As the COVID-19 pandemic drags on, the economic fallout is affecting not just the small businesses that are forced to close and the workers who have been laid off or furloughed, but their lenders, as well.
At Chicago Community Loan Fund, vice president of portfolio management Lycrecia Parks leads a team that normally checks in with each of the nonprofit’s borrowers on a regular basis, making sure projects are proceeding as planned or that business is going well. Scattered across mostly the South Side and West Side of Chicago, those borrowers include some nonprofits, housing co-ops and worker cooperatives, but largely one- or two-person developer teams who rehab vacant homes, small apartment buildings, or small commercial properties. If someone needs an extension or adjustment on their loan because of unforeseen circumstances, the portfolio management team is the one to work that out.
By mid-April, because of COVID-19 shelter-in-place or shutdown orders, Chicago Community Loan Fund was expecting to defer monthly interest payments for up to 20 percent of its borrowers for at least three months, meaning a significant reduction in income. The nonprofit will have to spend down its own reserves just to keep people on staff. Other smaller and mission-oriented lenders across the country are facing similar situations — from nonprofit loan funds to tiny credit unions and community banks.
“We have all these mortgages being deferred, credit card payments being deferred, personal loans being deferred, other business loans being deferred,” says Maureen Genna, CEO at Lower East Side People’s Federal Credit Union. “And of course the Paycheck Protection Program loans are automatically deferred for six months and probably forgiven before that, so there’s really no income there. With all this, this is going to become an issue really soon.”
Smaller and mission-oriented lenders are often the only ones (other than predatory lenders) serving the most vulnerable households, businesses and neighborhoods. But an economic crisis silently and steadily eats away at their foundations. What these lenders are asking for is to build on the lessons from the last crisis and provide funding with sufficient flexibility to help them keep doing what they are already doing — or more of it. If they get that, they’ll be in a better position to ensure their existing borrowers — small business owners, worker-owned cooperatives, first-time homebuyers and local nonprofits — don’t get left behind during the recovery period, whenever that starts.
“My hope is we’re going to have enough backstops from the government to avoid the same number of failures as we had in the Great Recession,” says Jeannine Jacokes, chief executive and senior policy advisor for the Community Development Bankers Association, a trade group.
Lenders of different types face different constraints on their reserves. Regulators require banks and credit unions to set aside a certain amount in cash reserves for every dollar in loans and other investments they have — banks call it their “leverage ratio,” credit unions call it their “net worth ratio.” If the ratio falls below the required threshold, regulators can put restrictions on making new loans, or even shut down a bank or credit union and force a merger into another institution.
For banks, the required ratio is usually one dollar in reserves for every 11 dollars in loans and investments. The CARES Act temporarily made the required leverage ratio one to twelve for community banks, providing some additional flexibility to draw down on cash reserves to get through the COVID-19 pandemic.
For credit unions, the required net worth ratio is one reserve dollar for every 16 dollars in loans and investments.
The half-dozen banks and credit unions interviewed for this article report leverage or net worth ratios from one to eight to one to eleven, meaning most small lenders have the room, at least on the federal regulatory level, to lend out a few more dollars or spend down their reserves. But as banks and credit unions start drawing down on reserves, their leverage ratios could reach dangerous levels.
At Brooklyn Cooperative Federal Credit Union, which currently has a net worth ratio of one to eleven, CEO Samira Rajan says she’s not expecting to know the extent of the damage to her credit union’s net worth ratio until the end of June, when the first round of deferments runs out.
Nonprofit loan funds don’t have the same regulatory requirements, but it’s a standard practice for them to voluntarily set aside a dollar in loan loss reserves for every six to ten dollars in loans on their books. In Chinatown, NYC, Renaissance Economic Development Corporation has been keeping their loan loss reserve ratio at one to three since Superstorm Sandy. Without a healthy loan loss reserve ratio, it’s hard to convince funders to trust nonprofit loan funds with their dollars.
