Before regulators placed requirements and provided incentives around community lending, banks focused lending on the strongest opportunities.
This resulted in highly discriminatory lending because banks were uninterested in making commercial loans in low-income areas as well as to organizations such as nonprofits which are less focused on profit metrics.
As a result, in 1977 the Community Reinvestment Act (CRA) was passed which is a United States federal law designed to encourage commercial banks to help meet the needs of borrowers in all segments of their communities. Now, federal regulatory agencies examine banking institutions for CRA compliance.
Meeting CRA requirements, though, does not require banks to lend to nonprofit organizations. Nonprofit loans have always been more difficult because the financial focus is much different from typical for-profit borrowers.
Further, due to heightened regulatory lending oversight since the financial crisis, it has become even more difficult.
It is important to understand the three main distinctions that put nonprofits at a disadvantage to for-profit commercial lending:
- Because of the social good and philanthropic nature of nonprofits, even if nonprofits are unable to perform financially, banks can encounter significant negative press when loans underperform and action is required.
- For-profit commercial loans typically have personal guarantors financially backing the loan. For nonprofits, volunteer boards should never be required to act as a guarantor which require the loans to be non-recourse.
- For-profits are focus on maximizing financial profits while nonprofits are looking to maximize community impact.
While banks are still lending to nonprofits, bankers are looking for reasons to say no! The goal of this series of blogs is to help nonprofits understand the bank underwriting process so nonprofits can proactively position themselves to effectively secure loan needs.
Now more than ever, having a trusted advisor that can help counsel nonprofits on its options as well as assist in gathering the necessary information and succinctly communicating with lenders to best position the organization is vital.
Todd Tarbert Semble
Todd Tarbert is CEO of Semble, a trusted non-profit advisor. To learn more about its services, you can call a representative at 877-973-6253. To see the financial impact Semble can have, try out its free online loan calculate by clicking here.