Mr. Chairman and distinguished Members of the Subcommittee, I am honored to appear before you today to urge reauthorization of the Community Development Banking and Financial Institutions Act of 1994 and, with it, the Community Development Financial Institutions (CDFI) Fund. The CDFI industry strongly supports the Fund, which has done an outstanding job of meeting the needs of poor people by strengthening and expanding the national network of CDFIs.
My statement today explains what CDFIs are, what they do, how the CDFI industry views the CDFI Fund, and what can be done to strengthen the Fund's role in building a national CDFI industry.
In summary, National Community Capital supports:
I am Mark Pinsky, Executive Director of the National Community Capital Association, a national financial intermediary founded in 1986. National Community Capital represents a membership of more than 210 CDFIs and affiliated organizations. I have attached a list of Members and Associates to this statement.
At year-end 1997, National Community Capital's Member CDFIs managed more than $472 million and had loaned and invested more than $709 million in many of the nation's poorest communities. This financing has created more than 43,000 jobs and 69,000 housing units. Cumulative loss rates were about 1.25%, comparable to the best banks despite the much higher risk profile of our lending.
National Community Capital's purpose is to build a strong national CDFI industry. We do this through our performance-based financing, training, consulting, and information services to CDFIs. National Community Capital currently operates a $14 million revolving loan fund from which we make performance-based, unsecured loans to our Member CDFIs. Earlier this year, we received a $3.5 million CDFI Fund commitment under the Intermediary Component of the CDFI Program to strengthen our financing programs.
To date, National Community Capital has loaned more than $10 million and granted more than $2.8 million in equity and program development grants to Member CDFIs. We have trained more than 1,000 CDFI practitioners. A key component of all of our work is "best practices" for CDFIs. I have provided with this statement a copy of our recently published document, "Best Practices for CDFI's: Key Principles for Performance."
National Community Capital considers performance the key to CDFI success-for that reason, we consider the performance of the CDFI Fund a key factor in our own ability to meet the needs of the markets we serve. We believe that low-income and low-wealth people have a right to expect the institutions that serve them to perform well and to bring the capacity and resources to respond to their dreams and ambitions. CDFIs are accountable to their investors, their borrowers, and their peer CDFIs. In much the same way, the CDFI industry expects the CDFI Fund to hold itself accountable to Congress, to the industry, and to the people that CDFIs serve.
I am also here today in my role as Chairman of the Coalition of Community Development Financial Institutions (The CDFI Coalition), representing the entire CDFI industry, which comprises more than 350 CDFIs working in all 50 states. The CDFI Coalition formed in 1992 to respond to initiatives by the Clinton Administration and Congress to support CDFIs. It served as a primary resource in drafting the legislation that created the CDFI Fund. Since that time the Coalition has devoted its efforts to building public and financial support for the CDFI industry through public education, knowledge building, and outreach. A list of the Coalition's Steering Committee is attached.
I first want to commend the Committee for taking up reauthorization of the CDFI Fund. In just its first few years, the Fund has dramatically improved the capacity of CDFIs to respond to the economic and financial needs in the communities where they work.
The CDFI Fund has responded well to its market's needs. In 1993, the CDFI industry told Congress and the Clinton Administration that it had two major needs-financial capital and human capital. We recommended that the CDFI Fund operate in these two areas by using its resources to (a) strengthen the capital positions of CDFIs, making them more risk-tolerant and more self-sufficient and (b) provide working capital for the large amounts of training and technical assistance the industry needs to recruit, train, and retain the skilled labor it needs to survive. The Fund has responded fully on the first point and is responding now on the second.
Through its rigorous review process, the Fund has made performance-oriented awards. In its first two rounds of awards, the Fund has committed and disbursed $75 million to 74 CDFIs and awarded $30 million to 93 banks and thrifts in Bank Enterprise Awards. In the next few years, the $75 million to CDFIs working in all 50 states will leverage at least $5 billion in new private and public investment in poor communities across the nation. In addition, the Bank Enterprise Awards have helped banks and CDFIs overcome a hurdle to collaboration by giving banks incentives to invest in CDFIs and in the communities where CDFIs work. These incentives generated more than $60 million in bank investments in CDFIs.