Chicago Community Loan Fund, Renaissance Economic Development Corporation, Lower East Side People’s and Brooklyn Cooperative are all federally certified Community Development Financial Institutions, or CDFIs, along with around 1,200 other institutions across the country. These organizations have a primary mission of serving low-income or other historically marginalized communities, and at least 60 percent of their lending or other economic development activities take place in those communities.
In New York, the nationwide epicenter of the COVID-19 crisis, a contentious state budget season that resulted in cuts to the state’s medicaid budget in the middle of a pandemic also saw one seemingly small victory for CDFIs. After decades of advocacy, the New York State Budget for 2020-2021 includes $25 million for the first state-level Community Development Financial Institutions Fund, to be distributed over the next five years.
“We are thrilled that New York state included an appropriation of $25 million over five years to support the work of community development financial institutions,” says Cathie Mahon, president/CEO at Inclusiv, a trade association for credit unions with a community development focus, in a statement provided to Next City. “At a time when New Yorkers have suffered the most adverse impact of the COVID-19 pandemic, these community based lenders have punched above their weight in ensuring people are connected to their funds and getting relief loans out in their communities.”
Modeled after the federal level CDFI Fund (which was actually modeled on a NY state-level proposal that stalled in the 1980s), the New York State CDFI Fund promises to provide grants for CDFIs in New York that can be used as each institution sees fit to bolster their operations. Details are still being worked out, but if it works anything like the federal-level fund has been working, those dollars could quickly go to replenish reserves that CDFIs are all spending down now, putting them in better position later to go back to business as usual sooner instead of having to replenish required or voluntary cash reserves before making any new loans.
Five million dollars in one year may not seem like a lot, but the eventual dollar-for-dollar impact on the community would be multiplied according to each community bank’s leverage ratio, each credit union’s net worth ratio, or each nonprofit loan fund’s loan loss reserve ratio. One dollar in state CDFI Fund dollars would mean anywhere from three to 16 dollars mobilized in terms of deposits or other cash CDFIs have on hand.
Beyond New York, Inclusiv and the Community Development Bankers Association are pushing for $1 billion to be allocated to CDFIs from any of the upcoming COVID-19 response packages.
The details for how to move that $1 billion to CDFIs are still being worked out, but such a move could be massive for CDFIs and the communities they serve. There is evidence of it from the last crisis.
In the 2008-2009 financial crisis, out of the $421 billion TARP bailout for the banking industry, $570 million went through the Community Development Capital Initiative, though it only supported 84 CDFIs out of 800 or so across the country at the time.
Of those, 48 were credit unions that received a collective $70 million that they used to temporarily replenish reserves depleted during the fallout from the financial crisis. According to Inclusiv, CDFI credit unions used those $70 million in temporary reserves to support 60 times that amount in economic benefits in terms of increased membership, more credit counseling, and homeownership programs. “Economically, we know that this works,” says Cathi Kim at Inclusiv. “We saw it previously, so why not now when our communities most need us.”
Similar to the overall TARP program, most banks and credit unions that received federal investment from the Community Development Capital Initiative did eventually repay those dollars. By April 2019, the Congressional Budget Office projected the initiative would have a net cost to the government of $70 million.
Nonprofit loan funds, however, were left out of the Community Development Capital Initiative. For now, though, some nonprofit loan funds are joining with other CDFIs in calling for that $1 billion, including Chicago Community Loan Fund. CEO Calvin Holmes also has a laundry list of ideas he’s pushing that would help organizations like his, from grants to cover staffing expenses during the crisis, or grants to replenish loan loss reserves. Holmes is also calling for philanthropic foundations to release restrictions on existing grants so the cash can be used to respond to immediate needs or replenish loan loss reserves.
At the Community Development Bankers Association, Jacokes is still hopeful that bipartisan support for CDFIs in Washington will result in something sooner than later. “We need resources targeted to the places that are getting hit the hardest,” she says.
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.