UVA-ENT-0202 Jun. 16, 2014
CITIZEN POTAWATOMI COMMUNITY DEVELOPMENT CORPORATION: FINANCIAL INCLUSION IN INDIAN COUNTRY
Cindy Logsdon, assistant director at Citizen Potawatomi Community Development Corporation (CPCDC), based in Shawnee, Oklahoma, faced a dilemma. In 2010, she had helped to implement the JumpStart Auto Loan program her organization offered to employees of the Citizen Potawatomi Nation tribal enterprises.1 On one hand, the loan filled a need in the market the CPCDC served. As did most of the United States outside of high-density metropolitan areas, Oklahoma lacked an efficient mass transit system, and, in order to get to work, employees needed reliable cars. On the other hand, the auto loan was one of the highest-risk programs the CPCDC offered. In addition, the loan portfolio was small, and so was the income it generated. The CPCDC was a certified Native American Community Development Financial Institution (CDFI) and loan fund established in Shawnee in 2003 (Exhibit 1). It provided microloans, business loans, short-term consumer loans, credit builder loans, individual development accounts (IDAs), and small business–development services to underserved Native communities. The CPCDC served Citizen Potawatomi Nation members and employees nationwide, as well as Native American–owned businesses throughout Oklahoma.2 One overcast day in January 2014, Logsdon sat in her office in Shawnee, reviewing the JumpStart Auto Loan program’s financial data (Exhibit 2). Over the past four years, the loan portfolio had grown by only 10 to 13 loans a year, and the average loan size was about $10,000. Logsdon had to ask herself whether helping 10 to 13 employees annually was worth the trouble. She recognized that, in addition to the cost of funds—which at 3.5 percentage points translated to $7,000 per year and about $3,500 per year in miscellaneous expenses—there was also the cost of 1
Citizen Potawatomi Nation was a federally recognized tribe of Potawatomi people based in Oklahoma. In this document, the term “Native” will be used to describe groups also described as Indians, American Indians, Native Americans, and by individual tribal designations. It is recognized that these terms are socially constructed, and the usage here is employed because it is the recognized federal term. 2
This field-based case was prepared by Gosia Glinska, Senior Researcher at the Batten Institute, and Gregory B. Fairchild, E. Thayer Bigelow Associate Professor of Business Administration. Names and job titles of loan applicants have been changed. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2014 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
-2-
UVA-ENT-0202
paying an employee to manage the program. She wondered if the social benefit of providing affordable car loans to a relatively small group of people and the revenue generated by the portfolio were enough to offset the cost of offering the loans. As Logsdon looked away from her computer screen, her eyes rested on three packets of car loan requests, which Tina Pollard, the JumpStart program coordinator, had left for her signature (Exhibit 3). Logsdon read the first application, which was from Jason Moore.3 During his eight-year employment as a full-time line cook at the Grand Casino’s Sports Grille, Moore had rarely missed a day at work. His wife, a stay-at-home mom, had recently had a new baby. Looking at Moore’s low credit score and cringeworthy debt-to-income ratio, Logsdon let out a deep sigh. From “True People” to U.S. Citizens: A Brief History of the Citizen Potawatomi Nation The Potawatomi—whose name meant “people of the place of the fire”—were an Algonquian-speaking tribe living in the region of the Great Lakes long before the arrival of the European settlers.4 Originally, the Potawatomi, the Chippewa, and the Ottawa were members of the Three Fires Council and formed one nation known as Nishnabe, or true people.5 Beginning in 1789—the year they signed a treaty of friendship with the United States— the Potawatomi were forced to move to increasingly smaller reserves and eventually lost more than 89 million acres of their tribal land holdings.6 The brutal removal of about 850 Potawatomi from Indiana to Kansas in 1838, during which many died, is known as the Trail of Death. 7 In Kansas, the Potawatomi kept losing their land to white settlers. After being forced to sign another treaty in 1867, they were pushed into Indian Territory in present-day Oklahoma.8 Hoping to prevent further land losses, they took U.S. citizenship, creating the basis for the Citizen Potawatomi Nation. By the early 1870s, most Citizen Potawatomi had resettled in Indian Territory, forming communities near present-day Shawnee. Over the years, many members of the tribe moved to California, Texas, Kansas, and other states in search of job opportunities. In 1948, the U.S. government officially recognized the Citizen Potawatomi Nation as a tribe of the Potawatomi people. At the dawn of the 21st century, the tribe had more than 30,000
