January 27, 2009
Investors Embrace Community Development Loan Funds to Invest Safely While Earning Interest
by Robert Kropp
As interest in community investing grows, CDLFs are proven vehicles for investment in affordable
housing and other projects.
Socially responsible investors who choose to invest with their values have embraced community
investing as an effective means of doing so. According to the Community Investing Center, a project of the Social Investment Forum Foundation and Green America, the amount of money involved
in community investing grew from $5.4 billion in 2000 to $20 billion in 2006.
Community investing provides financing for economically
disadvantaged people in the US who are underserved by traditional financial institutions.
Investors have three primary community investment options.
The first two options for the
practice of community investing is by banking with a community development bank or community
development credit union, which focus on funding economic development in low- and moderate-income
areas. As with traditional banks, they offer CDs, savings accounts, and checking accounts which are
federally insured up to $100,000.
(On October 3, 2008, FDIC deposit insurance temporarily
increased from $100,000 to $250,000 per depositor through December 31, 2009. The NCUA, which
insured deposits for credit unions, took the same action.)
Investors who want to make a
bigger impact have turned to community development loan funds, which provide affordable financing
for low-and-middle-income projects in the communities served by the CDFLs. Because investors commit
to investing their money for a specified length of time, their funds can provide dependable
low-cost financing to worthy causes.
Community development loan funds operate in specific
geographic areas and act as intermediaries that pool investments and loans provided by individuals
and institutions, often at below-market rates, to further community development. Many loans are
used to expand affordable housing, as well as economic development projects, cooperatives,
community-based nonprofit organizations, and community services such as day care centers.
One of many community development loan funds is the Vermont Community Loan Fund. SocialFunds.com spoke with Jake Ide,
Director of Development for the Montpelier-based organization.
"Our Social Investment Term
Account requires a minimum investment of $1,000. Its current terms are 2% for one to two years, 3%
for three to four years, and 3.5% for five years," Ide said.
Such terms seem fairly
typical of community development loan funds. The Boston Community Loan Fund
also requires a minimum investment of $1,000. By setting a relatively low entry point for
investment, community development loan funds can increase the number of investors in their
products, and maximize the availability of loan capital and technical expertise to low-income
Investors who put their money into CDLFs agree to accept market or
below-market interest rates such as those quoted by Ide of the Vermont Community Loan Fund. While
returns on investment may be more modest than those of other investment vehicles, the inclusion of
community investing in a diversified portfolio can help reduce risk and achieve a variety of
Ide pointed out that the interest rates quoted above were the
maximum rates. Many investors in CDFLs choose a lower interest rate in order to make the cost of
lending lower, thereby helping the loan funds to do more.
Ide said, "In Vermont,
investors who choose a lower interest rate are eligible for an income tax credit from the state."
Community development loan funds are not federally insured. Asked to describe some of the
safeguards for investors, Ide said, "We do a number of things to protect our accounts. We keep a
certain amount of equity on hand as a loan loss reserve. None of our $4.5 million dollars in
equity—which is derived from grants and our earnings—is invested in the stock market. It is in
money market accounts, and thus not at risk."
"Our borrowers work a lot more closely with
us than they would with a bank," continued Ide. "When a borrower gets into trouble, we know that
ahead of time and can provide technical assistance to help them get back on track. Doing so has
helped us mitigate a lot of the risk that a more impersonal lender might face."
for members of the Opportunity Finance
Network, many of which are CDLFs, are less than 2%—all of which are covered by loan loss
reserves. None of the investors in CDFLs that are members of Opportunity Finance have ever lost a
penny of principal.
The socially responsible investment philosophy of community
development financial institutions has always attracted those who invest with their values, which
has led to reliable track records for these institutions. The flexibility of the products offered
to investors by these institutions allows for shaping an investment portfolio that achieves the
objectives of community investing. And with stories of lifetime savings being lost in the current
economic meltdown, the steady profitability of investing in CDFLs makes the choice of such an
investment even more attractive.
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