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April 15, 2005
CARS Hits the Road: First Seven Community Development Financial Institutions Rated
    by William Baue

The National Community Capital Association CDFI Assessment and Rating System has another 11 ratings in the works, and expects to by fully operational by 2007.

One driver of investment is objective, third-party ratings, for example bond ratings issued by Standard & Poor's, Moody's, and Fitch. Investors interested in community investing now have a new tool to help them assess community development financial institutions (CDFIs). This week, the National Community Capital Association (NCCA) announced the first seven CDFIs to be rated by the CDFI Assessment and Rating System (CARS).

CARS has received the stamp of approval from one of the most prominent and significant economists in the country, Federal Reserve Board Chair Alan Greenspan.

While still in its early stages, CARS represents "a critical step in advancing understanding of the community economic development finance field and in designing policies and practices that can improve economic opportunity for low-income families and neighborhoods," Mr. Greenspan said in a recent speech on community development.

The first CDFIs rated include the Austin Community Development Corporation, the Florida Community Loan Fund, the Low Income Investment Fund, the Montana Community Development Corporation, the New Hampshire Community Loan Fund, the Northern Economic Initiatives Corporation, and the Rural Community Assistance Corporation. There are currently 11 more CDFIs being rated, including Boston Community Capital, Coastal Enterprises Inc., the Reinvestment Fund, and the Unitarian Universalist Affordable Housing Corporation. NCCA expects to release a total of 20 ratings by the end of 2005.

The rating system consists of two primary quantitative components. The Financial Strength and Performance rating (on a scale of 1 to 5) analyzes CDFIs' creditworthiness by looking at past financial performance, current financial strength, and potential risk factors. It does so utilizing a CAMEL (Capital, Assets, Management, Earnings, Liquidity) analysis. In this way, it resembles traditional bond rating schemes.

CARS also consists of the Impact Performance rating (on a scale of AAA, AA, A, and B) assesses social returns, evaluating how effectively CDFIs achieve their stated missions. Additionally, CARS includes a 15 to 20 page narrative analysis, which comprises a peer comparison that results from a site visit that includes interviewing management and reviewing documents and files.

"As an investor, Wachovia thinks CARS ratings will help rationalize capital-raising among CDFIs," said Catherine Dolan, senior vice president and managing director of community development finance at Wachovia, a CARS subscriber. Ms. Dolan also serves on the CARS Advisory Board. "We will certainly look for the CARS analysis for any individual borrower and plan to include it in our assessment, just as we use ratings from mainstream rating agencies like Moody's, Standard & Poor's, and Fitch in our market rate businesses."

CARS is available for individual purchase at $2,500, a three-pack over a 24-month period for $5,000, or an annual subscription to access all ratings for $15,000. Thirteen major investors have already subscribed to CARS, including the Calvert Foundation, Fannie Mae Foundation, the Ford Foundation, Trillium Asset Management, Washington Mutual, and the FB Heron Foundation.

NCCA plans to conduct 10 to 15 more CARS ratings in 2006 as part of a three-year soft launch before becoming fully operational in 2007.

"This new rating system will be instrumental in paving the way for new investors who are looking for a solid financial yield and a high social impact yield," said Mark Pinsky, president of NCCA.


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