3
To protect the privacy of the loan applicants, their names and job titles have been changed. R. David Edmunds, The Potawatomis: Keepers of the Fire (Norman, OK: University of Oklahoma Press, 1978), 3. 5 Lisa A. Kraft, “Citizen Potawatomi,” Encyclopedia of Oklahoma History and Culture, http://digital.library.okstate.edu/encyclopedia/entries/p/po024.html (accessed May 27, 2014). 6 “Culture,” Citizen Potawatomi Nation website, http://www.potawatomi.org/culture (accessed May 27, 2014). 7 http://digital.library.okstate.edu/encyclopedia/entries/p/po024.html. 8 http://digital.library.okstate.edu/encyclopedia/entries/p/po024.html. 4
-3-
UVA-ENT-0202
members, about 10,000 of whom lived in Oklahoma.9 Like other Natives, the Citizen Potawatomi Nation was plagued by poverty, ill health, bad living conditions, and ineffective selfrule. More than 100 years of broken treaties, land theft, destruction of natural resources, paternalism, and federal policies aimed at the eradication of Native language and culture had left the Citizen Potawatomi Nation with 2.5 acres of trust land, $500 in cash, and a run-down trailer that served as tribal headquarters.10 Enter “Rocky”: Citizen Potawatomi Nation Revival Things turned around under the leadership of John “Rocky” Barrett, who took the helm of the Citizen Potawatomi Nation as chairman in 1985, after serving as vice chairman for more than 10 years. Like many Citizen Potawatomi Nation people, Barrett had only one parent who was a member of the tribe—his mother.11 His father was of Irish descent. Barrett attended Princeton University and Oklahoma City University, from which he graduated with a degree in business. Following in his father’s footsteps, he worked in the oil industry, first as a roughneck at age 15, then as president of Barrett Drilling Company, an oil- and gas-production business he had started after buying an oil refinery. He was also president of Barrett Land and Cattle Company, an Angus cattle ranch.12 As chairman of the Citizen Potawatomi Nation government, Barrett was instrumental in the adoption of a new constitution and statutes that emphasized tribal self-determination under federal law but also held tribal officials accountable for their mistakes. The constitution led to the creation of a tribal government consisting of an executive branch with a tribal chair and a business committee, a legislative branch with a general council, and a judicial branch with a supreme court.13 “Back when we were poor, our tribal government was not a government at all,” Barrett said. “It was a circus run from inside the monkey cage.” 14 Barrett’s focus on Native entrepreneurship and shrewd management of the tribal sovereignty that gave tribes a competitive edge under federal and state laws started a pattern of economic revival.15 To secure loans and attract investors, the tribe adopted uniform accounting 9
http://digital.library.okstate.edu/encyclopedia/entries/p/po024.html. Blaine Harden, “Walking the Land with Pride Again; A Revolution in Indian Country Spawns Wealth and Optimism,” Washington Post, September 19, 2004. 11 The Citizen Potawatomi Nation recognizes tribe members based on ancestral records. To be recognized as a member, a person must be the child of at least one tribe member. 12 Keith A. Eaton, “The Face of Leadership: John A. Barrett, Chairman, Citizen Potawatomi Nation,” Distinctly Oklahoma, May 1, 2012. 13 http://digital.library.okstate.edu/encyclopedia/entries/p/po024.html. 14 http://digital.library.okstate.edu/encyclopedia/entries/p/po024.html. 15 The Indian Self-Determination and Education Assistance Act of 1975 helped Native tribes break the grip of the Bureau of Indian Affairs and take over operations of everything on the reservations. Tribal governments didn’t have to pay federal and state taxes on profits, which they reinvested in social services. 10
