Shared Risk Model Team

We built a model of the intention of flow of benefits in the system and then we talked about how the risk should be shared.

The management company gets a greater flow of deals, cheaper capital and larger deal sizes. There might be tiered membership in the Co-op. The governance of the management company we didn’t analyze too closely. The board might be based on shares per member or on capital contribution to the management company or size of assets of your company. The board would be made up of the organizations that are participating. The management company would have a long term contract with the co-op. The participants would all have the same motivation to work.

The shared risk model included an annual audit and loan review and common underwriting standards. We have more work to do there. Would the management company impose a single format on members or something looser? Even if it’s not one policy and one system, ultimately the system would be self-regulating because loan loss reserves would be based on a three year average and there is a minimum percentage of net assets (>20%). The co-op structure provides longer term, cheaper access to capital which it passes on to members. The ability of the management company to do this depends on the shared risk pool of the members as well as the diversity of the membership.

Value Proposition/Benefits Team

We created a flow of desired outcomes for ourselves, our beneficiaries and our investors. Then we wanted to see what structural requirements would be implied.

Risk management, product diversity and operating efficiency (more productivity vs. just cost reduction), operating stability (shared platforms, training, applications, HR) would be important for the members. This would enable us to look like organizations that are much bigger. Standard operating best practices are based on cross learning and on having a living manual or document.

Relevance was important. We need to be relevant to a broader cross-section of customers. Credit lines is one example of doing larger deals. We’d do better servicing and management. We’d be more visible in market places. More people would know about us. On the capital side, shared risk is important. Marketing and deal sources would be important because we all market poorly. Finally, liquidity is important to us.

The impacts on our communities is important to us. We want to achieve more in this structure than we can achieve working separately. We’d like to pass on savings.

The investor side gets more confidence and comfort in their deals and also providing larger concentrations.

We didn’t get very far on the structural things. We don’t have agreement on the membership scope. We don’t know how many members we need to have to get the benefits we’re looking for. We did not figure out anything beyond that someone needs to be at risk in the shared risk/shared capital department. What’s the downside of risk? Is that a police, or a balance sheet or a reputation function? There would be classes of membership. We also need strong leadership and a for-profit structure for the management company would likely attract a stronger entrepreneur.

The entity itself will have to be credible and that means net worth. The Co-op itself can’t be weaker than the members.

The co-op could buy loans from members as a function of pricing in the market.

If we are going to create a for-profit management company with standards, do we have to create barriers to entry? What if there were a competitor to our co-op. A competitor in a small field like ours radically changes the landscape. We’d want to analyze the players in the field on the competitive front. We might also start putting out feelers and information to the potential field of members as we create it.

To make the shared capital work, we need the demand and volume. So the group of members has to be users of the capital. If someone else comes in as a competitor, then our ability to get to the capital markets at scale would go away.

The Governance structure is a bit of a barrier to entry for members.

We might be able to make partners of some of the potential competitors. One way to connect might be through CARRS (sp). Is it reasonable to ask if they would be an investor in the management company? Or we might share our model and direction with them if they wanted to do something like it for the housing CDFI’s. It might be good to make them a part of the conversation at some point so we are not perceived as subversive. We want to create something flexible for the industry.

Our underwriting standards are different than CARRS. Are we a feeder system for CARRS as opposed to using it for our good seal of approval? There are some opportunities for cross-marketing. We might be able to jump to the top of the list with them.