Opinion

Felix Salmon

How can community lenders survive?

By Felix Salmon
April 28, 2009

At a panel this morning on community development finance, there was lots of talk about capital constraints and liquidity constraints and in general the way in which the funding for community development lending has completely dried up, despite the fact that such lending has massively outperformed most of the credit product out there.

The problem as I see it is that much of the funding has historically come through trying to be just a little bit too clever in terms of taking advantage of the more conventional banking system. Lots of community development finance has come from banks looking to get into compliance with the Community Reinvestment Act; or investors with taxable profits looking to buy things like low-income housing tax credits; or foundations looking to help provide leverage without risk by using the tools of structured finance, with securitization giving them the opportunity to invest in securities carrying a triple-A rating.

Today, of course, banks have much bigger things to worry about than CRA constraints; they don’t have taxable profits which need to be offset with tax credits; and faith in the tools of structured finance is at an all-time low. But the panelists still felt that they had to continue to push the old model — “none of us would be here”, said the moderator, Betsy Zeidman, were it not for the tools of structured finance being repurposed to what are often called “double bottom line” institutions.

This makes sense: there’s really no alternative out there able to provide the billions of dollars in funding which has flowed into the community-development space from the broader financial sector. On the other hand, with the broader financial sector shrinking, alternatives are going to have to be found somehow. There was talk about letting community development financial institutions borrow from the Federal Home Loan Banks on the same terms currently available to commercial banks — that seems like a good idea to me, so long as the Federal Home Loan Banks are up and lending (they have big problems of their own).

But it was clear that over the long term there’s a big need for community development financial institutions to get smarter and leaner about how they operate, by outsourcing a lot of the back-office and risk-management operations which are often at the moment performed haphazardly by institutions far too small to do them well. The problem is how do we get there from here — we don’t yet have the kind of institutions capable of providing efficient back-office services to a large number of small and largely non-profit lenders. Any laid-off bankers care to try founding one?

Comments
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Unbelievable that Chrysler (or Ceriberus)would relinquish 55% of the company to the UAW, that helped cause much of the current problems, of course with the help of Chrysler. They should go bankrupt. I have been in the auto business for 50 years, and Chrysler hasn’t changed. Their vehicles are ok for the first year or two, but watch them when they hit the wholsale used car market compared to Ford , GM and some imports….dramatic price difference overall. I can not believe that additional government bailout money(yes the tax payers debt and their children) and a 35% stake with Fiat will save Chrysler. Americans do not as a whole want to drive small electric or as referred to as “hybrids” vehicles. Of course with gas around $2 bucks or less per gallon, Americans want their pickups back and SUVs and this is evident in the current used vehicle market. Wake up America, no I guess I really mean, wake upour current administration and politicians who no very little about the auto indutry ( i wonder what kind of cars these guys and gals drive), Chrysler can not survive by offering the cash incentives and rebates as they do today to sell a car. What will change ?…probably nothing. Sometimes you just can’t sit back and say nothing…..again I can not believe Chrysler gave up 55% and with the governments blessing, typical Democratic administration and foundation beliefs.

Posted by RICHARD HAGOPIAN | Report as abusive
 

Your point about the need for small community-based institutions to get smarter and leaner in their operations and share resources is exactly right. In answer to the parting question: Yes, there is a group of ex-financial-types working on this kind of project – the company is called oFlows. oFlows is a SaaS loan origination and risk management technology platform that delivers an end-to-end paperless loan origination and risk management system to credit unions and community-based lenders with no big up-front investment and pay-as-you-go pricing that is actually cheaper than printing and mailing paper files. So any size institution can afford to go paperless and implement best practices for operations, risk management, and fraud detection. Check it out at oflows.com.

 

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