-4-
UVA-ENT-0202
standards, eventually winning a national award for transparent financial reporting. 16 Since withdrawing trust fund dollars from the Bureau of Indian Affairs that invested the tribe’s money in failing enterprises, the Citizen Potawatomi Nation doubled its returns on investments. 17 All those changes, combined with strong enforcement of the rule of law, led to a period of stability, progress, and prosperity, increasing tribal confidence and pride. Under Barrett’s leadership, the Citizen Potawatomi Nation had experienced more than 15% average annual growth for 20 consecutive years.18 Although the Citizen Potawatomi Nation owned several enterprises—including casinos, convenience stores, a grocery store, a golf course, a truck stop, and First National Bank and Trust—members of the tribe were less affluent than their counterparts in the general population. In 2006, 15% of Citizen Potawatomi Nation members in Oklahoma lived in poverty compared with 9.7% of tribe members in other states and 12% of the general U.S. population. The median income for Oklahoman Citizen Potawatomi Nation members was $38,846, while the general U.S. median was $41,994.19
The CPCDC: Founding and Mission Barrett understood that supporting entrepreneurship was crucial to the continued economic revival of his tribe. He was also painfully aware of the lack of access to capital in Indian Country. One day, while visiting Washington, DC, Barrett heard about CDFIs and their mission to expand access to credit and financial services in lower-income urban, rural, and Native American communities. In 2000, there were only two certified CDFIs that had a Native focus, and awareness about the CDFI movement was scarce.20 Upon his return to Shawnee, Barrett got in touch with Kristi Coker, who worked for the tribal government. Coker contacted the Opportunity Finance Network (OFN), requesting help.21 Soon, Bill Dorsey of OFN and Stewart Sarkozy-Banoczy of First Nations Oweesta Corporation, 16
Harden. Stephanie Innes, “‘Think Like a Sovereign,’ Indians Told,” Arizona Daily Star, November 13, 1999. 18 “The Citizen Potawatomi Nation Economic Impact Statement,” flier published by the Citizen Potawatomi Community Development Corporation, 2012. 19 “Citizen Potawatomi Citizen Development Corporation,” Harvard Kennedy School of Government website, http://www.innovations.harvard.edu/awards.html?id=31361 (accessed May 27, 2014). 20 In 2013, there were 35 Native American CDFIs that were certified or qualified to be certified. They all received awards from the Native American CDFI Assistance Program. See Community Development Financial Institutions fund, “List of FY 2013 NACA Program Award Participants,” http://www.cdfifund.gov/docs/2013/cdfi/2013%20NACA%20List%20Alpha%20by%20Org.pdf (accessed Dec. 22, 2013). 21 Based in Philadelphia, Pennsylvania, OFN was a national network of community development financial institutions investing to benefit low-income, low-wealth, and other disadvantaged communities. See the website at http://ofn.org/ (accessed May 27, 2014). 17
-5-
UVA-ENT-0202
came to Shawnee to help establish the CPCDC. They launched a market study and set a goal for the loan fund to provide loans to 3,000 Native business owners. When the study revealed that there were no financial institutions in Oklahoma dedicated to serving Native Americans, the CPCDC board adopted a mission to serve all Natives in Oklahoma and all Citizen Potawatomi Nation members in the United States. The CPCDC was incorporated in May 2003. From the beginning, the management and board understood that, even though the CPCDC was a Native organization, it was really dealing with the challenges specific to rural poverty, such as lack of access to mainstream financial services. Therefore, the CPCDC’s mission extended beyond providing loan capital and financial products to tribal members and Oklahoma Natives; the ultimate goal was to guide them through a transition from being unbanked to traditional banking. As one staff member put it, “I’m trying to spin people into the mainstream financial market.” The CPCDC was also committed to the sustainability of its programs and shied away from products that would rely on grant funding. “If we can’t sustain it, we don’t do it. There’s a lot of federal money we don’t go after,” Coker said, and added, “We do slow, steady, smart growth.”
