Evaluating the Alternative Financing Program

1. WOODSTOCK INSTITUTE Evaluating the Alternative Financing Program Geoff Smith Vice President Woodstock Institute March 18, 2008

2. The Evaluation • Purpose of Evaluation • Examine structure, financial characteristics, and performance of Alternative Financing Program (AFP) • Develop recommendations to promote increased financial self sufficiency and sustainability • Method • Summarize Characteristics of Alternative Financing Program • Analyze RESNA and UIC Data • Develop Case Studies of Six Funds • Identify set of “high performing” AFPs • Conduct interviews • Collect data from surveys

3. Summary Analysis: Types of Loans Sought Source: UIC Database

4. Summary Analysis: AFP Portfolio Characteristics Between FY 2004 and FY 2006: • Between FY 2004 and FY 2006, total AFP portfolios increased from 1,919 to 2,725 loans or $16.2 million to $22 million. • The default rate increased from 1.4% to 3.6% and the net loss rate increased from 1.2% to 3.0% however the rates remain on par with or below the rates for other institutions that served higher risk borrowers.

5. Summary Analysis: AFP Portfolio Characteristics • Number of Funds in FY06: 33 • Funds with Loans Outstanding in FY06: 29 • Median Portfolio Size FY06: • Loans- 54 • Largest: 248 Smallest: 1 • Dollars - $503,604 • Largest: $4.3 million Smallest: $5,373 • Median Portfolio Growth FY04 to FY06:* • Loans– 44.4% • Largest Change: 193 loans Smallest Change: -60 loans • Dollars – 22.7% • Largest Change: $2.2 million Smallest Change: -$1.5 million *Funds active in both years – 20 funds

6. Summary Analysis: AFP Portfolio Characteristics • Median default rate in FY06: 2.1% • Largest: 23.0% Smallest: 0.0% • Median change in default rate FY04 to FY06: 2.4% • Largest: 22.6% Smallest: -4.9% • Median Federal and State Grants Received: $1,694,641 • Largest: $11,874,101 Smallest: $200,000 • Average Income: Expense Ratio of AFP: .55* • Largest: 5.73 Smallest: .07 *Outliers removed

7. Summary Analysis: Sources of Expenses and Income, FYs 2004 to 2006

8. Case Study Selection • Larger Programs • Having more than 50 loans outstanding in 2006 • Growing Programs • Having positive portfolio growth between 2004 and 2006 • Offering diverse funding options • Buy down, guarantee, and direct lending progrms • Reaching higher risk applicants • Innovative partnerships

9. The Survey and Supplemental Materials • Prior to being interviewed all case studies filled out a survey and submitted program literature and other appropriate supplemental materials including: • Mission statements, Organizational Bylaws, News Letters • Loan Applications, Agreements, Policies and Marketing Material • Business Plans, Investment Policies, Financial Reports • Survey responses and supplemental materials were integrated into case study reports. • The survey focused on • The role of banking partnerships and board members • Staff and time allocation • Characteristics of lending portfolio • Non-loan operating revenues and costs • Underwriting practices • Organizational mission

10. The Interview • Each case study was interviewed in July or August of 2007 • WI spoke to AFP staff, a board member and a banking partner • Interviews covered: • History of the AFP • The lending process and underwriting practices • The role of banking partnerships and board members in the lending process • Investment practices • Future goals and perceived challenges

11. Overall Case Study Findings • The six case studies chosen were Illinois, Kansas, Oklahoma, Pennsylvania, Washington and Wisconsin. • The case studies highlight • Relationships with statewide networks of centers for independent living • Innovative investment strategies and banking relationships • Diverse Boards who participate and contribute to key aspects of AFP operations • Reaching difficult to serve borrowers • High costs associated with application process and dealing with delinquent loans

12. Program Highlights • Program highlights were as follows: • Illinois • Worked with independent living centers to market program • Developed business-oriented relationship with bank partner • Goal: developing more favorable banking partnership • Kansas • Developed innovative relationship with banking partner • Developed high yield investment strategy • Generated large loan volume • Provided significant technical assistance to borrowers • Oklahoma • Provided low-cost program model • Used lender to market program • Had low AFP staff overhead • Achieved a low default rate over 3-year assessment period • Goals: Reaching higher risk borrowers

13. Individual Case Study Highlights Continued • Highlights Continued . . . • Pennsylvania • Emphasized importance of relationship with banking partner • Worked with regional independent living centers • Provided services beyond lending • Found for additional funding sources • Washington • Assessed social impact of AT loans • Provided direct loans • Professional staff with previous training in loan fund management • Provided technical assistance to borrowers • Wisconsin • Placed emphasis on consumer choice • Developed partnership with independent living centers • Developed favorable banking relationship • Maintained active board

14. Individual Case Study Highlights Continued • AFP goals • Developing more sustainable business and lending models • Addressing sustainability issues to cope with the uncertainty of future funding • Targeting broader AT markets and developing community partners • Developing more favorable relationship with banking partners

15. Opportunities for Sustainability • Interest-Rate Buy Down • Lower cost model • Limited control of lending process • Limited opportunity to generate revenue • Loan Guarantee • Offers opportunities for generating earned revenue through the investment of unused funds • Relationship with lending partner important • Opportunity for sustainability • Direct Lending • Offers most control over lending process • Opportunities to generate revenue • Most costly and difficult model to operate

16. Develop Beneficial Relationship with Lending Partner • Benefits for AFP • Less funds held for guarantee • More funds available to loan and invest • Incentives for bank • CRA Credit • Desire to give back to the community • AFP deposits • Loan volume • Loan performance • Pooling AFP resources • Economies of scale • Larger pool of deposits • Greater loan volume

17. Balancing Improved Efficiencies with High Cost of Serving Market • Sustainability • Uncertain funding from federal, state, and private foundation sources makes improving self sufficiency critical • Total self sufficiency may not be achievable for all programs • Subsidy and Scale • Larger programs seem to have better opportunity for sustainability • Leverage resources and develop efficiencies • Challenges • Reaching scale necessary to achieve sustainability while necessary costs of lending to difficult to serve marekt

18. WOODSTOCK INSTITUTE Evaluating the Alternative Financing Program Geoff Smith Vice President Woodstock Institute 29 E. Madison, Suite 1710 Chicago, IL 60602 312-427-8070 gsmith@woodstockinst.org