Boston Community Capital: Representing CDFI Impact

Executive Summary

Not having access to mainstream financial services can be a disaster for individuals. CDFIs such as Boston Community Capital (BCC) are one solution to a hole in resources for low income communities. BCC focuses on developing and investing in affordable housing, child care programs, schools, youth programs, healthcare, solar power, and refinancing homes in foreclosure. BCC exemplifies the wide range of work done by CDFIs. CDFIs are constrained by low funding and struggle to make a widespread impact, but are effective partners to community efforts. While CDFIs can be effective working with community organizations, the institutions struggle to make connections independently. Though CDFIs do important work for the communities they serve, the organizations are limited by funding and their ability to embed themselves in a community.

Introduction

In 1985, a group from Old South Church in Boston started Boston Community Capital (BCC) with $3,500 (About us, n.d.). BCC is now a large Community Development Financial Institution (CDFI) that supports a broad array of initiatives to strengthen communities. Certified by the CDFI Fund of the US Treasury, CDFIs can be “banks, credit unions, venture capital firms and loan funds” (Cortés & Lerner, 2013). The CDFI Fund allocates grants to CDFIs that present a clear plan for how to use the award to benefit communities (Cortés & Lerner, 2013). The purpose of CDFIs is to provide financial products to low income communities that have been neglected by mainstream financial institutions (Cortés, K. R. & Lerner, J., 2013).

Boston Community Capital conducts the bulk of their business as a loan fund and operates a small venture capital fund to invest in businesses that benefit low-income communities (Boston Community Capital, 2016). BCC investors are individuals, religious organizations, foundations and corporations (Boston Community Capital, 2016). CDFIs often struggle to grow, but private investment is one source of growth in the industry (Theodos, B., Fazili, S., & Seidman, E., 2016). BCC embodies the broad trends in the CDFI industry. Though originating in Boston, BCC reaches throughout the east coast with its loan fund investments (Our loan fund reach, n.d.). BCC describes itself as “at the crossroads of downtown and community”, which is reflected by a board of directors representing major financial institutions and local Boston community organizations (Boston Community Capital, 2016). BCC’s self-description extends well to describe CDFIs as a whole. The institutions hover between roles as financiers and community organization. They are too mission driven to to expand rapidly and financially inclined enough to not always be strictly placed based.

BCC reflects both the strengths and weaknesses of CDFIs. CDFIs are small enough to work closely with community groups but too small to create impactful change in a place. CDFIs are no match for mainstream financial institutions that have a massive advantage in asset holdings and have the ability to shape communities to an extent CDFIs could only imagine. CDFIs are also less effective without community partners. BCC exemplifies the growth in the CDFI industry and the potential of further growth could allow the institutions to have a greater overall effect on communities that need their services.

Analysis

Low income communities lack access to mainstream financial institutions (Caplan, M. A., 2014). The result of inaccessibility of financials services can be dire. Low income people pay high prices for under regulated, predatory, fringe lending services, and many people do not have a bank account making bill payment harder and more expensive (Caplan, 2014). In low income communities, financial services can be scarce or exploitative. That is where CDFIs make a difference.

The Function of Community Development Financial Institutions

The functions of CDFIs can be simplified to three basic forms: market maker, market alternative, and market catalyst (Theodos, B., Fazili, S., & Seidman, E., 2016). The market maker function is the creation of a new financial service not available in a community, the market alternative function provides financial services to communities that mainstream lenders will not serve, and the market catalyst function shows that serving an unserved community can be profitable drawing mainstreams lenders to the community (Theodos, et al., 2016). These functions create broader access to financial services, which means people in low income communities do not have to be dependent upon predatory financial services.

Boston Community Capital

BCC’s lending does not respond to fringe lending, but instead lends to projects that may otherwise lack financial support entirely. BCC supports a wide array of community programs. By 2015, BCC had invested over $300 million in affordable housing; over $100 million in schools, child care, and youth programs; almost $100 million in residential mortgages; about $60 million in commercial real estate and community facilities; and an array of other investments in business, renewable energy, health-care, and supportive housing and shelters (Boston Community Capital, 2016). BCC reflects the flexible nature of CDFIs; the organization has been able to branch out and support many initiatives that benefit communities.

BCC has been able to grow significantly over the past decade through the use of New Markets Tax Credit (NMTC) (Boston Community Capital, 2016). Run by the CDFI Fund, the NMTC program is purposefully complex specifying poverty and income levels of eligible census tracts and impact requirements where the NMTC subsidies are put to use (La Franchi, D., 2010). BCC has made $468 million in investments through the NMTC program spread throughout the United States mainly focused on nonmetropolitan rural areas (New Markets Tax Credits, n.d.). BCC’s recent growth through the NMTC program is not place based, but that is likely due to the detailed structure of the program. Developers seeking a NMTC award typically seek out financial institutions, such as BCC, that are qualified to allocate NMTC awards (La Franchi, 2010). While BCC’s use of NMTC awards are not place based, profits from the NMTC program have allowed BCC grow its other local initiatives (New Markets Tax Credits, n.d.). BCC uses NMTC projects to increase in size, which increases BCC’s ability to make an impact.

Evaluation of CDFIs

One concerning aspect of the Treasury’s CDFI Fund is that there has been little academic evaluation of the program (Cortés & Lerner, 2013). There has been some study of CDFIs despite being difficult to study well (Hollister, 2007). Cortés and Lerner (2013) suggest that CDFI Fund grants increase lending by credit unions to low income people who otherwise would not receive financial services. The study does not analyze the impact of those grants on the community (Cortés and Lerner, 2013). Though the broader impact is unknown, the ability of credit unions to provide services to low income people means those people will not have to seek out riskier lending.

