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ARLINGTON, Va. – A noted leader among community development financial institutions has warned that a coming consolidation will weed out some of the organizations that specialize in working with poor Americans. But a leader among community development credit unions says that CDCUs, which also specialize in this area and many of whom are CDFIs, are unlikely to share in the coming shakeout. “CDFIs are operating in a very different environment than they were in the late 1990′s,” Mark Pinsky, CEO of the Philadelphia based National Community Capital Association, told a recent meeting sponsored by the Federal Reserve Bank of Philadelphia. “Then we were at the tail end of a time of plenty. Now we are at the front end of a time of diminishing resources. Some CDFIs will have the resources and strategies in hand to manage through, some will not,” he added. The NCCA represents 154 CDFIs around the country and Pinsky sits on an advisory board of the Arlington, Va.-based CDFI Coalition, which is chaired by Clifford Rosenthal, executive director of the National Federation of Community Development Credit Unions. “We expect a significant consolidation of the community development finance industry,” Pinsky said. Top-tier CDFIs ought to be able to continue growing. Mid-tier CDFIs will bifurcate; a relatively small number will prosper while a larger number will struggle. Smaller, low-tier and start-up CDFIs will have the hardest time and will be most prone to consolidation,” he added. Pinsky made his remarks against a significant background of changes among organizations which specialize in working with lower income Americans, often toward very specific goals, such as housing. CDFIs have traditionally been defined as loan funds and other organizations, generally non-depository, which finance community development projects around the country. Since 1994, such organizations have been more or less defined by their recognition by and participation in the U.S. Treasury Department’s CDFI Fund, a fund which was established to identify community development organizations and provide grants that the organizations can use to provide loans and services in lower income communities. It is this recognition and participation that has both helped CDFI organizations to flourish and which is the leading source of their current weakness, Pinsky explained. Under the Clinton Administration, the CDFI Fund focused on making grants to CDFIs directly from budgeted funds from the U.S. Treasury, Pinsky explained, but the Bush Administration has sought to move more CDFIs toward a program called the New Market Tax Credit. The NMTC seeks to reward federal taxpayers who invest in recognized community development enterprises by allowing them to take a credit for 39% of their donations on their federal taxes. According to the CDFI Fund, the 39% credit must be taken over a seven-year period, 5% per year in the first three years and 6% per year thereafter. In practice, this means that many CDFIs have to move from an economic model traditionally focused on getting and using money provided from government funding and grants, Pinsky emphasized, to a more market oriented model. This, and the shifting macroeconomic situation in the country, provides the biggest forces leading toward consolidation among CDFIs, he explained. While some community development credit unions are CDFIs, and while some have received support from the CDFI Fund, CDCUs overall will not face any greater pressure toward consolidation, according to Rosenthal. Unlike other parts of the CDFI industry, Rosenthal pointed out, CDCUs have not generally drawn a significant amount of their funding from the CDFI Fund and have thus remained largely unaffected by the Fund’s changes. “While support from the Fund has been very important for some CDCUs,” Rosenthal said, “and while we are still going to fight for as much as we can get, CDCUs have never gotten the same degree of support from the CDFI Fund that the unregulated organizations have gotten.” As an example of the inequitable way he said the CDFI Fund has dealt with credit unions, Rosenthal pointed out that the Fund made it relatively easy for a non-regulated organization to get itself organized and receive support from the Fund, while a start-up credit union remained shut out by regulation from any of the Fund’s grants. That means that the bigger economic pressures on CDCUs are the current low interest rate environment and the employment drought, particularly in inner city areas that are having a dire impact on CDCUs, Rosenthal added. These two pressures are serious and enduring, Rosenthal pointed out, but they have had little to do with the CDFI Fund. Pinsky acknowledged that credit unions will not suffer the brunt of the coming changes but he maintained they could not entirely escape the ramifications of changes among the entire industry of community development financial institutions. CDCUs should still expect to streamline their operations further and strengthen their focus on core competencies, he said. [email protected]

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