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December 19, 2007
Buying and Selling Loans for the Good of Communities
by Anne Moore Odell
The Community Reinvestment Fund USA offers investors a way to help keep capital flowing into
community development organizations.
SocialFunds.com --
Started in 1988, the Minneapolis-headquartered Community Reinvestment Fund USA (CRF) works to create liquidity for the community development
finance system. It buys loans from public and private non-profits and governmental community
development organizations and pools the loans together into asset-backed debt securities.
 CRF then makes the securities available to
institutional investors. Since its inception, it has enabled organizations to lend almost $1
billion dollars to low-income communities.
This secondary market for community and
economic development loans makes it possible for the original community development lending
organizations to collect almost all of the moneys owed them much more quickly than if they were to
wait for the loans to be repaid. Lenders are therefore able to offer more loans to the people and
communities they serve.
“We concluded our fiscal year on June 30, 2007, with one of the
strongest years in our history,” said Frank Altman, President and CEO, CRF USA. “We exceeded many
of the goals we set out to achieve. In particular, we delivered more than $210 million to
low-income communities using the power of the secondary market as a sustainable resource to rebuild
communities. This was the highest volume in our history. In the face of the early signs of the
melt-down of the credit markets, we ended the year with in increase in net assets of more than $1
million,” added Altman.
Through its partnerships with community development organizations,
CRF has served over 100,000 families, resulting in 32,789 jobs created and retained, 15,771
affordable housing units and funding for 457 minority- and women-owned businesses.
CRF
works with community development lenders when buying the loans, and either services the loans, or
the community development organizations themselves can continue to service the loans. CRF is
sensitive to the borrowers of the loans they service, with staff trained to recognize issues around
first time borrowers. CRF also can help with training and technical assistance.
CRF is
aware that the borrowing to invest or “leveraging” has been used in the past unethically. However,
it explains where all its funding comes from and how its loans are repaid. CRF allocated 2% of a
debt security as protect against possible losses, and typically this 2% is from charitable grants.
A little less than 20% of the funding is from “social investors” who are repaid on different terms
than people looking for market-rate investments. These equity-equivalent investments (EQ2) are
often repaid at a lower interest rate or on a different repayment schedule. The majority of the
funding (80%) is from institutional investors who get a market rate of return.
Social
investments enable CRF to attract more market-rate capital, which in turn, creates more funding for
economic development Altman explained. Social investors financial returns range from 1% to 4%,
depending on the nature of their investments.
In addition, CRF has recently created a
Program Related Investment (PRI) for institutional investors and high-net-worth individuals with
qualified investment advisors. It is structured like a traditional PRI with a below market rate of
return. Investors receive updates to how the loan moneys are spent. The minimum investment for the
PRI is $500,000, with interest rates being negotiable.
“In our 19 year history, CRF has
pumped nearly $1 billion into low and moderate income communities and it has never missed a payment
to its investors,” explained Altman. "As importantly, investors should expect superb social impacts
These funds have been used to create affordable housing, schools and multi use facilities, support
small businesses and build the capacity of community lenders to utilize the secondary markets to
bring more capital to underserved communities."
While social investors receive an
economic return that is below market, the notes that CRF issues to institutional investors are
rated by Standard & Poor’s and carry interest rates commensurate with their risk. Additionally,
banks receive Community Reinvestment Act (CRA) Credits for making community investments in CRF.
CRF has made loans in rural and urban communities in 46 states and investors can often
chose a specific geographical location to invest in.
“We monitor our performance monthly
and report on our performance quarterly against the goal,” said Altman. “Investors receive
quarterly updates on our progress. Over CRF’s history, we have delivered more loans in targeted
geographies than our investors have required.”
CRF was recently awarded a Social Capital
award by Fast Company
Magazine and Monitor Group. The annual
awards are given to non-profits that use “the tools of business to solve the world’s most pressing
problems.” The January 2008 edition of Fast Company Magazine will feature CRF and other non-profits
acknowledged by the award.
“CRF is one of the nation’s largest community development
entities, and has been a true leader in the secondary market for community development loans,”
Tammy Hobbs Miracky, Senior Consultant for the Monitor Institute, told SocialFunds.com. “The scale
of CRF’s impact is large, which has freed significant capital that can be reinvested in community
development projects.”
“I am thrilled we have been recognized with a Social Capitalist
award,” said Altman. “We always have sought to harness the financial clout of Wall Street to
benefit the small businesses of Main Street, so this award is particularly meaningful. Being
recognized as a social capitalist pioneer urges us all to redouble our efforts to drive community
impact in economically underserved areas throughout the country.”
©
SRI World Group, Inc. All Rights Reserved.
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