Equitable Benchmarking for Community Investments

This post was originally published by Community Credit Lab, which is now part of Common Future.

A new year means new opportunities for collaboration, relationships, and trust-building. At CCL, we continue to be energized by our current and prospective Lending Partners and their desire to design, build, and resource affordable Lending Programs for their communities across the United States. Whether they’re focused on converting foreign nursing credentials for immigrants to become registered nurses in the U.S., supporting women and gender-diverse adults to access careers in tech, or supporting small businesses led by BIPOC entrepreneurs to grow their companies, our Lending Partners are leading conversations across the country on what it means to build equitable access to credit and economic opportunities for communities that face obstruction in the financial system and beyond.

At CCL, we support our Lending Partners to achieve their goals by facilitating the Lending Programs they know are necessary for the people and small businesses they serve.

In addition, we’re energized by a growing network of funders and impact investors that are working alongside us to reimagine a financial system that supports all people to thrive. Our list of supporters now includes BECU, Mastercard Center for Inclusive Growth, The Russell Family Foundation, Amalgamated Foundation, SVP Seattle, Social Justice Fund, Kaiser Permanente, Cedarmere Foundation, the Washington Women’s Foundation, the Lorenzini Family Foundation, The Share Fund, Common Future, and over 50 individual impact investors and donors. We’re energized by their desire to collaborate with us and our Lending Partners in order to support borrowers effectively.

Since day one at CCL, in addition to enabling access to credit, we’ve been grounded in our desire to make credit affordable for communities that face discrimination by reducing or eliminating the poverty premium that permeates the traditional financial system and extracts most from communities with fewer resources. In 2022, we remain committed to ensuring that CCL is able to offer an equitable cost of capital—and defer to our Lending Partners to determine interest rates within an affordable range for their communities. Simultaneously, we know that every dollar that isn’t charged in interest and fees to people and small businesses helps to reduce wealth gaps. Funds not charged in fees and interest remain on the balance sheets of BIPOC business owners, or in the bank accounts of individuals that face discrimination due to their race, immigration status, sexuality, or gender. This fact continues to motivate us to think critically about what benchmarks are appropriate in community investment and how to ensure we support borrowers to retain as much capital as possible and build wealth for themselves and their families.

With this in mind, we’re excited to share the benchmarks we follow for lending and impact investments as well as blended funding and impact investment opportunities to catalyze and resource CCL’s work during 2022 below.

Lending & Investment Benchmarks:

Community investments and, specifically, investment notes issued by CDFIs and community lenders are increasingly seen as a substitute for traditional fixed income products in impact investing conversations. As we enter a rising interest rate environment in 2022, it is important for us all to reflect on the narrative around risk and return and the notion of “market rate” that perpetuates barriers and extraction in the form of traditional credit scoring and the poverty premium. Rather than beginning with historical pricing and risk/return practices, or benchmarking against traditional fixed income products, we seek to center those who are impacted most by investments by setting Lending Program parameters first and then setting a target return to funders and investors that enables patient, affordable lending to people and small businesses:

Lending Benchmark for CCL’s borrowers: As outlined in our recent Impact Alpha article here, the Applicable Federal Rates (AFR) refer to the interest rates that the Internal Revenue Service (IRS) requires for loans between family members. These rates are used when using credit as a tool to transfer wealth in our society (e.g. AFRs are applied on loans to family members to buy a house, attend graduate school, or to achieve another economic goal). In essence, the AFR is the intra-family lending rate for accredited investors (i.e. wealth owners). With this in mind, our goal continues to be to ensure that CCL is able to lend to borrowers at rates that are affordable and equitable, with “equitable rates” benchmarked against the AFR rates. Simply put, we ask this question: how can we ensure that our borrowers are treated as family members in order to build wealth for people who face discrimination in the financial system?

For mid-term loans between 3 to 9 years, the AFR rate as of January 2022 was 1.3%. Given that CCL’s Lending Partners typically prefer CCL to provide patient capital between 3 to 9 years, 1.3% is the rate we are using as a 2022 benchmark across our Lending Programs.

Investment Benchmarks for CCL’s Investors:

In order to accommodate the above equitable benchmark to borrowers, we need to incorporate impact investment benchmarks that seek to reduce the cost of capital to borrowers as an essential component to equitable community investing. With this in mind, we reviewed the following organizations when setting our 2022 interest to CCL’s investors:

1. RSF Social Finance: Social Investment Fund
2. Boston Ujima Project: Nia Notes
3. Calvert Impact Capital: Community Investment Note
4. Oweesta Corporation: Capitalization investments for Native CDFIs
5. Self Help Credit Union: Certificates of Deposit

As of January 2022, the above opportunities returned between .25% – 2.5% per annum with investment terms between 1 – 10 years. These rates help us and our impact investors understand what is being offered elsewhere for community investments. While we review these rates to understand the ecosystem of community investment opportunities, ultimately we set our target returns to investors by ensuring that our borrowers can access equitable, affordable capital to enable them to achieve their goals on their terms at the direction of Community Credit Lab’s Lending Partners.

For CCL’s 2022 Kinship Notes, with the above benchmarks in mind, we set an interest rate of .5% with options for investors to waive or donate interest.

2022 Kinship Notes, Recoverable Grants, & Unrestricted Grants:

As we grow the Lending Programs that CCL pilots and supports to scale, we designed a blended structure that enables us to reduce the cost of capital to borrowers, eliminate the poverty premium, and support our Lending Partners by facilitating capital to individual and small business borrowers that are eligible for their Lending Programs.

As of 2022, this funding and impact investment structure now includes:

• Kinship Notes: community investment notes that support CCL’s Lending Programs to scale based on relationship-based principles. Funds from Kinship Notes are used to resource CCL’s Lending Programs at the direction of our existing Lending Partners.
• Recoverable Grants: recoverable grants that support and enable CCL’s Lending Programs. Funds from Recoverable Grants are primarily used to resource CCL’s Lending Programs at the direction of our new Lending Partners.
• Unrestricted Funding: in addition to revenues from donations and service revenues that we receive from Lending Partners that are able to pay for CCL’s services, we continue to seek unrestricted funding that enables CCL’s work over the long term.

Learn more About CCL’s Approach & Collaborations:

• Yes! Magazine: Lending on Character, Not Credit Scores
• Impact Alpha: Sacrificing Returns? These Community Investors ask if they’re sacrificing impact.
• Stanford Social Innovation Review: Balancing Sustainability, Scale & Systems Change