Chairman Faircloth and distinguished members of the Committee, thank you for the opportunity to testify on the President's budget request for the Community Development Financial Institutions (CDFI) Fund. The President has requested $125 million for the CDFI Fund in FY1999. I urge you to support the President's full request.
My name is Martin Eakes. I am the CEO of Self-Help, a multi-faceted CDFI that provides community development loans across the state of North Carolina. Self-Help has grown tremendously over the last several years, and a $3 million investment from the CDFI Fund has played an important role in helping us achieve the increased impact on the lives of low-wealth North Carolinians that derives from that growth.
Community development financial institutions combine the entrepreneurial spirit and businesslike practices of the private sector with the commitment to public purpose of the public sector. CDFIs can be credit unions, banks, community development loan funds, microenterprise lenders and venture capital funds or some combination of these. In fact, Self-Help combines a community development credit union with a loan fund. CDFIs help create new economic opportunities for organizations, businesses and individuals who do not have access to the mainstream economy.
CDFIs emerged in response to the credit and related assistance needs of our most economically and socially distressed urban and rural communities. All CDFIs have community development as their primary mission and carry out that mission by financing businesses, human services and other nonprofit organizations, job creation and development, and home ownership and affordable housing in poor and moderate-income communities. The CDFI Coalition, a national organization representing nonprofit CDFIs, recognizes more than 350 CDFIs in all 50 states which have loaned and invested some $3.5 billion in our country's most distressed communities.
The CDFI Fund is a unique government effort created to capitalize financial institutions committed to serving and improving low-income and low-wealth communities. The Fund is focused on leveraging private sector dollars, ensuring accountability through measurable results, and building sound management practices in its investees. The CDFI Fund makes effective use of limited federal resources. It uses relatively small amounts of federal money to leverage significant amounts of private and state dollars, promotes private entrepreneurship and encourages self-help and self-reliance. A crucial attribute of the CDFI fund is its ability to provide equity, in the form of capital grants, to CDFIs that do not have access to stock investments as a mechanism to grow their capital base. Equity, in the form of capital grants, is a key constraint to the growth of most CDFIs.
Let me use Self-Help as an example of the impact the Fund can have through a relatively small investment. The Center for Community Self-Help was founded in 1980, with an original goal of providing technical assistance to employee- and minority-owned businesses in North Carolina. After seeing firsthand how a lack of access to credit could stop a business in its tracks, in 1984 we established our own financing affiliates: the Self-help Credit Union, a state-chartered, federally-insured credit union, and the Self-Help Ventures Fund, a nonprofit community development loan fund that is capitalized through capital grants, loans and program-related investments. The Center continues to serve as a "research and development" arm while home and business lending occurs through the Credit Union and Ventures Fund. To date, we have loaned over $120 million to help NC residents buy homes, build businesses, and strengthen community resources. Our loan loss rates are less than one percent, comparable to well-run conventional lenders.
Self-Help's mission is to discover and develop practical ways to create ownership and economic opportunities for those who are often overlooked by the nation's conventional financial system -- minorities, women, rural residents, and low-wealth families. Our development strategy is based on the belief that ownership-- and the assets that ownership creates -- empower people with little wealth and enable them to improve their economic position. And this in turn strengthens and revitalizes our communities.
Today, Self-Help is one of the nation's largest CDFIs. We have a staff of seventy in regional offices in Asheville, Charlotte, Durham, Greensboro, and Greenville; our asset base at year-end reached $156 million, and our loan volume hit $25 million last year. While significant, I need only look at the tremendous needs and opportunities that remain in our communities to realize that there is still a great deal to be done -- and more than any one organization can do on its own. That is why the CDFI Fund is so important.
In 1996, Self-Help received a $3 million grant from the CDFI Fund. We raised $3 million of dollar for dollar matching capital. This $6 million of equity has had a major impact on the scope and success of our efforts helping us to set new loan records and accelerate our five-year plan. Let me share a few details and stories with you:
Improved Financial Performance
First, the CDFI grant enabled Self-Help to improve its financial performance and put more of our assets to work in our communities. All these funds-the CDFI grant and the match-were used as core capital for the Self-Help Ventures Fund. Self-Help loaned some of this capital to help business owners and nonprofits stabilize and expand their ventures. The rest of the grant helped to successfully launch Self-Help's Secondary Market Program, a partnership with banks that helps low-wealth families become homeowners.
This increase in our lending activity drove a significant growth in our assets and net worth in 1997. Assets more than doubled. Most important, the proportion of these assets used to carry out Self-Help's mission reached an all-time high: 94% of our assets were used in community development lending by the end of 1997.
Thanks in large part to the CDF1 grant, Self-Help's financial condition can support even more community development lending and help support program development in important niches such as child care. And with a very lean cash balance, Self-Help can guarantee that any new funds will be immediately invested in new community development activity.
Increased lending:
Second, the CDFI grant helped increase our lending. In 1997, we served more families and individuals than any other time in our 17-year history. In 1997, Self-Help made 217 loans to small businesses and nonprofit organizations, for a total of $19.5 million in financing -- an increase of 37%. As part of this lending, our Community Facilities Fund made 60 loans for almost $7 million, which resulted in almost 1,500 child care spaces. Self-Help made 100 home loans in 1997, for a total of $5.8 million, and our $70 million of Home Loan Secondary Market Program purchases in 1997 will generate home loans for another 1,200 low-income families in North Carolina. These are the statistics, but I'd like to give you a few examples to illustrate the impact these loans have had.