Talent and Leadership Coker, who served as the CPCDC’s first executive director, had started her career as a college intern with the Oklahoma City government. She wrote grants and worked with a variety of groups dedicated to community development, including the Urban League. She held this position in 1995, the year of the bombing of the Alfred P. Murrah Federal Building in Oklahoma City, which killed 168 people.22 When the city launched a revolving loan fund to help small businesses, hoping to spur economic revitalization, Coker made loans and coordinated smallbusiness training. In 2004, recognizing the need for banking experience on the start-up, Coker hired Cindy Logsdon, who had worked in the retail banking industry for 15 years before serving in the Citizen Potawatomi government’s accounting office. Logsdon offered an operationsoriented skill set, including critical knowledge in the loan and mortgage documentation areas. In November 2011, Shane D. Jett, a Tecumseh, Oklahoma, native and member of the Cherokee Nation, took the helm of the CPCDC as executive director. A former state representative, Jett had been elected to the Oklahoma legislature in 2004 and had served the district until 2010. A strong believer in diversification of economic activity in Indian Country, Jett counseled the Oklahoma tribes against being too dependent on gaming. Instead, he advised them to seek contracting alternatives with the U.S. military.
22
“History and Mission,” Oklahoma City National Memorial and Museum website, http://www.oklahomacitynationalmemorial.org/secondary.php?section=1&catid=193 (accessed Dec. 22, 2013).
-6-
UVA-ENT-0202
Growth In 2009, the six-year-old CPCDC had six employees. With community development expertise, banking expertise, accounting experience, and deep knowledge of tribal matters, the CPCDC had the makings of an effective start-up team. The organization served about 1,200 people annually with financial education products. Approximately 275 people in that group held consumer loans. The CPCDC was the most active Native CDFI in the country in terms of the number of people served and dollars deployed. The CPCDC was also the only Native CDFI to have transitioned from the Native American CDFI Assistance (NACA) program to the mainstream CDFI funding program as of 2009.23 By 2009, the CPCDC had seen a considerable rise in demand for commercial loans, caused in part by growing unemployment in the manufacturing industry. 24 Borrowers who had stronger profiles were approaching the loan fund, creating another channel for growth. Coker foresaw a growth in loan size; she recalled “looking at the ins and outs of a million-dollar loan.” Another CDFI approached the CPCDC about administering its Individual Development Account (IDA) program. As she considered those opportunities, Coker was in frequent communication with accounting. “As we grew, our financial systems needed to get updated and grow too,” she said. The CPCDC received awards from the CDFI fund in 2002, from 2005 to 2009, in 2011, and 2013. Early awards funded technical assistance and training for the loan fund as well as the development of a credit counseling curriculum. In 2008, the CDFI fund’s award included $1 million for lending capital. The CPCDC was also recognized with the Community Impact award at the 2009 Wells Fargo NEXT Awards for Opportunity Finance and was a High Honors award recipient from the John F. Kennedy School of Government at Harvard University.
Core Markets, Products, and Innovation Initially, the CPCDC offered three programs: the Micro Business Loan Program, featuring loans up to $35,000; the Commercial Loan Program, offering loans up to $200,000; and Business Development Services. Over time, the organization started to develop financial products to fill an acute demand for unsecured, small-dollar lines of consumer credit. Because of tarnished credit, many tribe members and employees did not qualify for loans at the tribe-owned First National Bank and Trust, or at any traditional bank. When they needed 23
“Keynote Address by Director Gambrell at the 9th Annual Indian Country Tax Credit Conference,” August 18, 2009, http://www.cdfifund.gov/speeches/Gambrell-2009-06-9th-Annual-Indian-Country-Tax-CreditConference.asp (accessed May 27, 2014). 24 A General Motors plant in Oklahoma City, Oklahoma, that closed in 2006, laying off 2,400 employees, was just one example.