The Fund's new technical assistance program is a demand-driven product that this year will enable as many as 100 start-up and emerging CDFIs to develop the human capacity they need to succeed. The Fund's intermediary round, launched in 1997, is an effective way for the Fund to extend its reach.
The effect the CDFI Fund has had on the CDFI industry is clear: The CDFI industry is growing stronger and expanding at an unprecedented pace. The Fund has provided the right kind of financing--equity, it has assisted CDFI efforts to increase the flow of private sector capital into disinvested communities, and it has brought public attention to the CDFI approach of addressing economic and social problems through community-led, rather than government-led, approaches.
As you know, demand for the Fund's resources has far exceeded supply. In the first two funding rounds, for example, the CDFI Fund received 427 applications resulting in 75 awards. In these applications, the CDFIs requested $10 for every $1 available. This competition is good. Given the pace of growth of the CDFI field, it will continue as CDFI Fund resources increase.
The Fund is doing a good job and its future is important to the CDFI industry. To date, the Fund has:
The CDFI industry needs a CDFI Fund that is focused on long-term strategies rather than short-term patches. The extreme economic disenfranchisement CDFIs address in places such as the Pine Ridge Indian Reservation in South Dakota, the city of Watsonville, CA, and the three-state region of the Mississippi Delta result from generations of disinvestment. No solution can be a quick fix. CDFIs are not panaceas; they are long-term strategies to rebuild underserved economies by increasing the ability of ambitious, entrepreneurial people to act in their own economic self-interest. We want a CDFI Fund that five and ten years down the road will continue to be a source of capital for innovative finance-led strategies to address poverty.
CDFIs are private-sector financial institutions working to revitalize local economies, to link local and regional labor forces to national markets, and to provide low-income and low-wealth people the resources they need to act in their own social, economic, and political self interest.
CDFIs function as bridge institutions linking unconventional consumers to conventional financial services. There are five types of CDFIs:
CDFIs lend and invest in underserved urban, rural, and reservation-based markets. By financing business, housing, and nonprofit facilities development, CDFIs aim to bring poor people into the economic mainstream by providing access to capital and technical services.
CDFIs often are the first money into projects, often take a subordinate position to other investors, and always are looking for ways to encourage mainstream financial institutions to invest more. CDFIs work from the margins and, like tugboats, use well-placed leverage to prod mainstream financial institutions into distressed local economies. Over the past 25 years, National Community Capital Member CDFIs alone have leveraged about $6 in new investment in poor communities for every dollar they have financed. In that time, National Community Capital's 49 Member CDFIs have brought more than $4.7 billion of new capital into distressed areas.
The government did not create CDFIs. These institutions are community-based responses to market needs that banks and other conventional lenders are not serving. They are based on bipartisan principles of building private markets, creating partnerships, and providing the tools to enable poor individuals and communities to become self-sufficient stakeholders in their own future.
CDFIs employ the discipline of capital relationships to address economic, social, and other issues. The accountability needed to prudently manage other people's money when lending and investing in severely distressed markets is essential to the long-term sustainability of those communities and of the CDFIs that serve them.
The recent surge in financial services consolidation makes linking poor people to mainstream finance all the more important. The U.S. financial system is no longer characterized predominantly by locally based intermediary institutions but rather by large-scale institutional savings and credit distribution arrangements. The role of banks has declined while "parallel bank" institutions (i.e., mutual funds and finance companies) now dominate the financial services industry. As local savings flow out into regional, national, and international markets, the credit and capital gaps that plague struggling communities widen. As a result, CDFIs must play an expanding role in the future of financial services for poor people.
My colleagues on this panel will discuss their work in detail. I would like to offer a few examples that capture the range of capital-led interventions that CDFIs use today:
The examples go on and on. I urge you to see these examples, as well as the others you have heard and will hear, as representative of the potential CDFIs have to serve underserved markets, to ensure discipline in community development, and to open new markets for conventional financial institutions. When National Community Capital formed in 1986, one of the organization's goals was to change conventional ideas about lending risk. Today I think we can claim victory on that goal. Banks and other conventional financial companies now compete to make business loans to women and people of color.
