Not only can community development lending be done in low-income communities; it can be profitable.
By Real Leaders
Clearinghouse Community Development Financial Institution provides financing for low-income and disadvantaged communities and addresses their unmet credit needs to ensure that they have access to capital. The company was founded in 1996 in Southern California and has since expanded its reach across the U.S. Clearinghouse CDFI specializes in real-estate-based projects, including affordable housing, housing for developmentally disabled communities, charter schools, and community facilities.
Real Leaders spoke with Douglas Bystry, president and CEO, about his journey from running a nonprofit to launching and growing a profitable lending company for good, despite plenty of skepticism and hurdles.
Real Leaders: How did Clearinghouse CDFI come about?
Douglas Bystry: I was running a nonprofit that was brokering community loans to regulated financial institutions or banks, and the idea was because of the Community Reinvestment Act that banks would jump at making loans to people who either live in or serve in low-income communities. I did it for four years and quite frankly, we couldn’t get banks to step up.
That experience inspired me to say that if we want to ever make a difference in the low-income or distressed communities we serve, we need to raise our own capital and make our own credit decisions. That was the inspiration for me to start Clearinghouse CDFI. At the time, the only people doing this work for the most part were nonprofits, and I decided to incorporate Clearinghouse CDFI as for-profit. A lot of people said, “You’re crazy. This isn’t going to work. If you could do this kind of lending and be profitable, banks would be doing it. You’re going to be out of business in three years.” But we were able to prove that you can do community development lending in low-income communities — and you can do it profitably.
It’s a difficult task. Our company is walking this tightrope between impact and performance, safe and sound lending. It’s a balancing act because every loan we make has measurable community benefit, but it’s important that they also perform financially and that we get our money back.
RL: What are the biggest challenges you’ve overcome?
Bystry: Raising equity and debt capital has been and continues to be difficult — even after 27-plus years of success. It’s easy for people to say, “We don’t invest equity,” or, “You’re not traded publicly,” or “We can’t invest in an illiquid account,” or a variety of reasons. We’re recapitalizing the company, and we’re raising an additional $50 million of equity. We have a tremendous track record — and it’s still difficult. It continues to be one of the things I spend most of my time on.
In addition, we’ve faced challenges in the economic cycles of this country. For example, prior to the 2007 and ‘08 financial collapse, we were one of the successful single-family mortgage lenders to low-income, first-time homebuyers. At the time, we had originated over 700 single-family mortgages to people who would have been traditionally considered high-risk. At the time of the financial collapse, we had seven loans that had not performed, and that was a tremendous track record in light of what was going on with all the subprime mortgage collapse. But at the time, the sources that we borrowed from to allow us to do single-family mortgage lending stopped, and we had to stop providing that service to low-income families because the economy changed. Despite our successful track record, we had no source of capital to continue single-family lending.
We’re in a high-interest rate environment and a very tight credit market, and those always create new challenges.
RL: How has Clearinghouse CDFI innovated?
Bystry: We were certified as a for-profit CDFI in the first round of certification. We have a number of other firsts: We were the first non-depository CDFI to join and borrow money from the Federal Home Loan Bank System. We’ve been members of the San Francisco Federal Home Loan Bank, and to this date, we’re the largest CDFI borrower of any non-depository CDFI. We were the first CDFI to obtain an S&P rating. We had to convince my board to get involved in New Markets Tax Credits, but it has proven to be an incredibly beneficial tool for the communities we serve. In March 2023, we received formal approval from the CDFI Fund to go nationally, and we’re very excited about providing the kind of impactful loans that we do as a company on a national basis.
We first got involved in making loans in Indian country 15-18 years ago, and at the time there was almost nobody else that would even think about doing loans on a reservation or in and around Native American communities. The Native American reservation system is set up in a way that hinders participation in the nation’s capitalist system. The hardest thing to do is to lend in Indian country and on a reservation, but we figured out a way to do it.
RL: What’s your best advice for others who want to follow suit?
Bystry: Go into it with your eyes open and understand the difficulties that it will present. For example, as a policy, foundations will not work with us for the most part. I still get this “nonprofit: good, for-profit: bad” mentality. It shuts that door.
As a for-profit CDFI, we’re paying income taxes and we’re probably paying a higher cost for our borrowed debt capital than nonprofit CDFIs are paying, and that means that our rates have to be higher, unfortunately.
RL: What does Clearinghouse CDFI look for to consider a borrower a good risk?
Bystry: It starts with the mission and impact. We look at: Is this loan, this borrower, this project going to have a positive community impact and in what way? Then on the other side, we say, “If we loan this money, how can we be assured or at least have a good semblance of assurance that we’ll get paid back?” We also have to make sure because we charge interest that this borrower can make their payments on a monthly basis.
What’s nice for us is we don’t have any programs per se, so we’re not trying to get our borrowers to fit into a box, and that’s the difference between us and a conventional financial institution. You have to meet the criteria, and it’s almost completely numerically based where we can say, “Let’s take a look at this borrower. Let’s figure out a way that we can make this loan. Let’s work outside the box.” We’re not constrained. We don’t have to do things “by the book” of underwriting alone, and our underwriting department, led by Kristy Ollendorff, develops loan structures that optimize borrower success, as opposed to saying, “Here’s our loan. Here’s our interest rate. Here’s the term. Here’s what you know. Here are the numbers that you have to hit to be approved, and if you don’t hit those numbers, you’re declined.”
We can take that and we can say, “They really don’t have as much down, but maybe there are some other ways that we can do it. Maybe we can get clever with providing a second or maybe we can do two loans to them, one at first and one second. Maybe we can defer a part of the loan for another time. Maybe we can stretch out the amortization schedule longer.” We have a lot of underwriting flexibility, and our business development officers, our underwriters, and our loan committee do an outstanding job of finding ways to ensure that impactful loans get approved, instead of finding ways to turn them down.