-7-
UVA-ENT-0202
emergency cash, they turned to payday lenders. The minimally regulated payday-loan industry offered short-term loans—typically between $100 and $1,000—marketed as a quick, easy way to tide borrowers over until the next paycheck. In Oklahoma, as in other states that did not ban them, payday lenders charged triple-digit interest rates, trapping vulnerable borrowers in a cycle of debt. In 2005, the CPCDC launched the Citizen Potawatomi Nation Employee Loan Program, an innovative alternative to payday loans. In addition to loans ranging from $500 to $1,500, the program provided long-term solutions to financial hardship via its educational component. Through partnership with the Consumer Credit Counseling Service of Central Oklahoma, the program offered borrowers guidance in the areas of budgeting and managing credit obligations, increasing their financial literacy and creditworthiness. The CPCDC made more than 300 loans each year to employees of various tribal enterprises. By 2013, loan losses were under 1%. In 2006, the CPCDC introduced IDAs alongside the launch of the Asset Builders Matched Savings Program for adults and young adults. The program consisted of financial education—including sound budgeting practices and understanding credit—and a 12-month matched savings program. The adult IDA was designed to help participants accumulate assets for business start-up, home ownership, and credit repair, while the youth IDA—for participants between the ages of 15 and 20—was designed to help finance postsecondary education. The program helped participants increase their credit scores by 20 to 30 points. The CPCDC’s products illustrated its management’s belief that offering basic financial services such as transactional accounts and credit was not enough in an area where many people lacked even rudimentary knowledge about personal finance. “Anytime you bring a new product, it has to have an educational component, or it doesn’t work,” Logsdon said. 25 Comprehensive support services such as financial education and counseling were, therefore, indispensable; not only did they decrease the risk of future default by borrowers, they created opportunities for participants to set financial goals, build assets, and establish creditworthiness. Because the tribe-owned First National Bank and Trust was not equipped to provide the necessary support services, the prevailing notion at the CPCDC was that the two financial institutions would work together to build financial capacity among the Native population they served. The bank would refer customers who were not creditworthy to the CPCDC, and the CPCDC would help them repair their credit until they qualified to become customers of the bank.
25
All quotes attributed to Cindy Logsdon derive from a case writer interview with Logsdon, Shawnee, Oklahoma, August 2013. All other information and quotations, unless otherwise noted, derive from case writer interviews with company representatives.
-8-
UVA-ENT-0202
Risky Business: The JumpStart Auto Loan Program In 2009, Tina Pollard, the CPCDC’s consumer loan coordinator, was exploring ways to address barriers to getting to work that employees of the Citizen Potawatomi Nation faced. She knew that many needed reliable cars and affordable financing to pay for them. People with low-wage service jobs were especially vulnerable when their cars broke down. But even those with well-paying jobs were not immune to financial hardship that could tarnish their credit record. An illness or a job loss could easily lead to an inability to pay bills, seriously damaging their credit and destroying any chance of being approved for financing by a traditional bank. Pollard knew that many Citizen Potawatomi Nation employees, regardless of their income, had credit scores lower than 600. When they needed a car loan, they had no other option but to turn to car dealers offering buy-here, pay-here (BHPH) financing. The BHPH dealerships specialized in selling used vehicles, which they financed inhouse, to consumers with bad credit. Because the loans they offered were risky, they charged interest rates higher than 30%, which were considered predatory.26 In addition, many BHPHs sold road-worn vehicles at inflated prices. Pollard knew that many Citizen Potawatomi Nation employees who were BHPH customers had been offered financing with payments they could not afford. As a result, they experienced multiple car repossessions. The CPCDC alternative to predatory auto lenders To bridge the gap between borrowers with blemished credit and the availability of affordable car loans, in 2010, the CPCDC launched the JumpStart Auto Loan program for Citizen Potawatomi Nation employees. As Logsdon put it, “We had some capacity on the consumer side, and [Pollard] saw the need for dependable transportation that wasn’t being filled.” The JumpStart loan was available to active, full-time employees in good standing who had worked for any of the tribe-owned enterprises for at least three years. The interest rate was a flat 12%, fixed for the term of the loan, and zero down payment. “This isn’t a program for someone who can go to the bank and get a 4% auto loan,” Logsdon said. The loan term ranged from three to five years, but most borrowers opted for a four-year term. Applicants were required to complete a budgeting and credit counseling session during which Pollard determined the amount of the loan based on their ability to repay it. “The budgeting sessions—that’s all part of making sure the payments are realistic,” Logsdon said. “We’ve turned down employees for whom we couldn’t find a payment they could afford.”
26
Ken Bensinger, “Wheels of Fortune: A Vicious Cycle in the Used-Car Business,” Los Angeles Times, October 30, 2011.