National Community Capital looks at the Fund not as a government program but as a business partner, much as we look at our bank partners. In that regard, we want to make sure the Fund understands its market, that its products and services are market-based and market-driven, and that it delivers its products and services in a customer-responsive, reliable, and cost-efficient way.
The Fund is different than other government programs designed to help poor people in at least three ways:
The Fund has worked hard to understand its market. In the more than 400 applications it has reviewed to date, it has the single best data set that exists about the industry. It has used and plans to use that information in smart ways. The Fund's plan to create a research and policy program will provide enormous benefits to the CDFI industry.
Let me offer three observations about the Fund's market today:
The Fund's planned training program may be the single most important factor in the future success of this experiment. Because of its growth and expansion, the CDFI industry is facing a serious labor problem. Very soon there may not be the talent in the field to lead rapidly growing CDFIs, unless we can provide the training. Very soon there may not be the skilled lenders and venture capitalists we need to make deals work. The problem is simple, the solution is expensive. In addition, time is of the essence. If we do not put in place a large-scale training program in the next 6-9 months, the progress we have been making will slow until we develop the next generation of CDFI practitioners.
As I stated earlier, the CDFI industry enthusiastically supports reauthorization of the CDFI
Fund's enacting legislation. The Treasury Department's package of proposed technical
amendments, which principally adapt the law to recognize the Fund's place at Treasury, will also
reduce the bureaucratic impediments the Fund has faced. The proposed changes to the Fund's
authority under its training and technical assistance programs, for example, will help the Fund
better address the human capital needs of the industry.
National Community Capital and The CDFI Coalition also urge Congress to encourage or mandate two additional changes to the law:
1. First, we strongly recommend that the Fund create an "Easy Access" window as part of its Core CDFI Program Component. This window would fill a gap between the Core Component and the new technical assistance program by giving emerging CDFIs an intermediate step in a three-step process. These institutions often do not have the staff capacity to prepare full-fledged business plans, although they often have good plans in mind. For some promising CDFIs, preparing a business plan for the Core Component is an obstacle to participation. The Fund should be able to invest in at least some of these institutions.
The Easy Access Window is intended to make it easier for these emerging institutions to apply but, in turn, would limit the amount of capital they can request. To be specific, the Easy Access Window would:
2. Amend the Bank Enterprise Awards Program to include credit unions in the definition of insured depositories. The Bank Enterprise Awards Program is a valuable tool for increasing direct and indirect bank investment in poor communities. It can be equally effective with credit unions. In addition, many community development credit unions may prefer to apply to the Fund under the BEA Program rather than the Core CDFI Program.
Finally, we strongly urge Congress to continue and increase support for the CDFI Fund by appropriating the full $125 million requested by the President for fiscal 1999. In this era of scarce resources, the CDFI Fund represents a new model for leveraging private sector capital using government resources. Through CDFIs, the Fund works in ways that should encourage us all. No amount of government investment is going to fix market disinvestment, but carefully applied private sector investment might. That is what CDFIs are about, and that is why I urge you to reauthorize the Community Development Banking and Financial Institutions Act of 1994 and, with it, the Community Development Financial Institutions (CDFI) Fund.
The CDFI Fund has come through its start-up phase with its purpose and business strategy in place. Its strategic direction is sound. With a growing and diversifying CDFI industry, the Fund needs to make sure that it sticks to that strategic direction as it expands its product line.
The Fund must sustain its entrepreneurial outlook, seeking to build the institutional strength and capacity of CDFIs with the track record and/or the potential to make a difference in their markets.
The Fund must continue to strengthen its own performance. National Community Capital's confidence in the Fund and the new management team is strong and growing. So long as the managers see themselves as partners in community development finance, the Fund will continue to add value to the CDFI industry.
The Fund must keep its focus on CDFI performance. The Fund's purpose is not simply to help CDFIs get bigger but to become more effective-in short, to perform better.
Congress should reauthorize the CDFI Fund, including the changes that the Treasury Department has recommended, and appropriate the full $125 million that President Clinton has requested. The CDFI Fund is a good investment for the people living in our nation's most distressed and disinvested communities.
Thank you for this opportunity to share my views. I would be pleased to answer any questions
you might have.
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