The Promise and Responsibility of Community Finance

We are in the midst of a period of intense and frustrating contradictions for our country
in general and for community finance. Just take these examples:

• In an economy built on and sustained by credit, consumers now understand the importance of reducing debt levels, while businesses are increasingly having trouble getting the credit they need to survive, much less to get the economy growing again.
• Meanwhile, consumers who are seeking to pull in from excessive credit in order to save are increasingly faced with sudden unemployment that may force them to tap into their savings, including retirement funds.
• In the effort to prevent the collapse of the financial system, the government has extended its hand and wallet to large financial institutions and investment banks, most of which contributed mightily to the current crisis. At the same time, responsible smaller institutions, which have served their communities well and continue to do so, have largely been shut out. These include the vast majority of banks, credit unions, and all but a very few Community Development Financial Institutions (CDFIs).
• Finally, the need for community development finance has never been greater, yet the resources to support it have never been under more pressure, generating both short-term liquidity challenges and long-term funding concerns for CDFIs.

The challenge for community development finance is to some extent an extension of what the industry has faced for the past several years. Since at least 2001, Community Reinvestment Act (CRA)-based support of CDFIs has become harder to come by, pressured by a combination of demands for market returns, consolidation of the banking industry, and general disinterest in CRA . The CRA is a U.S. federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in their communities, including low- and moderate-income neighborhoods. More recently, philanthropies and pension funds, the source of many grants and investments in CDFIs, are facing enormous setbacks in a shaky and declining market, leading them to pull back—or at least not increase—CDFI investments. State and local governments face enormous budgetary concerns, drying up precious resources for community financial institutions. And capital markets are frozen, which has put at least a temporary stop to innovative financial initiatives that have been championed in the past. Even resources dedicated to community finance are pressured. Both the CDFI Fund’s investment programs and the New Markets Tax Credit have been vastly oversubscribed in recent rounds, and high-quality applicants turned away. Some relief has come in the recent stimulus bill, but it is unlikely to be enough. The Low Income Housing Tax Credit market, a source of both affordable housing and revenues for many CDFIs is in total disarray with the disappearance from the market of Fannie Mae and Freddie Mac (not to mention the lack of taxable income in general). And both the generally low, flat yield curve and financial pressures on CDFI borrowers have hurt, respectively, CDFI spreads and loan performance.