Loan funds such as BCC receive more grants from the CDFI Fund than any other type of CDFI (Cortés & Lerner, 2013). Because loan funds are unregulated and not required to report data to a central institution, the institutions are difficult to study effectively as a group (Cortés & Lerner, 2013). The difficulty of gathering data on loan funds as a whole is one reason the institutions are not invested in further despite larger CDFIs having more success (Swack, M., Northrup, J., & Hangen, E., 2012). A more uniform system for evaluating loan funds could help researchers better understand what the institutions need. With growth CDFIs are able to experiment and provide more services but can be limited in places where communities are not already organized (Theodos, et al., 2016). Growth could improve the ability of CDFIs to invest in and support communities.

CDFIs have so far been effective at avoiding political entanglement (Cortés and Lerner, 2013). Cortés and Lerner (2013) explain this success as a result of the CDFI Fund’s small size and strict standards for grant administration. In fact, the CDFI fund is very small: $1.3 billion in grants were awarded between 1994 and 2014 (Cortés, 2014). The fund does not seem large enough to merit political capture, nor does the fund seem large enough to be concerned about political capture. On the impact of CDFIs, Robinson Hollister (2007) writes “To expect a CDFI to have a measurable, sizable effect on the degree of poverty in a given area is unrealistic”. The CDFI Fund does not have the capacity to change the conditions low income people live in, but the fund is commended for being small enough to escape political influence. While a small size does enable the program to avoid notice, the conversation around the CDFI Fund should be reoriented to encourage the expansion of the CDFI Fund. Perhaps researchers should ask the question: Can CDFIs lower poverty?

CDFIs have seen success on small scales and the evidence indicates that growth could allow CDFIs to make impacts on neighborhoods beyond the individuals and groups impacted now.

Impact

CDFIs are successful, but could be more successful. The institutions do not have the financials power to rival mainstream investment. Scaling up could improve CDFI ability to make an impact.

CDFIs do not have financial power compared to mainstream financial institutions. Boston Community Capital has invested about $1.2 billion and manages approximately one billion dollars in assets (Boston Community Capital, 2016). To put the scale of Boston Community Capital into perspective, Bank of America had $903 billion in loans and leases, $2.1 trillion in assets, and made $235 million in loans to CDFIs in 2015 (Bank of America, 2015). First of all, Bank of America works with CDFIs on an incredibly low scale that produces doubt about possible growth of CDFIs through work with mainstream financial institutions.

Second, Bank of America and BCC are arguably not comparable. On the other hand, a 2012 report on the CDFI as an industry shows that only 13.5% of loan fund applicants to the CDFI Fund have assets over $100 million (Swack, et al. 2012). By that standard, BCC could well be one of the largest CDFIs in the nation, and should be compared to one of the largest banks in the country for that reason. Mainstream profit-driven financial institutions such as Bank of America have the power to shape cities through their investments. The social benefit mission of CDFIs should not preclude the institutions from being powerful. CDFIs cannot compete with an institution with $2.1 trillion in assets, but a socially driven institution that could compete would produce much more equitable investment.

Conclusion

BCC invests in many types of community initiatives and has had success in growing as an organization. Larger CDFIs have a greater ability to impact neighborhoods, despite their current inability to impact neighborhoods as a whole. The services that CDFIs provide are a necessary alternative to predatory lending, and larger CDFIs like BCC are building the capacity to make broader impacts on communities. Current funding for CDFIs is miniscule. An increase in government funding for CDFIs could allow the institutions to grow. Further regulation of CDFI loan funds could also benefit the organizations by creating more streamlined study of the institutions. There is much to be learned about CDFIs, but the community organizations could begin to have a widespread benefit to communities with growth and support. A prevalence of CDFIs would be a powerful counterbalance to predatory lenders and profit driven mainstream financial institutions.

References

About us. (n.d.). Retrieved from http://www.bostoncommunitycapital.org/about-us

Bank of America. (2015). Bank of America Corporation 2015 Annual Report. Retrieved from http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-reportsannual#fbid=JdXY98jsodi

Boston Community Capital. (2016). 2015 Annual Report. Retrieved from http://www.bostoncommunitycapital.org/investor-tools/annual-reports-and-financials

Caplan, M. A. (2014). Communities respond to predatory lending. Social Work (United States), 59(2), 149–156. https://doi.org/10.1093/sw/swu008

Cortés, K. (2014). Does the CDFI Fund Help Low-Income Borrowers? Economic Commentary. Cleveland: Federal Reserve.

Cortés, K. R., & Lerner, J. (2013). Bridging the gap? Government subsidized lending and access to capital. Review of Corporate Finance Studies, 2(1), 98–128. https://doi.org/10.1093/rcfs/cft002

Hollister, R. (2007). Measuring the Impact of Community Development Financial Institutions’ Activities. In J. S. Rubin (Ed.), Financing Low Income Communities (pp. 265–310). Russell Sage Foundation. https://doi.org/10.1007/springerreference_76056

La Franchi, D. (2010). New markets tax credits. Economic Development Journal, 9(4), 5–13. Retrieved from http://www.nationaltrust.org/ntcicfunds/NMTC_101.pdf\nand\nhttp://www.nationaltrust.org/ntcicfunds/NMTC.htm

New Market Tax Credits. (n.d.). Retrieved from http://www.bostoncommunitycapital.org/programs-services/new-markets-tax-credits

Our loan fund reach. (n.d.). Retrieved from http://www.bostoncommunitycapital.org/loan-fund-impact

Swack, M., Northrup, J., & Hangen, E. (2012). CDFI Industry Analysis. Durham, NH. Retrieved from https://www.cdfifund.gov/Documents/Carsey Report PR 042512.pdf

Theodos, B., Fazili, S., & Seidman, E. (2016). Scaling impact for community development financial institutions. Washington, DC: Urban Institute.