-9-
UVA-ENT-0202
The budgeting and credit counseling session served another important function. As with other loan products the CPCDC offered, the goal of the JumpStart program was not only to help employees buy a car, but also to educate them about personal finance and credit obligations. By offering them loans with payments that fit their budgets, the JumpStart program gave borrowers with tarnished credit history a chance to repair their credit, so that, eventually, they would be eligible for loans with mainstream financial institutions. “This is also a great lesson that your credit score is your asset,” Logsdon said. “You pay less interest when you have a better score.” While determining someone’s ability to repay the loan, Pollard considered not only the FICO credit score (Exhibit 4) and debt-to-income ratio; she also focused on each applicant’s unique situation, trying to get a more nuanced picture of whether he or she was creditworthy. “We look more favorably at someone who had big medical expenses, and that’s why they weren’t paying their bills on time, as opposed to not budgeting their money well,” Logsdon said. Protecting the loan Loans issued to borrowers who had FICO credit scores lower than 620 were considered riskier than loans issued to borrowers whose scores were higher than 720. The JumpStart loan was going to the borrowers whose credit scores made them ineligible for loans from mainstream financial institutions: the average credit score of a JumpStart loan recipient was 513. The CPCDC took several steps to protect the loans. Like most auto loans, the JumpStart loan used the car being financed as collateral; therefore, the CPCDC made sure that the borrowers purchased cars in the best possible condition. Once they were preapproved for a specific amount up to $15,000, they could buy a car at one of the two vendors approved by the CPCDC. In addition, the CPCDC placed a lien on the car. “We make sure that our interest in the car is shown in the state records, so that the loan recipients can’t sell it,” Logsdon said. “The vendor sends the car title directly to our office, and we hold on to it until the loan is paid off.” In addition, the borrowers were required to carry auto insurance. “If the car was totaled, the check would come to us to pay off the vehicle,” Logsdon said. Since all borrowers were employed by the Citizen Potawatomi Nation, the car payments were deducted automatically out of their paychecks. “When they leave employment, then we have a problem,” Logsdon said. If the borrower defaulted on the loan or left employment, the CPCDC would seize the car. As assets, however, cars depreciated rather than appreciated over time. The resale value of the car also depended on how well the borrower took care of it in terms of maintenance and safe driving. Despite taking precautions, the CPCDC had to repossess 10 vehicles in four years. “And we had two loan losses,” Logsdon said. “We had to sell three vehicles we repossessed, but we didn’t recover 100% of the value of the cars. They were too banged up. We’re addressing the need of making sure that an employee has reliable transportation, but it’s risky for us.” Logsdon
-10-
UVA-ENT-0202
added, “Loans in our commercial portfolio are A-rated loans, and we reserve 5% for potential losses. For potential losses for this particular program, we’re reserving 10% across the board.” As Bob Crothers, the CPCDC’s senior commercial lender, said, “It’s a needed product, but this loan isn’t something a start-up or a minimally capitalized program could offer. It’s our highestrisk program in terms of dollars out.” Logsdon’s Decision Since the launch of the program, the CPCDC had closed 59 loans. To date, the loan portfolio had generated $108,303 in income and fees. But there were the costs of funds and of paying an employee to manage the application process, review loan applications, and conduct budget- and credit-counseling sessions with the applicants. Pollard, who did all that, also managed an employee loan fund. She was paid from the income generated by those two funds, but her salary was not allocated to either fund. Pollard’s salary and fringe benefits amounted to $50,880 annually. Even though Logsdon was the one who signed off on each loan, she did not spend a significant amount of her time on the JumpStart Auto Loan program. The CPCDC was driven by a mission to offer affordable financial products and services in an underserved market. At the same time, the organization strived to be financially sustainable. The JumpStart program, therefore, needed to be self-sustaining based on the revenue generated from loan proceeds, while not being usurious to the borrowers. As Logsdon tried to decide whether her organization should continue offering the JumpStart Auto Loan, she couldn’t help thinking about the many employees of the several tribal enterprises for whom the loan was the only alternative to the high-cost auto lenders that populated Oklahoma. On her desk, the three packets containing the most recent loan applications awaited her signature.
