3c hapter - Index of

The Biggest- Impact Financial Sector You’ve Never Heard Of 87
CEO of Opportunity Finance Network, likes to describe CDFIs as
“working outside the margins of conventional fi nance.” When the
economy is booming, the margins of conventional fi nance expand
and cover more markets. When the economy is bad, the margins
shrink. “It’s like a tide, and right now the tide is way out,” says
Pinsky. “There’s just this massive amount of opportunity.”
But just as their services are most needed, CDFIs are facing
their own challenges.
Community development banks, like most of their banking
peers, had to scramble to raise capital as the economy deteriorated
starting in 2007 and their loans were marked down, throwing off
their capital- to- debt ratios. CDFIs did not engage in reckless lending.
Nor were they as highly leveraged as, say, Bear Stearns, which
borrowed $43 for every $1 it invested. But even at modest leverage
rates, the economic disruption was enough to take down institutions
such as ShoreBank Financial in Chicago, the largest and
best- known community development bank. 2 Most CDFI banks survived,
but many will have to focus on raising capital levels before
they can resume normal lending levels, notes Pinsky.
Community loan funds, on the other hand, raise the bulk of
their money from foundations as well as banks, which view the
low- interest loans and grants as a way to fulfi ll their mandates
under the Community Reinvestment Act (CRA), a law established
in 1977 to end the practice of discriminatory “redlining”
by banks in neighborhoods they operate in. Since 1994, the
Treasury Department has also supported community development
entities with fi nancing and tax credits through its CDFI
Fund. (It also certifi es such entities.) Community development
loan funds typically take these loans and grants and lend
the money out at a higher, but still modest, interest rate, with the
spread supporting their operations.
The community loan fund model generally held up very
well throughout the crisis. For one, the funds operate with
much higher capital cushions—double, triple, or even quadruple
that of conventional banks. During the boom, they might
have looked underleveraged and boring, but that conservatism
allowed the funds to take an honest look at their portfolios and