October 10, 2002
Community Investing Pays
by William Baue
New study refutes the myth that loans to low-income borrowers carry higher risk than loans to
Conventional wisdom holds that loans to low-income borrowers carry a higher risk of default than
conventional loans. However, a new study commissioned by the Community Investing Program, a joint project of the Social Investment Forum (SIF) and Co-op America, offers contradictory
evidence. The study, entitled CDFIs: Bridges Between Capital and Communities, finds that community
development financial institutions (CDFIs) actually have a better payback rate than commercial
banks. CDFIs provide community investing loans to low- and middle-income borrowers and the
businesses that serve these populations.
For the study, the National Community Capital Association (NCCA) surveyed
107 of its CDFI members. This representative sample of the community investing industry had
cumulatively provided $4 billion in financing through the end of fiscal year 2001. The CDFIs that
were surveyed had a loan default rate of 0.5 percent, almost half the 0.9 percent rate of all
commercial banks. This 0.5 percent loan default rate for CDFIs is the same rate experienced by
commercial banks with less than $100 million in assets.
The study also looked at how
well CDFIs insulate their investors from losses.
"Investors in CDFIs have never lost a
penny of investment capital," states the report. "The 107 surveyed CDFIs had sufficient equity
capital bases and loan loss reserves to absorb any losses in their portfolios."
Low-income individuals make up 72 percent of those served by CDFIs, according to the report.
Almost half (49 percent) of CDFIs' clientele are women, and just under half (46 percent) of all
clients are minorities. The cumulative financing of the 107 CDFIs helped create or maintain almost
180,000 jobs, helped develop about 147,000 housing units, and helped advance 2,500 community
To address the issue of underserved low- and middle-income
communities, Congress established the CDFI
Fund in 1994. The CDFI Fund is a governmental organization run by the U.S. Department of the
Treasury that infuses federal financing into institutions that serve low-income individuals and
distressed urban and rural communities. Examples of these communities include South Central Los
Angeles and the Pine Ridge Reservation in South Dakota. The Self-Help Credit Union, based in North
Carolina, is one of the CDFIs that the study surveyed.
"Our mission is to create
ownership and economic opportunities for minorities, women, rural residents, and low-wealth
families," said Self-Help Credit Union Vice
President Deborah Momsen-Hudson. "Since Self-Help's start in 1980, we have provided over $1.78
billion in financing to almost 25,800 small businesses, nonprofits, and homebuyers." Ms.
Momsen-Hudson is also the Social Investment Forum Community Investing chairperson.
Social Investment Forum and Co-op America established the Community Investing Program in 2000 to
promote the "1% in Community" campaign, which urges SIF members to allocate one percent of the
assets they manage to community investing. However, community investing attracts mainstream
investors as well as social investors. For example, Wachovia Corporation (ticker: WB),
the nation's fourth largest financial holding company, with assets of $325 billion, invested $19
billion in low- and middle-income communities in 2001.
"In our view, community development
investing is good business," said Wachovia Director of Community Development Jane Henderson. "It
is the right thing to do for our communities, but beyond that, it is also the right thing to do for
our shareholders. Since a significant portion of the U.S. population is located in low- to
moderate-income communities, not pursuing such business would be a missed opportunity for us."