Responding to Community Housing Needs


The Realities of Poverty in Delaware 2007-2008

Investing in Community

By Karen Kollias

Introduction

This article describes my humble observations of the importance of credit for community development, and how much of this credit has been brought to our “collective community development tables” over the years. Amazingly and fortunately, I have been involved with community development borrowing or community development lending for most of its history. The following describes early community development lending, leading to the CDFI (Community Development Financial Institutions) movement and its impact on lending over the last decade. Finally, there are thoughts about the credit culture in Delaware, along with suggestions of how we can participate with community development lending moving forward.

Over the past decades, people were convinced that the lack of housing production (or the lesser amount of production) was due to the lack of credit. But, if funds were available, this money was often seen as the “resource you hate to love.” (especially given its cost) During this period of time, reliance was placed on government funds, personal sources and contributions. Some “partners at the table” searched and found valuable resources through Loan Funds, governmentsponsored entities or Development Banks (like Shore-Bank). These early organizations paved the way to the success of balancing the business standards of banking while meeting goals with community development lending.

Also during this time, we were/are fortunate to have received the Home Mortgage Disclosure Act and the Community Reinvestment Act as tools to increase the capacity for community development lending. It has been nearly 30 years since the receipt of these and other tools, which created or leveraged significant sums of funds for affordable housing and other community development projects. There was especially an “active” time of what people called “CRA lending.”

Banks were interested in buying or selling banks and they knew they had to have satisfactory or excellent CRA ratings for approval. The other parties at the table - community advocates, etc. — became sophisticated in negotiating “CRA Agreements” with significant funds going into community development areas and projects. What is interesting during this period of growth for the community development credit culture is attention to becoming self-sustaining. Also during this time, loan pools were created as a risk-sharing measure of investing capital in products or locations that were perceived as a higher risk. There was a push for the opening of branches for banks, especially in locations where there was significant credit needs. Consortiums and partnerships were established, sometimes to fund a group of loans and sometimes for singular large projects. The partnerships often involved public sources at the state and local levels. Some of these vehicles are still in place today. During this time, community development lending moved from a “movement” to a formal line of business.

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The Credit Culture Continues to Grow

The CDL business continued to grow into the 90’s. At that time, a major tool for community development lending was the creation of the CDFI Fund in 1994 which was placed within the Department of Treasury which is where it is still located. There were a number of ways that CDL was growing which affected in a positive way how the CDFI Fund and its tools were and still are being used, including:

  • traditional financial institutions were developing and operating community development lending units and entities; in this situation, community development borrowers had the ability to work with lenders familiar with the financial packaging of community development projects;
  • traditional financial institutions searched for ways to gain support for their other business opportunities (i.e., bank mergers and acquisitions), so they became focused on the use of the Community Reinvestment Act, which resulted in products needed in their target areas and how they could address them;
  • community development loan funds and (CDLF) community development credit unions (CDCU) looked at product expansion and raising capital to make them more significant financial players for community development, in their important target market, and
  • community development banks were highlighted as “best practices” balancing community impact with financial feasibility in their lending, deposits and other financial services.

Certification as a CDFI, became important for investors and others to measure their operational, marketing and capital capacity. The investment of capital into CDFI’s from banks further strengthened the credit culture for CDL overall. Even the name itself, “CDFI”, shows that thoughtful consideration was placed on how the programs and certification are viewed within the Fund. For example, depending on what point I try to make, I refer to the “CD” of the CDFI, or the “FI”. It is clear that the “CD” means the community development side of a financing entity. To be certified, the lender has to provide its target market with community impact, accessibility and affordability of loan products and the ability to provide development services that connect to the actual lending. And on the “FI” side, the Fund wants to make sure that the organization has the reporting, compliance, underwriting, capitalization and financial management in place for the institution.

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Continuing to Support the Growing Credit Culture

There are still lessons learned from the Credit Culture that are worth noting. It also means that the community development/CDFI line of business is still a work in progress and there is still room for all parties to grow into related to this lending. For basic informational steps:

  • recognize that credit is always available; it is a matter of borrowers and investors being sure that what they are looking for matches up with CDFI’s and their goals;
  • learn which financial institutions and CDFIs lend in their areas; it is easy to find out about the CDFIs at the CDFI Fund’s website;
  • develop relationships with different types of lenders, depending on the diversity of the projects requiring funds; not every financing entity offers all products and all locations;
  • learn about the target markets of the CDFI’s — and how they may match up with their locations of interest;
  • learn more about how the lenders underwrite and structure their loans. For a long time, people often avoided lenders because they thought the cost of the loan (interest rate and fees) was too high; and that their requirements are difficult to meet (like cash collateral above and beyond the typical liens of the project being financed);
  • Interested parties state that the project(s) they are trying to finance cannot afford traditional debt. Our experience is that there are some projects that fit this. What is often the case is that a community development loan may be able to support 50 to 95% of a project’s development costs. There are gaps that need to be filled, typically with equity (grants, nonrepayable investments, government sources, etc) and the parties need to be aware of these other flexible sources;
  • In order to leverage the community development credits, cooperation between the parties is necessary. Government entities should be aware of other financial sources and how they may fit it, and where gap financing is required, to make sure that the borrower(s) know where these resources may be located.

The good news is that as the culture of community development credit advances, there are more financial resources available than one may think. For those that still hope to find “free” credit, that may not be as available, at least not from the private sector institutions. However, the flexibility of structuring loans and the accessibility of the financing is strong.

What’s Up in Delaware?

The growth of our national community development lending culture, is also happening in the State of Delaware. With a smaller state and fewer overall resources, this makes it easier for people to know where the credit is available overall. It is worth noting that there are three certified CDFI’s (as of end of 2007) which are: (1) the Delaware Community Investment Corporation; (2) the First State Community Loan Fund, and (3) the NCALL Loan Fund. All three have varying products, target markets and they complement one another.

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Keeping the Credit Culture Growing

Moving forward, one of the issues of community development lending is to make it self-sustaining. Since most of the lending activities are operated as businesses, the good news is that the banks, CDFIs and government programs will continue unless there are serious profitability and capacity issues. Government programs may be more at risk if they are reliant on other government sources which may be cut back. But here are some suggestions to support the maintenance and growth of community development lending in Delaware (which cover all parties):

  • learn more about which financial organizations are doing community development lending and the types of products they are offering; a recent CASCADE publication from Winter 2008 was developed through the Federal Reserve Board of Philadelphia and this issue was devoted to a number of regional CDFIs.
  • tell the story of community development lending (and ask about it), highlighting how much the private sector resources (including CDFIs) are leveraged.
  • increase the use of the lenders/CDFIs as resources to understand market risk (especially these days) and how the private sector is viewing it; a review of the financial assumptions of development projects
  • join or renew related technical and membership organizations -- Opportunity Finance Network, the national membership organization for community development lenders; Delaware Housing Coalition and Delaware Community Reinvestment Council;
  • learn about New Market Tax Credits as another capital source for primarily non-residential projects (the certification of organizations to do New Markets also comes from the CDFI Fund); New Markets acts as a tax credit through the Department of Treasury for support of commercial real estate and business investments, in designated areas.

In closing, the community development lending culture, along with the CDFIs generally, is growing, becoming more sophisticated and self-sustaining. While there are difficult financial times with market segments now, the diversity of financial organizations will remain involved in the CDL business. So, the four sets of partners should remain at the table.

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