Home Loan Bank. Subsequently, it benefited from the involvement of officials at the Federal Reser ve, the OCC, and the FDIC. NHSA has also established strong relationships with insurance companies, pension funds and others that invest in their securities. The NHSA stor y offers many lessons for success, and it is a worthy case study of what can be achieved by thinking creatively, planning with a holistic approach, and building on existing resources. Still, there are other lessons you can lear n from groups closer to home, including your competitors. While you and your competitors both target the same market segments—those just outside the margins of the economic mainstream—you do so with different goals. The primar y goal of CDFIs is to continually move those consumers into the financial mainstream. By contrast, the overarching goal of so-called fringe financial institutions—such as check cashers, currency exchanges, and payday lenders—is profit. With this goal in mind, these fir ms are successful at connecting with their customers, marketing their ser v ices, and managing their costs. For example, one reason that check cashing ser v ices are popular is because they make their ser v ices convenient. Similarly, currency exchanges and other vendors offer immigrants a network to rapidly process remittances to their family members in other countries. And when these institutions find that they cannot perfor m a routine activ ity efficiently, whether it is processing a remittance or rating a customer’s credit histor y, they subcontract it to a business that can. This allows the fir ms to minimize costs and leverage strong brands, enhancing their marketability. I am not here to offer explicit support of check cashing ser v ices, currency exchanges, and payday lenders, but only to suggest that they might offer some ideas to broaden your impact as community inter mediaries. After all, one high priority issue that the NCCA is addressing is the aggressive pricing and predator y lending by some of these fir ms. The best way to do that is to become a v iable alternative; and that means lear ning from your competitors how to gain further efficiencies in delivering new and existing ser v ices. All of the issues I have touched on, access to financial ser v ices for underser ved populations, capital markets access, and predator y lending are high priorities for the Federal Reser ve System and the Federal Reser ve Bank of Chicago. We offer a number of ser v ices that can help community lenders, including our newest ser v ice, ACH Inter national, which connects our clearing ser v ice with that of the central banks in Mexico, Canada, and five European countries. This ser v ice allows banks to send funds abroad for a much lower cost per transaction. Additionally, through our consumer and community affairs div ision, we research and address many topics related to understanding participation in the nation’s financial system. We conduct original research, build on research of others, and prov ide forums where interested parties can share ideas, thereby working to infor m the public policy debate. For instance, we hosted a capital markets workshop organized by Wall Street Without Walls earlier this week. If you are interested in our ser v ices or our research and events in this area, I encourage you to go to our website,, for more infor mation. We are also an active supporter of CDFIs, and support your mission in tangible ways. For many years, we have hosted workshops and training sessions at the Chicago Fed, and we have used our publications to describe the impact of CDFIs in our region. We have encouraged the development of new partnerships between banks and CDFIs; we have brought together the parties that are interested in for ming new community inter mediaries; and we have helped banks within our five-state region  254  Michael Moskow Speeches  2004  become CDFIs. There are many Fed staff around the countr y that work with members of NCCA’s network; Harr y Pestine coordinates most of this work at the Chicago Fed, and I think you won’t find a more devoted and infor med supporter of your work in the Fed System. In closing, your role as community inter mediaries is one that is growing in importance. As you continually redefine the financial mainstream, the test before you is to deter mine ways to leverage your strength as a collective group. Some of your competitors at the neighborhood level also work on the margins of the financial system, and you can lear n from these organizations, even if you do not agree with their pricing practices. In our financial world, growth matters, but it cannot be the principal goal. Your local commitment and knowledge are, again, always critical. But your success will also depend on working with the right partners and coming up with creative ways to build broad networks to access capital, market your ser v ices, improve efficiencies, and manage the costs of your routine but important functions.  Michael Moskow Speeches  2004  255