-11-
UVA-ENT-0202
Exhibit 1 CITIZEN POTAWATOMI COMMUNITY DEVELOPMENT CORPORATION: FINANCIAL INCLUSION IN INDIAN COUNTRY Community Development Financial Institutions (CDFIs) CDFIs were private-sector organizations dedicated to providing a range of financial products and services in economically distressed markets underserved by traditional finance institutions. 1 By “delivering responsible, affordable lending,” CDFIs helped “low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream.”2 As hybrids between mainstream financial institutions (such as banks) and community development organizations, CDFIs measured their success by focusing on the double bottom line: economic gains and the contributions they made to the communities they served.3 Although CDFIs were profitable, they were not profit maximizing, because their primary mission was community development.4 CDFIs had long existed as informal institutions, but they were formally recognized in 1994, when Congress passed the Community Development Banking and Financial Institutions Act. Realizing that CDFIs were relatively few in number, small in size, and had difficulty meeting the demand for their services, Congress created the CDFI Fund. The purpose was to use federal resources to invest in CDFIs and build their capacity to serve economically distressed communities that lacked access to affordable financial products and services.5 There were four types of CDFIs:
Community development banks, which provided “capital to rebuild economically distressed communities through targeted lending and investing.”
Community development credit unions, which promoted “ownership of assets and savings and provide[d] affordable credit and retail financial services to low-income people, often with special outreach to minority communities.”
Community development loan funds, which provided “financing and development services to businesses, organizations, and individuals in low-income communities.”
Community development venture capital funds, which provided “equity and debt-with-equity-features for small and medium-sized businesses in distressed communities.”6
Source: Created by case writer.
1
“CDFI Certification,” Community Development Financial Institutions Fund website, http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=9 (accessed Dec. 16, 2013). 2 “What Is a CDFI?,” Opportunity Finance Network website, http://ofn.org/what-cdfi (accessed Feb. 20, 2014). 3 Sarah Molseed, “An Ownership Society for All: Community Development Financial Institutions as the Bridge Between Wealth Inequality and Asset-Building Policies,” Georgetown Journal on Poverty Law & Policy 13, no. 3 (2006): 489–512. 4 http://ofn.org/what-cdfi. 5 “Community Development Financial Institutions Program,” Community Development Financial Institutions Fund website, http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=7 (accessed Feb. 20, 2014). 6 http://ofn.org/what-cdfi.
-12-
UVA-ENT-0202
Exhibit 2 CITIZEN POTAWATOMI COMMUNITY DEVELOPMENT CORPORATION: FINANCIAL INCLUSION IN INDIAN COUNTRY The JumpStart Auto Loan Program
Loans closed Loan disbursements Program income (interest and fees) Principal repayment Principal outstanding Cost of funds Paid in full Committed Charge-off Number of charge-offs
FY2010 20 $211,330.50 $ 6,177.72
FY2011 16 $172,956.57 $ 28,233.13
FY2012 10 $103,297.82 $ 41,263.49
YTD FY2013 13 $119,923.22 $ 32,629.38
TOTALS 59 $607,508.11 $108,303.72
$ 18,342.32 $183,062.00 3.50% 0 $ $ 0
$ 61,853.14 $273,007.00 3.50% 2 $ $ 0
$125,038.62 $269,471.03 3.50% 1 $ $ 0
$185,499.89 $233,267.83 3.50% 12 $ 11,000.00 $ 14,412.74 3
$ $ 3.50% 15 $ 11,000.00 $ 14,412.74 3
Source: Citizen Potawatomi Community Development Corporation, used with permission.
-13-
UVA-ENT-0202
Exhibit 3 CITIZEN POTAWATOMI COMMUNITY DEVELOPMENT CORPORATION: FINANCIAL INCLUSION IN INDIAN COUNTRY Loan Risk Criteria: Three Applicants
Name: Jason Moore Client’s FICO Score Score*
480
Debt/Income Ratio
Income divided by fixed monthly expenses (including the proposed loan payments)
Lo
Hi
Points
700 650 600 500 0 Lo
850 699 649 599 499 Hi
5 4 3 2 1 Points
2 1.5
+ 1.99
5 3
0 1.5 Auto Loan Payment
1
Total Points
Loan Score 10 9 7–8 5–6 1–4
Amount
Loan Amount
$15,000 $12,000 $11,000 $10,000 Denied
Total Points
Net Income Expenses $1,420 $950 Foreclosure 0 Repossession 0 Bankruptcy 0 A dedicated employee who hasn’t missed a day of work during his eight-year employment with the tribe. Works as a full-time line cook at the Sports Grille at the Grand Casino. Has a second part-time job at a gas station owned by the Citizen Potawatomi Nation. His wife, a stay-at-home mom, has recently had a third baby. *Client’s score was an average of the FICO credit scores from two credit bureaus.
