Filling the Gap: Md. Community Finance Institutions Help Communities Battered by Recession


WASHINGTON (April 19, 2010)—A day care center in Salisbury; an ezStorage Unit in Brentwood; a senior housing village in northwest Baltimore; a waste removal company in Easton; affordable apartments in Silver Spring—none of these enterprises would exist without the help of Community Development Financial Institutions.

But Maryland's CDFIs are struggling to keep up with the demand for their services. The recession is bringing more people to their doors for help while their supply of capital has shrunk. Their traditional sources of capital, like banks, corporations, foundations and local governments, all have less to give these days.

Neighborhood Housing Services of Baltimore, a CDFI that educates residents across the state on owning homes and preventing foreclosures, had to lay off two staff members in 2009.

"For a while in mid-2009 we were having to schedule (clients) two weeks out because we couldn't meet the demand," said Alicia Schuller, the philanthropy manager.

After cutting their affordable housing program, they were able to hire one new counselor in early 2010 to focus on foreclosure prevention.

Many different organizations serve low-income areas, but to become a certified CDFI, organizations must be approved by the U.S. Treasury Department every three years.

They must also meet certain criteria, like promoting community development, and providing 'development' services like technical assistance or counseling.

Banks, loan funds, credit unions, and venture capital funds can all qualify as a CDFI if they meet Treasury's criteria.

While they are much smaller than most financial institutions, CDFI assets have been growing steadily: CDFI bank assets averaged $163 million in 2009, according to the Treasury Department, up from $108.8 million in 2003, according to a Capital News Service analysis of Treasury Department data.

When the members of Wayland Baptist Church in northwest Baltimore decided to take action and revitalize their neighborhood, they turned to a Silver Spring-based CDFI, the Enterprise Community Loan Fund.

Enterprise contributed a $346,000 loan in 2008 that will be used to help build a senior housing village on a street currently occupied by vacant properties.

"Our goal is to turn these properties people who need affordable rents," said Carolyn Peoples, executive director of the church's development corporation.

"This is something that we had not done before," Peoples said, adding that Enterprise provided education as well as financial aid. "We call them friends, it goes beyond a partnership."

But CDFIs across the nation are fighting for survival, and some have not been able to take on additional customers. Maryland has a variety of CDFIs, but the number has dropped from 22 in 2006 to 16 at the end of last year.

A national survey from the fourth quarter of 2009 by the Opportunity Finance Network said more than half of CDFIs could not keep up with demand for loans, and the top reason was not having enough capital.

Another Maryland CDFI, Baltimore Community Lending, shrunk from about 14 to seven staff members in the past two years.

"Given what was happening in the economy, anything that wasn't paying for itself we couldn't do it anymore," said President and CEO Ruth Louie. "We're still doing some lending, (but) it's nowhere near where it used to be."

Raising capital is very hard to do right now, she added.

Many low-income borrowers were poorly served by large financial institutions who gave out loans without providing services like counseling or technical assistance.

In contrast, a major strength of CDFIs is that they emphasize relationships and education over handing out loans.

"They are generally very close to the people they lend to, they're generally in the community, actually existing in the area they are going to service," said Dawn Medley, director of business lending programs for the Department of Housing and Community Development. "It's one thing to get a business in business, but it's another to keep them there."

For example, customers looking for small business loans must take classes and receive counseling before they can get a loan from Maryland Capital Enterprises, a micro-loan CDFI in Salisbury, said Executive Director Hailey Gallagher.

One of Maryland Capital Enterprises' clients is Ray Hammond, a quadriplegic small business owner in Salisbury, who decided to start his company, Ray's Printing and Desktop Publishing, when his unemployment checks were about to run out.

A former engineer, Hammond signed up for a five-week business class in early 2009 offered by Maryland Capital Enterprises and the Small Business Development Center in Salisbury, after realizing Internet self-help guides were lacking.

He also met individually with the Enterprises staff to complete his business plan, opening his company in September 2009 in a 12-by-24 shed on his property. He maxed out two credit cards to cover start-up costs, but he said business is improving and he hopes to qualify for a loan in the next few months.

"They have a network of people that know the ins and outs, the pros and cons, the dos and don'ts of starting a business and maintaining it," Hammond said. "Using those resources or not using them could be the difference between succeeding or failing."

Gallagher said the goal for clients like Hammond is "to see the business graduate and get larger loans from a bank." But times are hard for her organization because grants for operating expenses have dried up, Gallagher added, meaning more work for fewer staff.

While more federal money is available now for CDFIs, Gallagher said the environment is increasingly competitive as more CDFIs apply for the same aid.

Local funds for CDFIs have also decreased because Maryland's budget has suffered major cuts.

Despite the recession, the number of CDFIs nationally has continued to grow, from 694 in 2006 to 834 at the end of 2009.

Susan Wagner, executive vice president of Prince George's Financial Services, a CDFI in Largo, said funds from the county have shrunk and she had to apply for federal funding for the first time last year.

"There's so much opportunity here in the county if we just had the funding to get those loans out on the street," Wagner said.

The biggest federal source of funding for CDFIs is the Treasury's CDFI Fund, which gives out several types of grants and tax credits. Maryland CDFIs have received more than $20 million in grants from the fund since it launched in 1994.

Another $1.5 billion in tax credits went to larger CDFIs and other kinds of community development organizations. Smaller CDFIs do not usually apply for the tax credits because the process is so complicated. A January 2010 Government Accountability Office report recommended Treasury's tax credit program either be simplified or converted to a grant program.

Konohia said the federal government is starting to recognize the value of CDFIs as way to get capital to struggling communities.

The CDFI Fund only received $54 million from Congress before the recession in 2007, but received nearly double in 2008 with $94 million and in 2009 with $107 million. The stimulus bill added another $100 million in 2009.

The federal funds are also important because they help leverage private investment at a rate of 15-to-1, according to a Treasury estimate. Before the recession the ratio was closer to 27-to-1.

Some state officials are beginning to take note of CDFIs, as well.

The January 2010 Sustainable Maryland report published by the Maryland Department of Planning recommended investing more in CDFIs, creating a state-level CDFI fund, and making CDFI resources available to the state's rural areas.

Maryland already has several state programs that CDFIs can tap into, from the Department of Business and Economic Development and the Department of Housing and Community Development.

The Maryland Legislature also passed House Bill 66 this session, expanding a Housing Department micro-enterprise loan program allowing CDFIs to qualify for more funding.

Celester Hall, manager of small business financing for the Department of Business and Economic Development, agreed there is a greater need for Maryland CDFIs because of the recession.

"They have a very beneficial impact because again they target projects and sectors of our local economy that have decent projects but generally can't meet the lending criteria of the traditional lending community," Hall said.

CDFIs are criticized for being too small to be effective, and because it's difficult to track information on failed and incomplete projects.

Their influence may seem limited in view of a national recession, but the Housing Department's Dawn Medley said the impact of CDFIs now "is greater for sure, because lenders—especially the big ones—they don't get it or they're not interested in getting it, the plight of small businesses."

Capital News Service contributed to this report.

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