Brett Simmons has spent the last three years convincing banks and community development financial institutions to embrace his vision of creating a national secondary market for microcredit.
Simmons serves as managing director of the EBA Fund (EBA stands for Entrepreneur Backed Assets), which has sold $18.5 million in CDFI-originated microloans to banks. That’s enough to prove the feasibility of the concept, Simmons said.
“We’ve been testing it for the last 30 months. Taking it to the next level is the challenge,” Simmons said.
Although CDFI microloans can be as large as $100,000, most cost less than $50,000, according to Simmons.
While EBA dates back to April 2020, it has really started to hit its stride over the past six months. The fund sold some 1,200 loans in December. In 2023, Simmons expects the dollar volume of its loan sales to reach between $27 million and $30 million. Simmons would like to see the EBA boost loan sales to around $100 million a year and overcome the need for help from the banks and foundations that continue to underwrite its operations.
“I would like to see a self-sustaining model where we don’t need philanthropic support,” Simmons said. “If we need philanthropy forever, we haven’t scaled. We haven’t moved the needle.”
The CDFI microloan offering is limited, and banks prefer to purchase them in multiples, rather than a one-loan-at-a-time approach. This is why a secondary market requires a broker who can keep loans on balance sheet while working to arrange sales.
In basic terms, EBA acts as that intermediary. The fund purchases the loans from community lenders and offers them for sale to banks, which reward them for the Community Reinvestment Act credit they can generate.
EBA works with about 20 CDFI lenders and 18 banks, and to date, the fund has purchased a total of $40 million in loans from CDFI lenders, Simmons said. To achieve the goals Simmons outlined without any help from Congress, he would have to increase those numbers to “40 or 50 banks and the same number of CDFIs,” he said.
If the EBA succeeds in scaling that model, it would represent a big step forward for banks, which often find it difficult to buy microloans directly from the CDFIs that originate them, said Alberto Paracchini, president of Byline Bancorp, with assets worth $7.5 billion. , In Chicago. .
CDFIs are independent lenders that serve different niche markets and use their own highly individualized underwriting processes, so the deals they originate produce “small, bespoke, non-standardized loans,” said Paracchini, who also sits on EBA’s board. So as valuable as microloans are to banks, they often cannot justify the time it takes to perform the due diligence required to execute a directly negotiated purchase agreement.
“It’s a lot of work,” Paracchini said. “We’re not talking about millions of dollars in loans. We’re talking about thousands of dollars.”
An initiative like EBA represents an obvious shortcut for banks interested in adding microlending to their balance sheets. EBA performs due diligence when you purchase a loan, then packages it into a product that allows for simplified decision making by a potential buyer. “When this idea came up, we were intrigued,” Paracchini said. “We knew how difficult it was to do a transaction with one CDFI, let alone multiple CDFIs.” Byline bought its first microloan from EBA in 2020 and has been a partner ever since, Paracchini added.
The EBA and the CDFI community at large could get a boost from a bill introduced Thursday by Sen. Mark Warner, D-Va., and Sen. Mike Crapo, R-Idaho. The legislation, called the Community Lender Escalation Act, would provide the CDFI Fund with $100 million to finance six pilot programs chosen on a competitive basis with the goal of developing secondary markets for CDFI products.
Simmons was quick to back the Warner-Crapo bill, calling it “a critical step to leverage the CDFI Fund and drive innovation.” However, he faces a very uncertain future. Warner introduced identical legislation in 2022 that failed to make it out of the Senate Banking Committee. If the 2023 version becomes law, the EBA is likely to seek funding, Simmons said.
Ken Thomas, president of Community Development Fund Advisors, said he “applauds any effort to expand credit, especially to low- and moderate-income borrowers.” However, Thomas said he was in favor of banks working directly with CDFI, regardless of the effort involved.
“We encourage banks to go directly to CDFIs,” Thomas said. “Access to [bankers’] Financial experience is invaluable. That was the intent of the Community Reinvestment Act, for banks to spend time and sweat capital in the community.”
For CDFI microlenders, EBA loan sales continue to be impressive. They allow mission-based lenders to recycle capital, rebuild their balance sheets, and ultimately make more microloans to their borrowers, a disproportionate number of whom are women and minority entrepreneurs.
EBA “has been a great help to us,” said Michael Rapaport, president and chief operating officer of Accion Opportunity Fund in San Francisco. Accion has sold around 180 loans to EBA in the last 18 months.
“In the past, we had to find banks to buy our loans. The EBA is doing a lot of the heavy lifting now and we’re getting a good premium.”
As part of EBA’s business model, CDFIs continue to service the loans, an arrangement that works for both buyer and seller, Paracchini and Rapaport said.
“We have always worked closely with the CDFIs,” Paracchini said. “They are the financial institutions best equipped to offer, originate and service microlenders.”
For CDFI microlenders, retaining service means they can “retain empathy and help [borrowers] through any difficulties,” Rapaport said.
While Rapaport called Accion’s decision to do business with EBA a “no-brainer,” both he and Simmons acknowledged that some CDFIs have been hesitant to accept the idea of selling their loans. “They’re saying, ‘We’ve worked so hard to make these loans, now they’re telling us we should sell them,'” Simmons said.
The EBA will have to “change the mindset that it’s making loans and keeping them on the books for years and years,” Rapaport added.