CRS: Measuring Effectiveness of CDFI Program Is Daunting Task
Report says lack of data, unique consumer profiles hamper analysts.
Even as CDFI Fund officials attempt to overhaul the application and certification process, the Congressional Research Service warned on Friday that measuring whether the program meets its goals is difficult.
“Data collection gaps impede the ability to measure CDFI industry effectiveness,” the CRS said, in a new report.
The agency continued, “Public and private stakeholders are interested in the CDFI industry’s ability to help higher-risk clients gain access to capital and succeed, but measuring and evaluating that performance is difficult.”
The agency warned that since CDFIs, including CDFI credit unions, must engage in more default mitigation activities than traditional financial institutions, it is difficult to gauge their financial strength and performance.
The report comes at a critical time for the CDFI program. The program has been in an extended blackout period while fund officials attempt to overhaul the application and certification process. That blackout period has been extended—much to the chagrin of the financial services industry.
NAFCU officials said that late last week, they and other industry groups met with Treasury Department officials and House Financial Services Committee ranking Democrat Rep. Maxine Waters, D-Calif., to express their concerns that program changes may inhibit small financial institutions that want to become certified or re-certified.
Fund officials have said they expect to reopen the CDFI program this fall.
Difficulties in Measuring Effectiveness
However, the CRS warned that measuring effectiveness of the program might still be a daunting task, saying that:
–Data collection gaps and other issues complicate the ability to directly link a CDFI’s activities to their clients. Even if more data were available, CDFI customers in underserved areas face greater income volatility and would be expected to fail more than traditional borrowers, the CRS said.
–Data collection gaps also exist when it comes to the lending activities of small institutions and small loans with unique financial characteristics.
–CDFIs often rely on relationship banking and use “soft information,” which contains circumstantial details for borrowers with less traditional financial records.
–Servicing CDFI loans may be more costly, as financial institutions interact more with higher-risk people in an effort to avoid default.
–Tailoring prudential standards for CDFIs is challenging because each institution has portfolios consisting of localized and highly customized loan data.
–When it comes to small business lending, the CDFI Fund may not collect credit application information that may be useful for comparing CDFI applicant experiences with those of non-CDFI applicants.
–Originating loans at CDFIs is often a more manual process and it generally is more costly than automated processes that can be used for “traditional” customers.