By Ross Culverwell, NCCLF’s Chief Lending Officer
At NCCLF we’ve been committed to addressing issues of social and economic disparities throughout California for nearly 30 years. While our staff have always informally assessed whether our loans meet our mission of promoting economic justice and alleviating poverty, we saw the benefit of developing a rating system that establishes a transparent, quantifiable tool for assisting with this assessment. Though our organizational principles and other industry metrics have always guided us in pursuing our mission, the last couple of years have pushed us further in using data and assessment to drive our decision-making.
The process began in 2014 when I participated in the Annie E. Casey Foundation’s CDFI Lending, Learning and Leading Program, a 12-month in-depth results-based leadership development program, which among other goals sought to push the CDFI industry to focus more explicitly on developing tools that address disparities in race, class, and culture. While this has always been a focal point of our work, the Casey program encouraged us to be more intentional in pursuing this goal. As part of the first cohort of the program, we were asked to identify an organizational challenge and develop programs or tools that could support solving that challenge. I wanted to develop a rating system that would help us gain a better understanding of the ways in which our loans impact and contribute to decreasing the disparities we witness daily. With generous funding from the Annie E. Casey Foundation, and working with our management team (including two others who also participated in the program), board, lending team, and our partners at Pacific Community Ventures, we developed what we’ve coined as our Social Impact Rating System (or Impact Rating for short).
In Fall 2015 we began implementing the Impact Rating, and now it’s used in parallel with our risk rating system in the underwriting process of every loan. Now, beyond relying only on our intuition about whether a specific loan may be high impact, we assess the following factors before developing a rating for each loan:
- Impact on Community: Does the location of the borrower or client population impact barriers to opportunities?
- Impact on Borrower: Will the loan improve the borrower’s effectiveness or capacity to serve its target population?
- Impact on Beneficiaries: What are the direct impacts of the borrower’s services on beneficiaries that are supported by a loan from NCCLF?
- Impact of Financing: Is there a potential for NCCLF to increase the impact of the borrower as a result of working with NCCLF specifically and not a different lender?
The system relies on a sophisticated formula, which places different weights on a range of factors. For example, rather than each of the factors above accounting for 25% of the Impact Rating, the Impact on Beneficiaries comprises 50%. This is because on our initial testing of the rating system we found this to be the most meaningful factor. We are one of only a few CDFIs with a system like this that scores each loan, and the items we assess are specifically-relevant to our work and our loan portfolio. We use the Impact Rating less to exclude loans than to help us establish what a high impact loan looks like. It is an additional tool for us to consider when we are looking at a loan with higher credit risk, for the sake of supporting clients that have especially high social impacts in low-income communities with historically low investment. The ratings are a centerpiece of discussions around impact in our loan committee meetings and our goal is for our impact to grow over time by using this tool. Implementing this rating system heightens our focus on what factors contribute to really high impact and why, and generally supports our efforts to gather data to look at our trends over time.
At the end of this month we’ll be sharing even more with CDFI leaders at the 2016 Opportunity Finance Network’s Conference in Atlanta. Our highly interactive session, Test a Loan Impact Rating System, focuses on the development and implementation of a robust impact rating system and participants will score loans in real time to understand how the rating system works in practice. Join us to gain insight into what it takes to implement a rating system that is mission-aligned and allows your organization to compare the impacts of your loans, facilitate greater risk-taking and enable impact-based pricing.
About the Author
Ross Culverwell is NCCLF’s Chief Lending Officer. He has been with NCCLF for 10 years.