The CDFI group has been working together for a number of months on possible options for forming an alliance or cooperative. The purpose of this session was to crystalize some options and actually create a plan for going forward, to include interim structure and capitalization. The cooperative will help its members access larger volumes of lending capital at better rates. In order to do this, some common risk management and operating standards will have to be put in place and these will also benefit the members of the cooperative. The ultimate objective of the cooperative is to lend more money at better rates in each member's individual community, thus spurring economic develoment and the accomplishment of each member's mission. The cooperative will allow each member to take full advantage of their local knowledge of their community--something the larger competitors don't have--while lending at competitive rates.

The core group met all day on Monday before the formal start of the session. They looked at different models of alliances and built a preliminary model of the risk management component of their own alliance. On the first day of the session the core group was joined by a group of people representing diverse resources and thinking. With their input, the core group started to develop models for understanding the various services that a cooperative could offer both to its members and to their borrowers.

On the second day of the session the group build a model of protocols for shared risk and a picture of what the ultimate structure might look like. Another team took on the task of defining the outcomes and value proposition for all the different stakeholders (investors, members, and borrowers). The session ended with the group crafting a six month plan, an interim cooperative governance structure, and an interim capital plan.

Assignment: Round 1

Assignment:

Context:           You’ve just been exposed to a presentation on going to scale while maintaining sustainability, and also to six models of how it has been done in different industries and economic communities. In addition, our group has been augmented by 10 people who bring outside perspectives and ideas to the CDFI challenge. The purpose of this assignment is to mix all of these new ideas and resources together and explore ideas for models of collaboration.

Objective:        Using the three panel discussions indicated above for your team to focus on, and your own individual experiences with various types of cooperatives, work through the following questions.

Part I

1. First, for background, what are the drivers in the external environment that are forcing change in the CDFI world?
2. Now, what specific ideas from the panel presentations appeal to you or intrigue you with respect to a CDFI cooperative model?
3. Based on what you’ve heard, what are some good rules of thumb for creating and running successful cooperative models?

Part II

4.   What are the benefits that should accrue from creating a CDFI cooperative model? What are the risks?

5.   Finally, considering your answers to the above questions, what is your vision for how the CDFI world would be transformed in 2010?

CDFI Report Out

We'll start with the Capital group first.

Team 1 - Capital
Our group wound up with asking ourselves "who are we?" Who are the CDFI's? There's a potential for others to be at be at the table with us. But we really need to get better at telling our story for that to happen. Until we can get better at that we cannot do our jobs well and raise the capital we need. To access a whole variety of capital streams we need to answer that question. There was a debate about standardizing and how important that is. Building the value proposition was high on the list of things to do.

In the beginning we talked about who we are and what our constraints are. We looked at ways to raise capital. Working with other people's money was the first idea we brought up. Maybe we thought we could look at managing pools of funds. We said biggest potential market was high net worth market.

We had both GE and Goldman in the group so who we looked at the evolution of banks having some developing interests in the philanthropy. We talked about blended value and return. What is the value of the proposition of this set? CDFI is a heterogeneous set.

Then we thought about trying to create a secondary market. Maybe it looks more like what credit card companies are doing. Pine Tree partners has made some headway and we should find out what they've learned.

Did you try and come up with the value proposition?

Value creation and the value of retaining enterprises and jobs is key. It's about what we prevent from occurring (at the regional level) and the actual impact on enterprise jobs created and retained.

We should try to quantify the effect in our communities. That would help in telling our stories. It's the small business CDFI story.

Any other questions or comments?

Team 2 - Shared Services
I'll do the first half. We started with an overview of how the Lenders One business is formed. All the members are part of the co-op. There's a management company that has a long-term management contract with the co-op. There responsibilities of the members is to do what they do best. In our co-op we negotiate deals with buyers; develop loans to make more money; products for members are cheaper; we buy technology where the members are using it already. A plan for '06 is lead generation.

There are also partners who we work with. Part of our job is to cater to their needs as well. We're match makings lenders to our investors/buyers. In exchange for that our management company earns revenue.

It's capitalized by the members too.

Money Savers
So that is the background of what the value equation is between a co-op and its members. So we then looked at money saving things for us. The shared loan loss may be a key way for savings - this could be the home run. The reason is because we're all at various levels 5-7 (percent of outstanding loans). If we could lower our loan losses by 3 % that's worth $180,000. If what we're doing is effective our risk management standards could reach a level where the industry that funds us says a 5 times rate is acceptable and we can earn 8.5% - that would mean $76,000. There's a net effect of maybe $50,000 of additional net income if we can figure out how to share a loan loss reserve. The way to support it is a standard - charging a half percent or one percent fee. The money goes toward the support of the co-op.

