CALIFORNIA BUSINESS MINUTE
California & CDFI’s
07-01-09
Hi, I am Tim Johnson and welcome to the California Business Minute.
Community Development Financial Institutions, CDFIs, are banks or credit unions
that provide affordable financial services to communities that traditionally lack
access to such services. California has several CDFI’s that are playing a significant
role in the state during the economic downturn.
Recently, Federal Reserve Chairman, Ben E. Bernanke illustrated the value of
CDFI’s and the critical role they play in revitalizing neighborhoods and
preserving gains made in low- and moderate-income communities over recent
decades.
He lauded the organizations for their critical work in offering loans to
communities that large banks might consider too risky or too small to be
profitable. Additionally he expressed that the community lending groups
are helping address unemployment and foreclosure challenges by providing
loans for charter schools and small businesses and other projects that
could help stabilize neighborhoods.
"While community development finance is a small part of our overall capital
and credit markets, the Federal Reserve recognizes that these financial flows
are critically important for many low- and moderate-income communities,"
Bernanke said. "In fact, the Board of Governors has been working with several
of the Federal Reserve Banks to promote research on how best to promote CDFIs'
effectiveness and financial stability."
Bernanke noted that CDFIs, like other lenders, have been hit by the financial
crisis, having to grapple with a rise in delinquency rates and defaults. Still,
demand for community development bank services is growing as mainstream banks
pull back from credit markets, said the Fed chief. “That said, community
development banks need to broaden their funding base to take advantage of new
opportunities,” Bernanke said.
Bernanke noted that the Federal Housing Finance Agency recently introduced new
rules on how CDFIs can become members of the Federal Home Loan Bank System, FHLB
and tap into lower-cost funds. The funding would help CDFIs manage their balance
sheets more inexpensively, Bernanke said. He also pointed out the creativity of
one CDFI that has created a product similar to a mutual fund so that individuals
can invest in community banks. "It has performed well, with an average 3% rate
of return to investors and very low loss rates," Bernanke said.
Doug Bystry, President and CEO of the Orange County based Clearinghouse CDFI
agrees with the Fed Chairman. “It is exciting to hear the Fed Chairman publicly
recognize the important role of CDFIs in our national economy. Many people are
still unaware of the millions of dollars of capital CDFIs bring to low-and-moderate
income communities,” said Bystry.
“Access to the Federal Home Loan Bank system will greatly increase the available
capital for CDFIs to make even more loans and equity investments. However, we have
been pushing hard for several years to get us access to the FHLB. Our cost of
funds is higher since we cannot access this tool. And unfortunately even though
we are a large CDFI, smaller and weaker community banks can get access to the FHLB
and we can’t… we don’t think that is fair,” commented Bystry.
“Unfortunately, being either funny as peculiar or a sad thing is in the first round
of eligibility guidelines from the FHLB they are asking CDFIs like us to have an
equity ratio to debt of 20% as opposed to the banks requirement which is only at 8%.
Thus, they are still holding us to a higher standard because of those “risky” loans
we make to low-income people even though our loan to loss ratio related to these
loans is almost negligible,” said Bystry.
I am Tim Johnson and this has been the California Business Minute.
For further information, see the article on Doug Bystry at 'CAEO Corner' under
CA Insights at the main menu www.CaliforniaBusinessMinute.com.
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