Study Suggests Perceptions Of 'Risky' Loans Unfounded
WASHINGTON, D.C.- Loans generally identified as presenting greater risk, such as those made to low-income borrowers in economically depressed markets, are no riskier than standard "conventional" loans, according to a new study.
The study, conducted by the National Community Capital Association (NCCA) and released by the Community Investing Program of the Social Investment Forum Foundation and Co-op America, reviewed almost $4 billion in financing by 107 community development financial institutions (CDFIs) in distressed urban and rural markets across the United States. The NCCA is a national network of 127 community development financial institutions.
The findings indicate that loan portfolios with "high-perceived risk," such as loans for housing, child care and small businesses in economically disadvantaged markets such as North Camden, N.J., South Central Los Angeles and the Pine Ridge Indian Reservation in South Dakota had net charge-offs of 0.5%.
How Delinquencies Compare
The study's authors said that compares favorably to 0.9% for all commercial banks, and 0.5% for commercial banks with less than $100 million in assets.
"These data up-end the conventional wisdom that community investing loans to low-income people and the businesses that serve them carry high risks," said NCCA CEO Mark Pinsky. "These facts speak for themselves. Community development financial institutions make financing prudent and profitable in thousands of underserved markets across the nation. CDFIs are successful working in these communities because they know the local markets, they provide substantial technical assistance to their borrowers and they develop flexible loan and investment products."
President Deborah Momsen-Hudson, VP with Self-Help Credit Union in Durham, N.C., said the study shows there is no reason for "banks and other institutional players to keep sitting on the sidelines when it comes to community investing. The CDFIs are out there that know how to make this kind of loan activity work."
Momsen-Hudson pointed to her own credit union's experience, saying that since Self-Help Credi Union was chartered in 1980 it has provided $1.78-billion in financing to almost 25,800 small businesses, nonprofits, and homebuyers.
Among the other findings of the study, which is entitled "CDFIs: Bridges Between Capital and Communities":
* Investors in CDFIs have never lost a penny of investment capital. The 107 surveyed CDFIs had sufficient equity capital bases and loan loss reserves to absorb any losses in their portfolios.
* CDFI loan activity is no riskier than, and is as safe as lending at traditional banks/credit unions. Overall portfolio quality was found to be high, based on both net charge-offs and delinquency rates. The 90-plus day-delinquency rates for the institutions in the NCCA sample was 3.3%.
Who Is Borrowing
* The vast majority of beneficiaries of community development financial institution activities are low-income individuals. NCCA's survey found that 72 percent of clients were low-income persons. Of that group, 49% were women and 47% were minorities.
A complete copy of the study can be found online at www.communitycapital.org.