When Banks Can't -- or Won't -- Help

By Jason Fry
American News Service

Eighteen months ago, farmers Wade and Christine Clegg stood at the edge of bankruptcy in a rural outback of Washington state. They needed a new water supply system but couldn't afford to buy one in their first season as specialty potato growers.

Closer to Seattle, a small community of Indochinese refugees, farmers from the mountain tribes of Cambodia and Laos, needed an expensive tractor repair to keep growing their sugar peas and other vegetables. But after a very bad season, they had nothing left in the bank.

In town, a small trucking company called Western Cascade was floundering, imperiled by a cash crunch and customers who hadn't paid their bills.

The Cleggs, the refugees and the truckers were all in desperate need of operating capital, but couldn't get help from commercial banks. They finally did get their loans - not from a bank, but from Cascadia Revolving Loan Fund, a Seattle community development loan fund.

"It's extremely difficult for a small business to do business with a commercial bank," said Pat Malara, part-owner of Western Cascade Truck Inc. "Banks loan money to people who have money."

* * *

Increasingly, those who don't have the money to get approved for a commercial bank loan are turning to community development banks and loan funds. These institutions receive loans made at below-market rates by depositors whose concerns go beyond their own financial return. They then reinvest the money in businesses and distressed communities that conventional lenders have written off as bad risks.

Where conventional lenders "stop looking at an application is where we start," said Patty Grossman, executive director of Cascadia Revolving Loan Fund.

In bankruptcy when they applied for their loan, the Cleggs received $25,000 from Cascadia. Today their organic farm grows and sells over 50 gourmet varieties of potatoes to some of the country's most exclusive restaurants including the Four Seasons and Ritz Carlton.

They have also recruited neighboring families into the business, teaching them how to grow potatoes. Among the new growers are displaced timber workers who lost their livelihoods in part because of federal efforts to protect the spotted owl; others are former fisherman who met a similar fate with the depletion of salmon and other fishing stock.

So far, the potato-growing project has generated more than $80,000 for 10 families.

Community development funds, such as Cascadia, have been operating in rural and urban areas for over two decades. Those involved in this new field often cite the South Shore Bank, launched in 1973 in a low-income African-African community in Chicago, as providing early evidence of their movement's potential.

Over the years, South Shore has provided financing for rehabilitating approximately one-half of the neighborhood's housing stock, in an area covering over 200 square blocks. As further proof of the bank's importance to the community's development, advocates note that South Shore makes more loans to minority borrowers than any other bank in Chicago.

Since South Shore's founding, the industry has grown dramatically. The National Association of Community Development Loan Funds based in Philadelphia, which represents 44 private, non-profit community development financial institutions, has seen its members' loans grow more than sixfold in the last decade to approximately $80 million in value.

Community loan funds and development banks are part of a larger movement that also includes certain types of lending by credit unions, microenterprise funds (very small loans to group borrowers), and community development corporations. Nationwide, these institutions have loaned more than $3 billion, according to the Coalition of Community Development financial Institutions.

Malara and his five partners at the trucking company in Seattle came into about $30,000 of that money when they needed it most. With Cascadia's help, they now have more than 20 employees and pay $17 an hour, plus benefits, to their starting journeymen.

Although these community-focused institutions lend principally to people who can't get a loan from a commercial bank, very few of their loans go bad.

Jeremy Nowak, executive director of the Delaware Valley Community Reinvestment Fund in Philadelphia, said that his group has a default rate of only a fraction of 1 percent - $15,000 in losses on $35 million lent over 10 years.

One reason for the exceptional success rate is that these funds use a different criterion in determining when a loan is written off. Another may be that many also offer training to their clients.

In Woodinville, Wash., the farmer-refugees, for example, needed not only the money to fix their tractor, but also training in how to market their specialty flowers and vegetables. They received both from Cascadia and now have a thriving booth at the Seattle farmers market filled with bunches of dahlias and cosmos among the dozens of flowers, together with baby bok choi and other Asian vegetables.

"We're investors - we risk capital," says Nowak. "We've got a sense of what works and what doesn't work."

* * *

More and more, community development funds see themselves as forging a new kind of solution - one that defies the usual categories of left and right, private and public, profit and non-profit.

"The politics of what we do cuts across traditional partisanship," said Mark Pinsky of the National Association of Community Development Loan funds. "Our approach to combating poverty marries the compassion traditionally identified with Democrats with the Republican ideals of business discipline," he noted.

"We achieve Democratic ends using Republican means."

Loan funds teach Washington the politics of local control

Many supporters of community development loan funds were pleased when President's Clinton's 1992 campaign promises included the creation of 100 new "South Shores," referring to the successful Chicago development bank founded in the 1970s.

But insiders were less than enthusiastic. "Those of us in the field reacted very strongly," recalled Patty Grossman, director of Cascadia Revolving Loan Fund in Seattle. "Why create new institutions when there are people out here with a history and a track record?"

Moreover, "We were worried that the government was taking a cookie cutter approach," said Mark Pinsky of the National Association of Community Development Loan Funds, "trying to make all the emerging initiatives fit one model like South Shore. We tried to convince Clinton and Congress to be more flexible, to allow people to meet local needs in any way that is appropriate, as long as the funds use sound business practices."

With no Washington lobbyists to push their case, community fund advocates turned to their networks of borrowers and investors around the country. They invited lawmakers and congressional aides to visit communities with successful funds.

"We were shocked," said Pinsky. The grassroots campaign worked, resulting in a flexible federal program aimed at strengthening the community development efforts already under way.

So far the Clinton administration has garnered $95 million in congressional appropriations for a new Community Development Financial Institutions Fund.

Even though the new federal support will increase the capital base of community development lenders, Pinsky said he will continue to be "on my watch" to make sure federal support does not undermine local control. "Capital for community purposes can take different forms in different communities. It's local control that matters."

Jason Fry is a writer in Brooklyn, N.Y. His work has appeared in a number of publications, including the New Orleans Times-Picayune, the St. Petersburg Times and the Fresno Bee.

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