-14-
UVA-ENT-0202
Exhibit 3 (continued)
Name: Randy Paxson Client’s FICO Score Score
780
Debt/Income Ratio
Net Income $1,846 Foreclosure Repossession Bankruptcy
Income divided by fixed monthly expenses (including the proposed loan payments) Expenses $1,475 0 0 0
Lo
Hi
Points
700 650 600 500 0 Lo
850 699 649 599 499 Hi
5 4 3 2 1 Points
2 1.5
+ 1.99
5 3
0 1.5 Auto Loan Payment
Total Points
Loan Score 10 9 7–8 5–6 1–4
Amount
Loan Amount
$15,000 $12,000 $11,000 $10,000 Denied
Total Points
1
Randy Paxson has been employed with the Citizen Potawatomi Nation for three years and one month in facilities maintenance at the FireLake Grand Casino. He’s divorced and pays child support to his ex-wife, with whom he shares custody of their daughter.
-15-
UVA-ENT-0202
Exhibit 3 (continued)
Name: Trudy Cowan Client’s FICO Score Score
470
Debt/Income Ratio
Income divided by fixed monthly expenses (including the proposed loan payments)
Lo
Hi
Points
700 650 600 500 0 Lo
850 699 649 599 499 Hi
5 4 3 2 1 Points
2 1.5
+ 1.99
5 3
0 1.5 Auto Loan Payment
1
Total Points
Loan Score 10 9 7–8 5–6 1–4
Amount
Loan Amount
$15,000 $12,000 $11,000 $10,000 Denied
Total Points
Net Income Expenses $6,820 $1,780 Foreclosure 0 Repossession 0 Bankruptcy 0 Trudy Cowan has worked for the Citizen Potawatomi Nation for eight years as an administrative assistant at the Citizen Potawatomi Nation Clinic. Her income is $1,850. She’s married, and her husband, an auto mechanic, is cosigning the loan. His net income is $4,970. Data source: Citizen Potawatomi Community Development Corporation, used with permission. Names have been disguised.
-16-
UVA-ENT-0202
Exhibit 4 CITIZEN POTAWATOMI COMMUNITY DEVELOPMENT CORPORATION: FINANCIAL INCLUSION IN INDIAN COUNTRY FICO Credit Score
Banks, credit card companies, and other lenders used credit scores to assess the risk of lending money to consumers. A credit score was a number that summarized a borrower’s risk of default, based on a snapshot of one’s credit report at a particular point in time.1 Everyone who had a credit history had a score. It was based on the records compiled by credit bureaus, which tracked everyone’s personal accounts, balances, amounts of available credit, and payment histories. The FICO score, created by the Fair Isaac Corporation in 1989, was the most commonly used credit score in the United States. Experian, Equifax, and TransUnion, the three national credit reporting companies, used the FICO model. Because data on individual consumers varied depending on which company collected it, an individual’s FICO score calculated by Experian could be different from the score calculated by TransUnion or Equifax. The generic FICO credit scores ranged from 300 to 850—the higher the score, the lower the risk of default.2
Credit Score Makeup Although the FICO score was calculated using a proprietary mathematical algorithm, FICO disclosed five types of information used to calculate the score for the general population: Information Payment history Amounts owed Length of credit history New credit Types of credit in use
Percentage of Overall Score 35% 30% 15% 10% 10%
Credit scores were commonly used by lenders because they were affordable and provided a largely accurate picture of a consumer’s credit history. They had their drawbacks, however. For example, a considerable part of the FICO score was calculated by looking at the ratio of credit used to credit available to an individual. One could easily improve one’s FICO score by increasing the credit limits on his or her credit card accounts. Source: Created by case writer.
1
“About Your Credit Score,” myFICO website, http://www.myfico.com/crediteducation/creditscores.aspx (accessed Feb. 12, 2014). 2 http://www.myfico.com/crediteducation/creditscores.aspx.