If we can figure out the loan loss sharing then it creates income that really justifies the event for our members and puts us in position to work on the other money savers.

What about survey?

Scott suggested an annual survey. He negotiates a contract for his members. Something consistent like that to help articulate the value proposition and share with funders could be very useful.

It may seem like this is too intangible. We spent a lot of time telling our story about he co-op. When you're up with these big funders like United Way you need to be polished. You need surveys, testimonials, videos, etc. The survey is something that an objective third party can do. We get real results from our surveys. You can't overvalue the importance of telling a great story.

Is the assumption behind this that size will reduce the loan loss reserve? Or is it geographic dispersion?

It needs to be tested. The initial thought is that different funders will impose a reserve requirement upon us. But we've never pushed back. 3% I'm holding on a balance sheet, the other 3% is in the collective pool. What Scott is doing is that he buys insurance that he's able to offer to his members. Maybe it's insurance or collective loan loss. The point is that if the risk management works and we can build our leverage then any dollar capital that we hold that's not in reserves will be worth more.

What does lead generation mean?

One of the real challenges is that we're all covering huge geographic areas: 10-20 staff people. The ability to build leads is really important to the success of our business. Maybe through websites, referral points, etc.

It also grew out of the fact that future revenue must be improved. With entrepreneurs, there's a revolving door notion. We don't know where the next class of entrepreneurs will come from. How do we think about this idea of lead generation that keeps us economically viable?

What do you think of the shared services model?

It's an interesting starting point.

What are the steps to get to this?

That's for tomorrow.

Our organization looks out five years after the fact. What I've said is that there's no time to start today, but I do know that if you go back to your offices and say we will regroup in a couple of weeks then it will continue to sit on the desk. We talked about funding and sharing office space or having someone do due diligence for you.

Is the set of CDFI's in this working group?

There were 14 members we invited in the beginning.

We're starting now to create a value proposition that could be sold to these other eight groups. It could be ten.

It wasn't brought up that the umbrella of members of the co-op is sort of a mindset. There is a group guarantee component of this, where the members would take on the shared liability. We're interested in other members organizations that are mission oriented. We might not want to partner with all members.

Scott said we should have 12 months of operating expenses to get going. So we need to discuss who the initial members are.

The last thing is that this could be a great horse without a jockey. Maybe we need to write a job description for an entrepreneur to run this. We should look nationwide.

I thought we were going to hire Scott?

You'd get sick of me really fast.

There's a lot of conversation about how we're all over-reserving.

There was some conversation about diversifying sources of income. Is there any discussion about that in shared services? Is there anticipation of capturing revenues at the services or management company level? Do you get back anything when you put in capital?

Our company earns half of our revenue from loan centers. We also earn member fees; training; products and services; sponsorship money (City Mortgage and GMAC). And half of our revenue is from other sources besides lending. The co-op will differ in ways because it's a membership organization. The survey was one of the things I mentioned. Members should pay to have the survey done and the management company will run it.

Any other comments?

The human capital side of the equation hasn't been talked about. Attracting, developing, and training people. Why did that not come up?

It did come up. The theory behind some of the risk management and standardization of software and services is going to help us to overcome that.

If you do have a co-op how do you attract good talent? Could attracting talent be another service? You could become a CDFI co-op fellow. There could be ways to leverage the human capital.

I just want to point out that this is not easy. Don't kill me if this doesn't work. You have a challenge on the revenue side. There's a lot you can do as an organization. She just gave you an awesome tip on how to get an employee to work at your office for 12 months. Little things like that make a difference. Knowing the story you guys have to tell and that you are so focused on having mission-driven companies to form stronger partnerships within your industry and to fulfill your mission will help you to succeed.

Bryan Coffman

What do we need to work on tomorrow?

Start with he revenue model.

Leadership - management company.

Initial equity requirements for the management company - the whole management company structure and capital requirements.

There's also a pre-development period. There's time and expense getting to that point.

Value proposition.

Competitive analysis assumptions. There are other groups that would have a vested interest in seeing it happen or not happen.

I think you need to hear from the funders. They're being conspicuously quiet today.

I think we should tie risk management back to this and see if it all fits into this.

You definitely need to walk out tomorrow with what the next steps are.