OFN Recap #1: Capitalization, Public Policy, and Financing

Summit’s mission-oriented finance team recently attended the annual Opportunity Finance Network conference from November 9 to November 12, 2020. Due to ongoing concerns around the COVID-19 pandemic, the conference was held in a virtual format for the first time in its history. In total, the Summit team attended 41 breakout sessions over the four-day conference. These sessions covered different aspects of the community development financial institution (CDFI) industry related to the conference’s overall theme of finance justice. This three-part blog series discusses the highlights and key takeaways from the conference’s main themes:

Capitalization and Fundraising

The CDFI industry has a reputation as an expert in funneling capital into impactful projects, leading to increased corporate partnerships and interest from nontraditional sources. Notably, Housing Trust Silicon Valley recently partnered with Alphabet/Google to launch an affordable-housing project in the San Francisco Bay Area, while the Chicago Community Loan Fund, Local Initiatives Support Corporation, and the IFF fund jointly partnered with Starbucks to inject small-business capital into the areas surrounding Chicago’s Magnificent Mile on Michigan Avenue. These investments are a small subset of the large-scale programmatic investments made by multinational firms that recognize the expertise of the CDFI industry.

Moreover, CDFIs have leveraged investments from traditional sources in response to the COVID-19 pandemic. Capital Impact Partners partnered with nonprofit institutional investor Nonprofit Finance Fund and The California Endowment to create an emergency-relief fund that directly benefits California community-health clinics. Capital Impact Partners launched this fund by pooling patient capital from investors that were willing to forgo a traditional market-rate return, allowing more flexibility to distribute capital to the organizations directly affected by the pandemic. These programs would not be possible without the support and variety of capital generated through traditional and nontraditional investors.

Public Policy

While the Riegle Community Development and Regulatory Improvement Act established the CDFI Fund in 1994, other earlier key pieces of legislation like the Fair Housing Act of 1968 and the Community Reinvestment Act of 1977 (CRA) remain foundational elements that guide the work of CDFIs. Accordingly, CDFIs continually look to work with policy makers to improve legislation and secure additional and more flexible funding for programs that direct investment to low-income communities. The CRA, which was designed to prevent systemic redlining and other forms of discriminatory lending practices, was last updated significantly in 2005. Amid growing calls for CRA modernization to address the changing banking landscape, the Office of the Comptroller of the Currency (OCC) issued its proposed rule in May 2020, while the Board of Governors of the Federal Reserve System issued its own Advance Notice of Proposed Rulemaking in September 2020.

Both proposals seek to clarify CRA-eligible activities and their associated geographic qualifications. The Federal Reserve proposal specifically addresses additional assessment areas apart from physical location to capture mobile and internet-based banking activity and creates two separate tests for retail and community development activities. The OCC proposal also expands the list of qualifying activities. However, the most significant change in that proposal is a new assessment metric based on investment dollar volume. Critics of OCC’s proposed guidance argue it would incentivize banks to seek single large-dollar transactions to meet their CRA requirements and undermine the more holistic assessment approach that should define CRA modernization.

Financing

Systemic barriers to acquiring loans and credit have led to a widening wealth gap between white communities and communities of color. Stringent underwriting standards and lack of credit history often force low-income households to borrow under predatory-lending practices, with Black, Indigenous, and people of color (BIPOC) communities utilizing payday loans at significantly higher rates than white households, according to research from the Pew Charitable Trust. CDFIs acknowledge this resource gap and consistently leverage their expertise and local networks to bring financing options and technical expertise to underserved communities throughout the country. By adjusting underwriting standards to address the challenges of first-time borrowers, CDFIs provide flexibility by limiting the need for appraisals, examining overall payment history instead of credit scores, and offering loans with higher loan-to-value ratios that reduce the amount of existing capital necessary to secure a loan. Furthermore, CDFIs continue to expand products and strategies such as collective wealth building through cooperatives and employee ownership of small businesses. Along with these flexible underwriting standards and new strategies, CDFIs provide technical assistance and financial training to ensure first-time borrowers understand loan terms and that they are prepared to step into an ownership role.

The CDFI Fund continues to provide support to CDFIs across its programs. All existing programs were funded through the 2021 fiscal year, as was the new Small Dollar Loan Program (SDLP), an initial $5 million program designed to provide loan loss reserves and technical-assistance funding for CDFI small-dollar loan programs. The introduction of the SDLP has the potential to help CDFIs reach more borrowers, particularly first-time borrowers of color, who could otherwise not obtain financing from traditional financial institutions.

Check out the 2020 OFN Virtual Conference recap site to explore the official conference content for free.