In an interview with the Express & Star at the end of the Labour party conference, Yvette Cooper said police officers had told her they were using softer penalties more because they do not have the resources to take as many cases before judges.
Community resolution can include taking someone arrested for an offence to meet their victim to say sorry.
It comes following multi-million pound cuts and the axing of thousands of police officer posts.
Ms Cooper also called for a re-think on plans to close Dudley Magistrates Court to criminal cases to ensure that it would not leave the borough worse off.
And she criticised ministers for the immigration backlog which stands at more than 500,000 cases while at the same time accused them of 'gimmicks' for a campaign to drive vans around with posters telling illegal immigrants to 'go home' or face arrest.
"The police are in a very difficult situation", Ms Cooper said. "Chief constables and police and crime commissioners are working really hard and facing tough decisions following 20 per cent cuts to their budgets.
"Community resolution is great for low level crime but it should not be used for cases of domestic violence. There has to be an appropriate penalty to reduce re-offending.
"The reason for the increase is we have so few police officers to do their jobs. They're stretched and can't get these cases to court."
Dudley's magistrates court is set to become a civil, family and tribunal centre, which MP Ian Austin has said would leave it the largest town in the country without a criminal court.
Ms Cooper said: "The government has to look really hard at this. It will mean the police having further to go to take cases to court. It also means defendants not being judged in their local community."
On immigration Ms Cooper said ministers needed to 'get a grip' of the backlog that will take 40 years to clear.
Warley MP John Spellar has previously revealed he has cases brought to his attention by constituents dating back seven years. Asylum applicants are not allowed to work while they wait and are living on taxpayer funded handouts.
Ms Cooper said: "There's a serious problem with the backlog of asylum cases. People who are fleeing persecution and deserve support should be welcomed into the country so they can get on with their lives. Those whose cases aren't going to go ahead should have an answer quickly."