sri-advisor.com
where checking accounts rebuild communities
Back to homepageInstitutional ReportsSRI Financial Professionals DirectoryToolsNewsSRI Performance and TrendsAbout Us   
News


April 16, 2009
Rating System Helps Investors Assess Social and Financial Performances of CDFIs
    by Robert Kropp

In the first quarter of 2009, the CDFI Assessment and Rating System added seven CDFIs to list of 46 that it has analyzed, and it hopes to rate an additional 23 by year's end.


The more than 1,000 community development financial institutions (CDFIs) in the United States promote economic development in areas underserved by traditional financial institutions by providing financial services such as mortgage loans and commercial loans to small businesses. CDFIs can receive funding for their activities from the CDFI Fund, a program of the US Department of the Treasury, but a crucial source of support for CDFIs is private investment, as well.

One reason for the dramatic growth of CDFIs since the 1990s is the confidence of investors that the institutions are meeting their objectives of effectively providing financing for underserved communities. In order to help maintain investor confidence and by doing so maximize the flow of private investment to CDFIs, the Opportunity Finance Network (OFN), a national network of CDFIs, created the CDFI Assessment and Rating System (CARS), an independent project of the Network, in 2004.

According to a CARS On the Road, an annual overview of the system, its methodology is designed for nondepository CDFIs that have a significant majority of their assets invested in loans. By providing CDFIs with greater credibility and transparency, CARS can help increase investment in CDFIs by streamlining the underwriting process, attracting new investors, promoting the alignment of capital with CDFI performance, providing a third-party assessment of CDFI performance, and promoting industry-wide performance standards for CDFIs.

To date, CARS has assessed and rated a total of 46 CDFIs, including seven whose ratings were completed in the first quarter of 2009. According to Paige Chapel, one of the original CARS analysts and since 2008 its executive vice president, "We plan to rate 30 CDFIs in 2009, and we hope to do 40 next year."

Chapel continued, "CARS provides investors with an ongoing monitoring service. We rate a CDFI every three years, but issue annual interim reports to keep investors up to date."

SocialFunds.com spoke with Pat Thomson, President of the Grow America Fund (GAF), an entity of the National Development Council. GAF operates as a community development lender that provides financing to growing small businesses throughout the country, and was one of the CDFIs rated by CARS in the first quarter of 2009.

Thomson said, "We borrow from a number of banks and financial institutions to fund our mission of providing small business lending in distressed communities, and we hope the CARS ratings will help the banks with which we work simplify their due diligence process."

Chapel acknowledges that the CARS rating process can be rigorous for CDFIs. "We request reams of information from CDFIs, and use that information to provide investors with reports that are up to 60 pages long," she said.

"The CARS process is very rigorous," Thomson acknowledged. "The two CARS analysts got deeply into our financial statements and our business operations and came to truly understand how we operate and why we operate."

The CARS system focuses on two primary aspects of the performance of CDFIs. Its impact performance rating assesses how effectively a CDFI's performance aligns with its social mission, how well a CDFI uses its financing resources in support of its mission, and how well a CDFI tracks its activities and outcomes.

CARS also assesses the financial strength and performance of CDFIs by analyzing past financial performance, current financial strength, and apparent risk factors. It employs the CAMEL analysis used by regulators to rate banks. CAMEL stands for capital, asset quality, management, earnings, and liquidity.

"Our CAMEL analysis evaluates credit worthiness from the investor perspective," said Chapel.

At present, the 29 institutional investors that subscribe to the CARS ratings include banks, foundations, and sustainable and responsible (SRI) investors. Potential CDFI investors who want to invest in CDFIs but do not have the necessary industry knowledge, underwriting expertise, or staff capacity to underwrite or monitor CDFI loans, can use the CARS analyses to help guide their investment decisions.

"Our reports allow investors to compare very different CDFIs by the same criteria," said Chapel. "We rate both small and very large CDFIs in the same way."

"The first thing I did after assuming my position with CARS was meet with the investors who subscribe to our product and go through our reports with them," Chapel said. "I asked them for recommendations on how to improve the reports, and in many cases we were able to implement their recommendations."

Chapel continued, "We interview our subscribers annually, and ask them which CDFIs they would like to see us rate."

Because CARS is an independent project of the Opportunity Finance Network, Chapel has been rigorous in maintaining what she describes as a firewall between CARS activities and the activities of the CDFIs that comprise the Network.

"OFN is a membership organization of CDFIs, and the job of CARS is to rate those members," Chapel said. "Investors need to know that our ratings are completely independent."

 

 
Home
| Reports | SRI Financial Professionals Directory | Tools | News | SRI Performance and Trends | About Us | Contact
© SRI World Group, Inc. - All rights reserved
Terms of use - Privacy Policy - OneReportTM Network