Loan prepayment and default analyses of a US regional community development financial institution

Community development financial institutions (CDFIs) are instrumental lending organizations responsible for a large part of regional new venture creation. CDFIs provide financial services, loans, training, and technical assistance services to individual entrepreneurs and small businesses that are often turned away by conventional financial lending institutions. In most cases borrower and/or loan specific characteristics are outside of generally acceptable ranges. Loan prepayment risk and repayment risk are two financial hazards that CDFI managers must effectively control. We examine historical runoff rates (prepayment risk) and default rates (repayment risk) of the loan portfolio of a mid-sized regional CDFI. Specifically, we examine how loan prepayment risk is influenced by loan term at origination. We find that longer-term loans are paid back relatively more quickly. We also gather data from repaid and defaulted loans and identify borrower and loan specific characteristics that significantly influence default rates. These include measures such as borrower FICO score, household income, prior bankruptcy, the collateral coverage ratio, and whether the loan is gap or joint bank-partnered financing.