Magazine article Common Cause Magazine

Banking on the Inner City: Reverse Redlining Pays off for a Network of Alternative Lenders

Magazine article Common Cause Magazine

Banking on the Inner City: Reverse Redlining Pays off for a Network of Alternative Lenders

Article excerpt

On July 15 Joseph Holland stood on the South Lawn of the White House with the president, vice president, members of Congress and the press. With all eyes upon him, the 37-year-old lawyer recounted the opening of his Ben & Jerry's franchise - the first inner-city location for the chain - and the store's positive impact in his distressed Harlem neighborhood.

"I wanted them to understand that real progress could take place in an area like Harlem if the right approach was followed," says Holland, whose 100,000 business loan came from a small community development bank after several conventional lenders rejected his idea.

Holland then introduced President Bill Clinton, who announced a plan to provide $382 million over four years to strengthen the nation's community development financial institutions (CDFIs). The fledgling network, Clinton said, "has demonstrated that when there is a constant commitment to this kind of development, you can produce jobs and growth."

CDFIs, which include federally regulated banks and credit unions and unregulated loan funds and development corporations, operate specifically to rehabilitate housing and jump-start small business in neglected, credit-starved communities. The most talked-about CDFI is Chicago's South Shore Bank, a $250 million federally insured bank with checking and savings accounts like conventional banks, which has been successfully investing in low-income neighborhoods for 20 years.

CDFIs go where traditional bankers fear to lend, shunning the presumption that inner-city investments are sure losers. And after lending about $2 billion over the past 15 years for housing and small business that conventional banks would term risky, the network boasts a loss rate of just I percent.

Their secret is to provide more than money. CDFIs offer the kind of technical assistance critical to making a borrower "bankable."

"Joe [Holland]'s loan application was not in bankable shape when he walked in the door," concedes Lyndon Comstock, founder of the three-year-old Brooklyn-based Community Capital Bank, the CDFI that bankrolled Holland's Harlem scoop shop. "But that didn't mean it couldn't be." With some refinements to the business plan, the loan fell into place, says Comstock. His state-chartered, FDIC-insured institution has $23 million in assets, and $10 million in loans and commitments - and no defaults.

"We do a tremendous amount of technical assistance and hand-holding," explains Patty Grossman, executive director of the nonprofit Cascadia Revolving Loan Fund in Seattle. "At any one time as many as one-fourth of our borrowers are struggling."

Cascadia provides vital how-to information for the borrower, regarding everything from accounting procedures and employee benefit plans to marketing and expansion. In eight years, the fund has loaned nearly $2 million and lost less than 1 percent of it. "That's competitive with traditional banks on a portfolio they wouldn't touch," says Grossman, a former commercial loan officer for a Seattle bank. Like other revolving loan funds, Cascadia borrows money from socially conscious individuals, paying them market interest rates. The fund in turn loans money to credit-worthy projects.

One Cascadia customer, Western Cascade Truck Inc., was started by Pat Malara and four fellow truck mechanics in 1987 to repair fleets of trucks, trailers and tankers. Three years ago Malara got burned on $22,000 worth of service he advanced to a friend and the company was suddenly without cash.

After disappointing visits with Seattle banks, Malara turned to Cascadia, which set about researching the company and its market. "We believed in their ability to turn around," recalls Grossman. Since that first $32,000 loan, Western Truck has borrowed another $64,000 and paid it back. The company bought a new computer system, developed specialized inventory software and expanded into diesel emissions testing. …

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