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May 12, 2009
NCIF Develops Tool to Measure Impact of CDFIs on Low-Income Communities
    by Robert Kropp

The National Community Investment Fund finds CDFIs and mission-driven community banks outperform other banks in service to underserved communities by a substantial margin.

Between October 2008 and February 2009, the outstanding loan balances at the banks that received taxpayer help via the Treasury Department's Troubled Asset Relief Program (TARP) declined by about $52 billion. The distressed loan and securities portfolios at the nation's largest banks have led to reluctance by them to extend credit at a time when the restoration of responsible lending is critically important to the revitalization of the economy. The banks' reluctance comes at a time when executives at TARP banks have received over $18 billion in bonuses.

Since many communities—especially low-income communities—have historically been underserved by the mainstream banking industry, examples of successful lending in those communities now stand in even starker contrast to the social and financial irresponsibility of large banks. Lending in low- to moderate-income communities by community development financial institutions (CDFIs) provide such examples.

The mission of CDFIs is to promote economic revitalization and community development in areas that are underserved by traditional financial institutions. There are currently over 800 CDFIs certified by the CDFI Fund, which was created in 1994 to promote investment in and assistance to CDFIs.

In order to measure and communicate the impact of financial institutions that serve low- and moderate-income communities, a report analyzing their impact was recently issued by the National Community Investment Fund (NCIF), a non-profit, private equity trust that invests in banks, thrifts and credit unions that generate both financial and social returns. Since its formation in 1996, NCIF has invested $23.9 million in 37 financial institutions nationwide.

For the purposes of its study, NCIF expanded its analysis to include community banks that have a mission of working in low-income communities, but are not certified as CDFIs. NCIF coined the term Community Development Banking Institutions (CDBIs) to describe these banks.

The report, entitled "The Impact of Community Development Banks: 2007 and Beyond," utilizes three primary tools developed by NCIF to measure the impact of CDFIs and CDBIs on underserved, low-income communities.

The NCIF Social Performance Metrics use publicly available home-mortgage lending and branch location data to identify banks and thrifts that direct a large proportion of their services to low-income communities. NCIF also tracks the lending activities of institutions in its portfolio by measuring the total dollar volume of lending that is directed toward low-income areas and borrowers.

By means of its Model CDBI Framework, NCIF also determines if CDFIs and CDBIs are providing the types of products and services that economically distressed communities need.

The NCIF Social Performance Metrics, the results of which are searchable on NCIF's web site, utilize two primary tools to establish benchmark values. The DLI-HMDA metric analyzes an institution's Development Lending Intensity according to public data submitted to the Home Mortgage Disclosure Act (HMDA), by measuring the percentage of the institution's loan originations and purchases that are located in low- to moderate-income communities.

The Development Deposit Intensity (DDI) metric measures the percentage of an institution's physical branch locations that are located in low- to moderate-income communities. Data for both metrics are available for all years dating back to 1996.

NCIF's analysis reveals that the low-income community focus of CDFI banks is substantial, and CDFI banks exhibit much higher scores on the its metrics than do all domestic banks. The average DLI-HMDA score of the 59 CDFI banks measured was 56.2%, more than 2.6 times greater than the average score of 21.3% for the 8,510 domestic banks measured. CDFI banks also scored an average DDI of 71.4%, over 2.6 times greater than the average of 27.1% scored by all domestic banks.

By proposing a threshold level of 40% for DLI-HMDA and 50% for DDI, NCIF was able to group financial institutions according to performance. The threshold level also allows NCIF to identify non-CDFI banks that nevertheless "have a social mission either by choice or by virtue of its activities in low income areas." According to a division of the threshold values into quadrants, the CDFI peer group was ranked as high-performing, while both the All Bank peer group and the Top-Ten bank peer group were ranked as under-performing.

NCIF also measured the performance of the institutions in its portfolio. The average DLI-HMDA for the NCIF portfolio banks and thrifts was 53.4%, while the average DDI was 78.2%.

Since 1998, the institutions in NCIF's portfolio have generated over $3.7 billion by means of 83,839 loans. In 2007 alone, development banks and credit unions in NCIF’s portfolio originated 9,519 new development loans amounting to $651.71 million.

NCIF's Model CDBI Framework seeks to deploy a qualitative tool to determine if an institution has a community development orientation. The framework examines the market need of the community that the institution serves. It asks a series of questions pertaining to the level of poverty and unemployment in the community served, the products and services offered to the community by the institution, the provision of non-financial products such as financial counseling, and whether the institution has formed partnerships to maximize the impact on the community.


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