Regenerative Lending Model
Updated: 4 hours ago
October 2020 Update: Going forwards, CCL is not planning to use the below "Regenerative Lending Model" to attract capital. Instead, we will aim to use a blended finance approach to resourcing affordable lending program pilots and scaling these programs as they prove to be successful at the direction of our Lending Partners.
In the meantime, we will continue to host this blog in order to preserve and share the early stage evolutions of our lending model for informational purposes & collective learning. The below model was essential to CCL's ability to attract resources at inception and we continue to be grateful to our partner, Express Credit Union, and the investors that participated.
Affordability is essential to the communities we serve and, as a result, we currently focus on consumer lending at 0% interest in partnership with nonprofits that collaborate to design loan programs. All terms are designed jointly with partners, vetted and shaped by the communities we serve, and tailored to each new loan program we pilot.
To lend at 0% interest, one thing is obvious: we need to attract values aligned capital from investors that embrace the idea that to effectively support underserved communities, we must build relationships and terms that are fair and just. We’ve learned that partnership and transparency are essential, not only with respect to how we design products and lend, but also with respect to how we partner with investors and funders to secure investment capital in the first place.
Based on the above, we are excited to share the below pilot structure of Community Credit Lab's Regenerative Lending Model and to announce that we have recently closed our first investment round of $50,000 USD using this pilot structure. We emphasize the word 'pilot' because we expect the structure to evolve based on learnings and feedback.
Regenerative Lending Model
The main components of the Regenerative Lending Model are:
1) Philanthropy: catalytic philanthropy provided a 25% loan loss guarantee (also known as loan loss reserves) in order to mitigate risk and attract impact investors to participate. In the case of our first pilot, we set the loan loss reserve at 25% of the total amount we sought to raise in order to be conservative and ensure our investors were comfortable with the first structure. Although we do not believe the likelihood of our borrowers defaulting on their loans is 25%, we are aware that circumstances for people can change quickly. We seek to learn from our ongoing lending experience and adjust our loan loss reserves accordingly. In the future, loan loss guarantees may be provided philanthropically or as Program Related Investments by charitable foundations.
2) Impact Investment: with the 25% loan loss guarantee in place, Impact Investors committed to fund a note payable from Community Credit Lab (CCL). In the case of the pilot, Community Credit Lab issued notes payable at 1% interest per annum to individual accredited investors directly. In the future, we anticipate the need to structure this under a protected investment vehicle in order to further secure the assets of impact investors, our organization, and our future borrowers.
3) Line of Credit: in order to design to lend at 0% interest to underserved communities while still paying impact investors 1%, we partnered with a mission aligned financial institution by placing the $50,000 from impact investors into an insured Certificate of Deposit (C.D.) with the financial institution partner and used the C.D. as 100% collateral on a $50,000 line of credit. We collaborated to structure a C.D. that worked for all parties by agreeing on a reduced C.D. rate with the financial institution partner, providing a marginal fee of .25% to Community Credit Lab to help cover a small portion of our costs, and providing a rate of return to our investors of 1% interest per annum. Most importantly, we were able to receive the $50,000 line of credit at a 0% cost of capital using the C.D. as a 100% guarantee and, ultimately, collaborate to lend to underserved communities at 0% interest using these funds.
4) Repayments: During the repayment process, borrowers will repay loans at 0% interest and defaults (up to 25%) will be covered by the philanthropic guarantee on Community Credit Lab’s balance sheet. With these funds, impact investors will be repaid. Additionally, collateral will be released from the C.D. to the financial institution partner to repay the line of credit in full. In the future, there is potential to operate the model on a revolving basis rather than make repayments to all stakeholders and unwind the structure. At this stage, we look forward to learning from the pilot and continuing to think about how to iterate the model as our partnerships evolve.
Designing structures that prioritize multiple stakeholders is never easy: it takes strong values alignment around a shared goal. In this case, the shared goal was supporting underserved communities in our region to achieve their goals. Although the amount of $50,000 may seem small, the win is big to us and, most importantly, to the people we serve. We're grateful to the organizations and individuals that worked with us to get this structure off the ground; specifically, our board members, the members of the Seattle Impact Investing Group that provided thoughts, feedback and capital, and Express Credit Union, our first financial institution partner. Without them, we would not have been able to continue designing loan programs that prioritize underserved communities in our region - ultimately, this is and will continue to be our joint goal.
We look forward to continuing discussions with others around potential opportunities for collaboration. If there's one thing we've learned so far, it's that the need for increased access to affordable capital is substantial and it will take a collective effort to reorient resources accordingly. As always, please feel free to contact us directly with thoughts, questions, critiques and ideas for collaboration.