Merrill Lynch Uses CDFI Assessment and Ratings System on $93 Million Community Investment

http://www.socialfunds.com/news/print.cgi?sfArticleId=2157

November 08, 2006

Merrill Lynch Uses CDFI Assessment and Ratings System on $93 Million Community Investment
    by Bill Baue

While many investors use the CARS ratings as secondary information in their community investment decisions, Merrill Lynch will use it as its primary underwriting tool.

SocialFunds.com -- At last week's Opportunity Finance Network (OFN) conference, Merrill Lynch Community Development Company (MLCDC) announced plans to place $93 million in community development financial institutions (CDFIs) using the CDFI Assessment and Ratings System (CARS). The move represents a major stamp of approval for CARS, which was developed in 2003 by the National Community Capital Association, the CDFI membership organization that changed its name to OFN last year. While some 20 investment firms subscribe to CARS to augment the research that informs their community investment decision-making, Merrill is foregrounding CARS by using it as the primary tool steering underwriting decisions.

"Merrill is jumping in with both feet, using CARS to identify and monitor transactions going forward," said Mark Pinsky, CEO of OFN. "They're doing so because CARS is much more efficient than underwriting it themselves."

"What we're finding is that many of our existing subscribers are building CARS into their own systems," Mr. Pinsky told SocialFunds.com. "We think over time more and more of these folks will go the way of Merrill Lynch and use CARS as the primary source of their underwriting information."

CARS is a third-party rating system that assesses CDFIs on impact performance (namely, how well they fulfill their social mission of providing capital to low-wealth borrowers and positively impacting economically disadvantaged communities) as well as on financial performance. Dan Letendre, an MLCDC director and CARS Advisory Board member, points out the practical advantages of CARS.

"We believe CARS will reduce the due diligence burden on CDFIs, especially for those who have already been rated, as well as speed up MLCDC's approval process and facilitate the faster deployment of capital," said Mr. Letendre.

Currently, CARS has issued complete ratings on 22 CDFIs, with five more slated for completion by year-end 2006 and about 30 scheduled for rating by year-end 2007, according to Mr. Pinsky. CDFIs rated thus far include big-name entities such as The Reinvestment Fund (TRF) and Low Income Investment Fund (LIIF), as well as smaller CDFIs such as the Unitarian Universalist Affordable Housing Corporation (UUAHC), the Community First Fund, and PeopleFund.

MLCDC is applying CARS to the $93 million allocation it received June 2006 in the fourth round of the New Markets Tax Credit (NMTC) program, which is administered by the CDFI Fund under the US Treasury Department. The NMTC provides tax credits to investors who support CDFIs that in turn use these funds to provide loans and other financial support to low-income communities.

"One of the critical aspects of the New Markets Tax Credit for investors is the need to look beyond the transaction to see where and how it impacts communities," explained Mr. Pinsky. "The CARS analysis provides transparency on impact, documenting that CDFIs are really accomplishing what they say they're going to accomplish in a given area."

"So CARS acts as a compliance tool as well, providing an extra measure of assurance," he continued.

Other CARS subscribers, such as Wachovia, have significant NMTC investments, though they have not explicitly confirmed they use CARS as an NMTC compliance tool, according to Mr. Pinsky. He added that CARS has also garnered significant uptake amongst socially responsible investing (SRI) practitioners

"We know that social investors are very interested in putting more money into community investing, but CDFIs are not particularly good at providing information in a way that makes it easy for investors to find them and to invest in them," Mr. Pinsky pointed out. CARS helps solve this problem. "For example, Trillium Asset Management is a subscriber to CARS and they use it as a way of advising their investors--we think there is going to be more of this going on in the future."

"We see social investors as the second generation of CARS users," he said.

Other SRI practitioners using CARS include the Calvert Foundation, Domini Social Investments, and the FB Heron Foundation.

In addition to the Merrill Lynch announcement, OFN also announced the introduction of a new "CARS-Rated" logo program with an option for CDFIs to include their actual rating on it.

"It's a way of creating more transparency and making it easier for prospective investors to find investment opportunities," Mr. Pinsky stated.