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At City First Bank of D.C., all deposits are used to fund loans to nonprofits that aid battered women or the homeless, or to small-business owners in low-income neighborhoods, or to developers that purchase and renovate apartment buildings in those communities.
Since opening for business three years ago, $48 million-asset City First has made about $25 million of loans in some of Washington's poorest neighborhoods, said Clifton Kellogg, its president and chief executive officer.
"What we often say is you can be a social activist simply by depositing your money in our bank," he said.
City First is one of more than 200 lenders that have been certified by the Treasury Department since September 1998 as a community development financial institution. According to a November report by the Social Investment Forum, loans made by community development financial institutions -- which include banks, credit unions, loan funds, and venture capital funds -- have increased 41% since 1999, to about $7.6 billion, in part because of the surge of new lenders.
Steve Schueth, a spokesman for the Washington-based Social Investment Forum, said better grassroots efforts plus a lackluster stock market have heightened awareness of community development lending in the last two or three years. That has in turn spurred the creation of 22 community development banks, 19 community development credit unions, and nearly 100 loan funds in a two-year period that ended Sept. 30.
Currently, 527 lenders are certified as community development financial institutions and are eligible to receive money from a U.S. Treasury fund for such institutions. "People are turning to their investments and saying, 'I've got this money here -- how could I use it to make a difference?' " Mr. Schueth said.
Some banks, such as City First, and credit unions commit 100% of their deposits to improving surrounding communities. Others, including Wainwright Bank and Trust in Boston, either set up separate deposit accounts to fund loans for development projects or commit a percentage of their deposits to community investment.
Either way, low-income communities are benefiting. Through the second quarter, community development banks had loans outstanding of $3.1 billion, up 7% from June 1999. Meanwhile, credit unions had loans of $1.8 billion, triple the amount of two years earlier.
Wainwright, with $470 million of assets, commits 40% of its deposits to community development and other socially responsible projects, and senior vice president Steve Young attributes a 29% surge in deposits since September 1999 to growing consumer awareness of these causes.
"The same people who care about practices as a consumer -- whether it is buying dolphin-free tuna or recycled toilet paper -- care about how their money is being invested," he said.
Self-Help Credit Union in Durham, N.C., which earmarks all of its deposits to community-building, recently set up two socially responsible certificates of deposits. Deborah Momsen-Hudson, the vice president of $83 million-asset Self-Help, said one is for child-care loans and the other is for environmental lending.
But the acknowledged leader in the community investment field is ShoreBank Corp. in Chicago. The $1.2 billion-asset company was founded in 1973 to help reverse the economic decline in the city's South Side, and in the last two years it has provided start-up capital and advisory services to a handful of banks certified as community development financial institutions. These include City First, which received organizing guidance from ShoreBank Advisory Services.
Jean Pogge, a senior vice president at ShoreBank, said that since Sept. 11 the company has seen more interest in community investing from depositors and new banks. "I think more people are looking to make a difference in the lives of others," Ms. Pogge said. "And community investing is like a donation that pays you back."
Still, loans made by community development institutions make up just a small portion of the $2.3 trillion committed to socially responsible investing, according to the Social Investment Forum. There are about $153 billion in mutual funds structured to include socially concerned companies, such as environmentally friendly businesses, or to exclude certain companies, such as gun manufacturers. Retirement accounts and other managed portfolios that select stocks based on social concerns make up $2 trillion of social investing, according to the forum.
Outside of the socially responsible investing as defined by the forum, nearly all banks are involved in some sort of lending to help poor neighborhoods and promote social concerns.
Ms. Momsen-Hudson said that though the number is growing, relatively few banks and credit unions have sought designation as a community development financial institution because of the capital-raising requirements. Since lending primarily to low-income people is perceived as risky, she said, community development banks have to raise more initial capital to cover these risks.
"It's just hard work to get started and organized," Ms. Momsen-Hudson said. "Community development banks have strenuous capital requirements and credit unions have their own set of hurdles."
Joe Black, the president and CEO of $330 million-asset Southern Development Bancorp in Arkadelphia, Ark., can attest to that. When Southern Development, which had been a traditional community bank, started earmarking funds for community development about four years ago, it had to boost its capital by $5 million.
Mr. Black said Southern Development also had to spend a great deal of time marketing its community development deposit accounts -- chiefly CDs -- to depositors outside its market areas. Southern's three subsidiaries are in low-income regions of Arkansas and Mississippi, so Mr. Black said he promotes its CDs to socially concerned companies and "community-minded" organizations in wealthier areas of the country. These accounts now have about $10 million of deposits.
Mr. Kellogg said City First also had to scout out deposits. The bank courted nonprofits and D.C.-based businesses, as well as "consumers of high net worth," explaining the bank's community-investing mission and encouraging them to participate, he said.
"There is no question that the loans are there," he said. "Our in-box is overflowing with requests; now our biggest question is, 'Where are we going to get more deposits?' "
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