Community Development Finance Leader Clifford Rosenthal Says CDFIs No Longer in Defensive Posture But Face Longer Term Pressures

July 2012 Update—Since we originally posted our interview with Clifford Rosenthal, the long-time President and CEO of the Cliff_Headshot_-_Resized_-_12-08National Federation of Community Development Credit Unions, the CDFI industry has continued to face considerable challenges. However, it has also moved towards resolving many of its long-standing problems in the past 2 years.

When we spoke with him last, Rosenthal named the need for greater transparency, integration, and standardization as the three primary issues that the industry needed to address. The evolution of the industry rating system CARS™ , originally an extension of the Opportunity Finance Network, reflects progress made in the areas of transparency and standardization. CARS™ has been re-released as an independent entity and relaunched with a larger offering of analytic tools. These new products afford clients a more holistic view of a specific CDFI’s organization, function and proficiency. Many CDFIs have used their first-round CARS™ ratings to re-position their organization, and receive higher ratings in second-round ratings. The CDFI industry has become more standardized as organizations try to reach better CARS™ ratings levels. Issues of efficiency and integration are still being addressed, although integration is taking place within the industry with the establishment of centralized back office services for smaller CDFIs.

Rosenthal recently left his post at the National Federation of Community Development Credit Unions, assumed a new position in May 2012 as Assistant Director of the Office of Financial Empowerment at the Federal Consumer Financial Protection Bureau.

Pamela Owens has assumed the role of Interim President and CEO as a permanent replacement search is conducted. Pamela served as the Vice-President for Programs at the National Federation of Community Development Credit Unions prior to her role as interim President and CEO.—Evan Lozier. Evan is Capital Institute’s Summer 2012 intern.

August 2010—Clifford Rosenthal is among the pioneers of U.S. community development finance. His call in 1986 for the creation of a national neighborhood bank corporation helped catalyze the establishment of the CDFI Fund in 1994. Created under the Riegle Community Development and Regulatory Improvement Act, the CDFI Fund is a Treasury Department program that provides funding through a competitive application process to community development financial institutions (CDFIs) serving low and middle-income populations. There are over 860 certified CDFIs operating in the United States today, including banks, credit unions, loan funds, venture capital funds, and community development corporations.

Since 1983, Rosenthal has been the President and CEO of the National Federation of Community Development Credit Unions, a CDFI that has invested $100 million since its inception in local community development credit unions through its Community Development Investment Program. Here he shares his perspective on how the financial crisis is impacting CDFIs, as well as his thoughts on the industry’s longer-term challenges.

The good news for CDFIs, says Rosenthal, is that they have lately been the beneficiaries of relatively strong support from the Obama administration and Congress, in contrast to the “defensive posture” they were forced to assume during the Bush years. “Bush had actually tried to eliminate community development programs including the CDFI Fund, which is the linchpin of it all,” says Rosenthal. The landscape has changed dramatically since Obama took office. As part of the American Recovery Act, for example, CDFIs received a special supplemental $100 million round of funding, which Rosenthal reports was made available to them in a “breathtaking” 90 days after the legislation was enacted.

The Obama administration has also earmarked $250 million for the CDFI Fund’s 2011 operating budget, representing a peak level of funding, and the Senate has actually proposed to top that by $50 million dollars. CDFIs are also receiving a $50 million appropriation for the Bank On program that provides mainstream financial services to low-income communities, and they are being actively engaged in the U.S. Department of Health and Human Services Healthy Foods Financing Initiative that addresses the problem of food deserts in inner city neighborhoods. Extra funding has also been earmarked under the Dodd-Frank financial reform bill for CDFI depository institutions to support loan programs that provide alternatives to payday lending.

Another piece of good news for CDFI banks and credit unions, says Rosenthal, is that they have attracted a stream of new depositors due to public disaffection with the practices and performance of the commercial banking industry. Still, says Rosenthal, more support from the CDFI Fund for CDFI depositories in general would be welcome, and he would like in particular to see credit unions given greater access to CDFI Fund awards. “The system is weighted toward the loan funds,” he says, “which get 70 or 80 percent of funding because it is easier for them to demonstrate specifics around job impacts and housing units.” As a result, Rosenthal explains, the CDFI Fund has provided less support to CDFI banks and credit unions which channel critical consumer credit, transaction-oriented, and savings services to underbanked, low-income communities. “We have been arguing hard with the fund to reframe its view of the field to allow its depositories to compete more effectively for the limited resources,” Rosenthal reports.

“We serve those that are not readily served. If what we do could be easily standardized the big banks would be doing it. The inherent business we are in of trying to tailor appropriate financial solutions and products for underserved populations is resistant to the kind of standardization and securitization that would promote more rapid scaling up.”

Loan funds, for their part, have been stressed in the current economic downturn by a general liquidity squeeze, as the big banks have cut back on the Community Reinvestment Act lending upon which the funds have largely depended. Financial assets appear to be “migrating out of the regulated CRA industry” for a couple of reasons, Rosenthal conjectures. One is that regulators who might in the past have pressured banks to commit to their CRA obligations are more focused on the very survival of the financial system as a whole, and less so on the needs of low-income communities. Secondly, in the past, regulators were able to pressure banks to fulfill their CRA obligations as a condition of approving mergers in the industry. “Now that so much consolidation has already taken place in the banking industry this is probably not the best hook on which to hang CRA enforcement,” he says. Another unfortunate byproduct of bank consolidation is that it does not always facilitate the flow of CRA funding to the most needy projects, Rosenthal reports.

Rosenthal sees other longer-term pressures building beyond the current economic crisis for a CDFI industry seeking to meet the growing needs of lower income communities, the foremost of those being the challenges of industry standardization, integration, and “scaling up.”

Standardization of financial metrics is less an issue for CDFI credit unions and banks than it is for CDFI loan funds due to the fact that the former must conform to regulatory reporting requirements. The National Community Investment Fund, a nonprofit that invests in community development depository institutions, has also contributed to greater reporting transparency with its own “Social Performance Metrics” evaluation system for domestic bank and thrift institutions.

Evaluating the financial performance of loan funds is more problematic, Rosenthal maintains, because they are not subject to regulation, report on a variety of fiscal calendars, and may report key metrics–for example, their loan delinquency rates–in varying, nonstandard ways. Initiatives like CARS, which rates CDFI Loan funds by both financial and social performance, holds promise for creating greater transparency and standardization within the sector, says Rosenthal.

Rosenthal lauds efforts like CARS to inject more transparency and standardization into the CDFI industry and also believes there is considerable room for integration and/or sharing of operational functions, like back office services, to achieve economies of scale. But he notes that while the push to securitize assets within the CDFI industry came to a “screeching halt” because of the financial crisis, that “Wall Street tool” may always have only limited long-term applicability in an industry characterized by its diversity, its local focus, and the unique risks associated with its underlying market. “We serve those that are not readily served,” says Rosenthal. “If what we do could be easily standardized the big banks would be doing it. The inherent business we are in of trying to tailor appropriate financial solutions and products for underserved populations is resistant to the kind of standardization and securitization that would promote more rapid scaling up.”—Susan Arterian Chang