In January of 2012 the CARS™ system was spun-off OFN and re-launched as an independent organization.(Read more about CARS™ here.—Evan Lozier. Evan is Capital Institute’s 2012 Summer Intern.
September 2010—Opportunity Finance Network (OFN), founded on the principal that it is possible to lend profitably to low-wealth and low-income people and communities, has been providing financing, knowledge-sharing, and advocacy for Community Development Financial Institutions and other community development organizations since 1973. The Capital Institute recently spoke to Mark Pinsky, the organization’s President and CEO, about how OFN supports the CDFI industry in its efforts to scale up to meet the ever-growing, critical financing needs of low and moderate income (LMI) communities throughout the United States. He also expressed his views on how the Community Reinvestment Act might be reinterpreted and reinvigorated by acknowledging the new ways that banks define their markets.
Since Pinsky joined the Network in 1995, OFN membership has quadrupled and member assets have grown by 1500%. Under his leadership OFN has introduced numerous innovative products and services including the Equity Equivalent investment (EQ2), a capital product that allows CDFIs to increase their debt capacity and lending capabilities without negative balance sheet impacts, and the CDFI Assessment and Ratings SystemTM (CARSTM) recently profiled on the Capital Forum. During Pinsky’s tenure, OFN has also assumed a greater role in shaping policy and vision for the CDFI industry.
“Grow, Change or Die” Strategy
Pinsky reports that in 2001, he and the board of OFN began a conversation about what would be required of CDFIs to ensure their relevance in 2010. “CDFIs were already thinking about this and were ready to take on the challenge,” he says. “While mainstream banks had been evolving, the CDFI model was highly inefficient. I used to say, only half jokingly, that we have created all these financial institutions that are models of inefficiency on providing capital. So we started out talking about what it would take to change that, which led to a strategy of ‘grow change or die.’ It was a call to action for the industry. Vertical integration of distribution, capital and operation was the hoped-for outcome of that strategy. While it is beginning to happen we are not yet far enough along.”
Opportunity Finance Network’s central mission is to help the industry “as a whole” scale up: “We see scale not so much as building it within individual institutions,” notes Pinsky. “The amount of dollars we can get into our communities is partly a factor of our productivity. So we are looking at vertically integrated partnerships as alternative ways to deliver capital–for example, operational partnerships where a single CDFI back office provides services to 10 others. Then there is the aggregation of demand, collaborations where a larger CDFI works with smaller ones to find deals and aggregate capital on a greater scale than we have done in the past.”
Pinsky notes that while the opportunities for CDFIs are vast the sector in general continues to be challenged by limited access to capital. Currently, he reports, “depository CDFIs are badly constrained by lack of access to equity–their balance sheets and their capital ratios are shrinking– while CDFI loan funds have strong balance sheets but are constrained by lack of access to debt.”
At the same time, he notes that CDFIs have lately had more to celebrate, including larger appropriations from the Treasury’s CDFI Fund and the fact that CDFI loan funds in particular have become vehicles of choice for larger banks that want to lend in distressed markets but lack the requisite expertise. Since last November, Pinsky reports, Bank of America, JP Morgan Chase, Citibank, Wells Fargo, and Goldman have allocated more than $1 billion for small business financing through CDFIs. “The market we are serving in partnership with these banks is bigger and more demanding than it has ever been,” he maintains.
Opportunity Finance Network’s central mission is to help the industry “as a whole” scale up: “We see scale not so much as building it within individual institutions,” notes Pinsky. “The amount of dollars we can get into our communities is partly a factor of our productivity. So we are looking at vertically integrated partnerships as alternative ways to deliver capital–for example, operational partnerships where a single CDFI back office provides services to 10 others. Then there is the aggregation of demand, collaborations where a larger CDFI works with smaller ones to find deals and aggregate capital on a greater scale than we have done in the past.” Examples of the latter collaborations include charter schools and healthy foods financing and, most recently, multifamily affordable housing projects. “The industry has always been collaborative,” reports Pinsky. “But we are now implementing more formal business strategies that create a more productive system for financing.”
Pinsky is also eager to point out that while some of the larger CDFIs in the country have become “material” players in a particular asset class in their communities, many smaller ones have achieved similarly deep impacts through innovative products and services. For example, Northeast Entrepreneur Fund serves a market in Northern Minnesota larger than the state of Maine but with a population of just 600,000. The fund has leveraged a $3 million dollar finance and management-training program for entrepreneurs into a service that reaches more than 40 percent of the businesses in its market.
OFN is also in discussion with the SBA to use the CARSTM rating system as part of their selection process for its lending programs and has been reaching out to the Socially Responsible Investing community to draw attention to the performance of CDFI loan fund portfolios. “Socially motivated investors are beginning to understand that CDFIs are a powerful tool for channeling capital into the markets they want to target,” he reports.
The fact that CDFIs may be outperforming other financial institutions is a mixed blessing, says Pinsky. “CDFIs are profitable but not profit maximizing,” says Pinsky. “In a healthy capital economy there should be folks that take higher risk for higher returns as long as they do it for good purposes. The fact that CDFIs have been healthier than the mainstream financial sector suggests we are good at what we do but it also reflects the fact that the overall economy is distressed.”
Supporting Green Financing
OFN is also supporting CDFI forays into “green” financing with the goal of promoting it as an integral business strategy for more CDFIs. “We are doing it through advocacy and the bully pulpit,” says Pinsky. “And we are also using some of the tools we have in the past, combining grant money and low-cost debt to support CDFIs that want to become more active in this sector. We did this successfully 11 years ago with childcare by offering a variety of financial supports to CDFIs including long-term inexpensive debt to help them become bigger players in this space. After 3 or 4 years we no longer needed to provide those supports.”
In addition to the CARS ™ subscription service, Opportunity Finance provides free, studies of CDFI institutions operating in a given sector. These “Side by Sides” are a useful benchmarking tool for both private CDFI investors and government policymakers.
Modernizing the Community Reinvestment Act
Pinsky recently testified before bank regulatory agencies during hearings on Community Reinvestment Act “modernization.” He maintains that while in the broadest sense CRA has successfully channeled financing into many LMI communities, there is at the same time a critical need to reinterpret the legislation, enacted in 1977, to reflect changes in the marketplace. “The Community Reinvestment Act was originally organized around the notion that the principal business of banks is to take deposits in local communities,” he explains, “but deposit taking is only a small part of what banks do now. So we need to preserve the original principal that the core business of banks should drive their social responsibilities but we need to recognize that their prime business now is different–it is not defined by geography or bricks and mortar but by demography and product targeting. Our contention is that if a bank chooses a particular market then it ought to have a commensurate obligation to serve everyone in that market. Recognizing this would allow banks to invest in a given CDFI even if it is not in its geographic footprint.” If regulators acknowledge this new interpretation of the CRA, Pinsky maintains, it would immediately and significantly increase the access to capital of many currently disadvantaged CDFIs that are not located in money center markets. “We think there should be a requirement that all institutions that rely on taxpayer money should have an affirmative duty to serve all people in their community,” he elaborates. “We need to figure out a way to do that that helps all mainstream financial institutions integrate what CDFIs do into their economic rulebook. Obama said we have to do what is good for all people not because it is charity but because it is the right thing to do. I think the CRA could be an important part of how that happens.”—Susan Arterian Chang
