February 25, 2004
Study Finds Loans to Low-Income Borrowers No More Risky than Conventional Loans
by William Baue
Research released yesterday finds that community development financial institutions serving
low-income clients have a lower rate of loan write-offs than mainstream banks.
Who is more likely to default on a loan: low-income borrowers at community development financial
institutions (CDFIs), or the more affluent borrowers that mainstream banks serve? Contrary to
intuition, the latter represent a bigger write-off risk, according to a new study conducted by the
National Community Capital Association (NCCA), which represents more than 100 CDFIs.
In 2002, the net charge-off rate (or percentage of loans written off as
uncollectable) for all US commercial banks was 0.97 percent, according to data sourced from the
Federal Deposit Insurance Corporation (FDIC). The NCCA study,
entitled Community Investing 2002: Safety & Soundness Data Findings, reports that the net
charge-off rate for the 138 CDFIs in its sample was only 0.7 percent during that same fiscal year.
"[M]aking investments in low-income communities is no riskier than doing business in
mainstream markets," said Mark Pinsky, CEO of NCCA. "This study shows that CDFIs provide investors
the opportunity to be socially responsible and financially prudent at the same time."
Although the study supports this assertion, it cautions that the sample represents "a sub-set
of the industry of approximately 800-1,000 CDFIs," and thus "the trends and statistics presented
here cannot be generalized." It also acknowledges that number-crunching for the study was done by
NCAA, and the study was not externally audited.
The study confirms the findings of NCCA's
previous study, CDFIs: Bridges Between Capital and Communities, which documented 2001 net
charge-off ratios of 0.9 percent for commercial banks and 0.5 percent for the 107 CDFIs in its
sample. Both studies were released by the Community Investing Program, a joint initiative of the
Social Investment Forum (SIF), the
organization representing the socially responsible investing (SRI) industry, and Co-op America.
Moreover, the new study finds that
"CDFIs have not lost a penny of investor capital." The surveyed CDFIs achieve this degree of
security by maintaining loan loss reserves of 5 percent on average, and an average equity capital
of 27 percent, "which are both more than sufficient to absorb portfolio and operating losses,"
according to the study. CDFIs also typically provide more technical assistance to their clients
than mainstream banks provide for their borrowers, and CDFIs monitor their loans more closely.
The study also provides an impressive snapshot of the historical accumulation of social
benefits generated by the surveyed CDFIs. Through the end of fiscal year 2002, these CDFIs
provided more than $6.6 billion in cumulative financing, helped create almost 186,000 jobs, and
backed the building of more than 283,000 housing units and almost 4,000 community facilities.
The study also provides a socioeconomic snapshot of those assisted by the CDFIs in 2002: almost
70 percent were low-income, while almost half were minority, and almost half were female.