LOS ANGELES–(BUSINESS WIRE)–Faith Bautista, President of the National Diversity Coalition (“NDC”) and National Asian American Coalition (“NAAC”), announced today a partnership with private investors and banking professionals, led by Steven Sugarman, to launch a lending platform to finance underserved homeowners and small businesses. This venture will seek to finance prime borrowers that are currently unserved by banks and other traditional financial institutions. It is estimated that this diverse population of borrowers currently accounts for over $100 billion in annual credit-worthy lending opportunities that is unable to access traditional sources of capital.
“It has been my dream to help enable these underserved and minority homeowners get the credit they deserve at rates they can afford. This will be the gold standard of community development. I am thrilled to have partnered with Steven Sugarman and his experienced team of executives,” said Faith Bautista.
Ms. Bautista, who recently received a Presidential appointment to serve on the U.S. Department of Treasury’s Community Development Advisory Board, will Chair the venture’s Community Advisory Board (the “CAB”) to represent the interests of underserved and minority borrowers and to ensure they receive equitable access to capital and credit counseling services. Vice-Chairs of the CAB will include Pastor Mark Whitlock, Gil Vasquez, NDC Chair Jin Sung, and NAAC Co-Chair Jeff Lim.
“For community development to be successful, it must be collaborative, profitable, and prudent,” Ms. Bautista continued.
Founding investors – led by Jeffrey Seabold, Mario De Tomasi, Scott Simonich, Marshall Geller and Lawrence Taylor – have committed to provide $20 million in equity to the venture, which will seek federal certification as a Community Development Financial Institution (“CDFI”) and membership with the Federal Home Loan Bank of San Francisco. This represents the largest ever equity capital raise to launch a new, non-bank CDFI since the founding of the program in 1994.
“These socially responsible investors are to be commended for their commitment to providing prudent financing to underserved, but credit-worthy borrowers. This lending partnership is innovative, important, and just beginning. As the state legislature recently stated, California has a shortage of two million affordable homes. The efforts of NDC and NAAC alongside their partners are poised to creatively reduce this lack of affordable homeownership,” said Bob Gnaizda, General Counsel of the NDC and NAAC.
“I am proud to be joined by a strong, passionate, and growing team of banking and lending professionals with the experience and track record to lead this venture and maximize its impact over time,” said Sugarman. “We are excited to continue working to empower the dreams of California’s diverse homeowners and small businesses by providing much needed access to prime capital to nontraditional borrowers. This is a huge, attractive market that has been overlooked and ignored for nearly a decade; it will no longer be.”
The venture will focus on meeting the credit needs of the unbanked and underbanked such as low income, minority — including African-Americans, Hispanics, and Southeast Asians — and women.
Following the 2009 recession, Congress passed the Dodd-Frank Act to reform the financial system including to establish the Consumer Financial Protection Bureau (the “CFPB”). In 2013, the CFPB implemented Regulation Z, Truth in Lending, which sought to prevent predatory lending and to ensure lenders had a reasonable expectation of repayment by each borrower at the time a mortgage loan was made.
The rate of homeownership has seen a material decline from its peak in 2008, as lenders have tightened lending underwriting standards to conform to Regulation Z, making more sound credit decisions and eliminating potentially predatory lending practices. While much of this decline in homeownership was an appropriate result of more prudent lending, the CFPB recognized that Regulation Z had the risk of reducing financing for credit-worthy borrowers in need of non-traditional underwriting methods. To do so they provided certain exemptions to organizations including CDFIs to enable thoughtful approaches to providing access to capital to these credit-worthy, underbanked borrowers. In fact, the rate of homeownership now stands several percent below its long-term average homeownership rates during the decade preceding the recent real estate bubble and great recession. This reflects a potential reduction in lending to homeowners of approximately $100 billion annually below the long-term averages.
According to The Urban Institute, the tightening of the mainstream mortgage market since the recession prevented 5.2 million mortgages between 2009 and 2014. As the market looks to responsibly expand access to credit, special considerations should be provided for groups that are underbanked to help bridge them into the standard banking system.
Community Development Financial Institutions have attempted to close the gap in lending to these underserved communities, but have not historically had the financial resources to meet the size of the challenge. For instance, California based non-bank CDFI’s made less than $2 billion in total home loans in 2016, most of which were loans made to be sold to third parties pursuant to U.S. Government and Agency programs (e.g., Fannie Mae, Freddie Mac, and FHA). This has left unaddressed the needs of a significant population of borrowers who do not fit within the narrow confines of these programs. The NDC and NAAC believes that many of these borrowers are prime credits requiring loans with low loan-to-values (the loan-to-value measures the amount of the loan in comparison to the value of the house being financed). As co-Founder Seabold noted: “There exists significant unmet demand in California and nationally from underbanked, minority and women borrowers for low LTV, prime mortgage loans. This need can be met in a sound and prudent manner.”
The NDC and NAAC will continue to seek partnerships with social impact investors, banks, and other corporations to help address this critical need and to better serve the over 25% of the population that the FDIC has deemed unbanked or underbanked.