Almost two-thirds of Self-Help's commercial loans go to borrowers seeking a microloan of $25,000 or less. These microborrowers are disproportionately low-wealth, minority, or female. Like many Self-Help borrowers, they have entrepreneurial drive, a dream, and real skills to offer, but they may have little collateral and a blemished credit history. Through our microlending, we helped people like an Eastern North Carolina woman who opened a machine shop serving local textile mills and agribusinesses. A microloan enabled her to purchase machinery and create new jobs in a small town with limited employment opportunities.
Our Staged Micolending Program serves even smaller entrepreneurs whose businesses are in their earliest stages of development. Over the last two years, 43% of staged microloans have gone to women, 67% to minority entrepreneurs, and 50% to low-income individuals. For example, we just made our third staged microloan to a hair stylist in a small town near Charlotte. Her husband is disabled, and she has an annual household income well below the poverty level. In 1996, she came to Self-Help for a $ 1,000 microloan to buy a reliable car, so that she could give better service to elderly, homebound clients. With this loan repaid, she came back to Self-Help for a $2,000 loan with which to expand her business. In 1997, with a perfect repayment record on the first loans, she returned to Self-Help for a $3,000 loan, to continue to expand her growing home-based business.
And our loans have helped people like the couple who got a Self-Help loan to start a Latino community grocery store. Now on their third Self-Help loan, this couple owns and operates two grocery stores which employ twenty people.
Self-Help's Community Facilities Fund was created in 1994 to help the state's essential network of human services providers and community-based nonprofit organizations. Our CDFI Fund investment provided capital at a crucial point in this Fund's development, playing a key role in its growth over the last year.
Child care lending has been a major focus of the Community Facilities Fund since its start. By the end of 1997, loans through Self-Help's Child Care Initiative had created or stabilized more than 6,000 child care spaces throughout the state. One such loan, in 1997, went to a low-income African-American woman who had completed a business training program. She had purchased a building and worked hard to renovate it herself, but required about $9,000 to finish the job and obtain her license as a small child care center. In spite of her blemished credit history and lack of assets, Self-Help was able to make the loan by fully securing it through the State of North Carolina's Child Care Revolving Loan Fund, which Self-Help administers.
In 1997, Self-Help began to offer "Fix-It!" loans that cover both purchase and renovation costs of rundown houses in local neighborhoods. For example, the neighborhood near Durham's North Carolina Central University (NCCU) is targeted for renovation. Working with the Eagle Village Community Development Corporation, affiliated with NCCU, Self-Help has enabled two long-term residents of the neighborhood to purchase and renovate their homes, even though they lacked any assets. One man, for example, had worked at Duke University for many years, but he had never been able to own anything. The house he rented lacked insulation and had holes in the walls and roof. His loan package covered the purchase price, basic repairs, and energy-efficient improvements such as new doors and windows and insulation in the floor and ceiling. Now this man, with an income of $19,000 a year, is a proud homeowner.
Self-Help developed its own neighborhood revitalization project in Durham. The Walltown project neared the end of Phase I in 1997. Typical houses in this historically African-Amenican neighborhood are small, run-down duplexes neglected by absentee landlords. A creative partnership of organizations including Duke University, the Walltown Community Association, the City of Durham, and Self-Help joined forces to purchase twenty-eight of these houses and renovate them as attractive, affordable singlefamily homes. Funding for renovation and purchase assistance makes Walltown homes affordable to families with incomes of less than $20,000 a year. For example, a highly motivated family moved into a Walltown home in October. This woman was an unlikely home buyer. She had held the same job for many years, but her partner was disabled and medical collections spotted her credit history. She, her partner, and their four children lived in a dilapidated duplex owned by an absentee landlord. Through great persistence and hard work, she finally obtained a Walltown loan package that included down payment assistance from the City and a loan from a Duke Power fund.
Perhaps the most dramatic effect of the CDFI grant was how it helped us expand our Home Loan Secondary Market Program, designed to purchase pools of "nonconforming" mortgages from banks and give them the capital to make more loans to low-wealth home buyers. In 1997, we more than tripled the number and dollar amount of affordable mortgages purchased from North Carolina banks, purchasing six portfolios with a total value of $70 million. This means another 1,100 families will become home owners thanks to this program -- many more than we could ever reach through our direct lending.
Programmatically, these purchased loans are serving our core constituencies. For example, the percentage of African-American borrowers in our portfolio (30%) is ten times greater than the percentage in conventional mortgage pools (3%). Female-headed households have accounted for almost half (44%) of the loans, and over half (53%) have gone to families in rural areas. These loans are reaching working-class families; the average borrower income is only 61% of the area median income. Financially, the loans have performed well to date.
Using Self-Help's successful model and4brough Senator Faircloth's and Representative Price's leadership, in October Congress approved legislation that will provide $10 million in capital to replicate this program in other states. This should generate another $ 1 00 million in mortgages for low-wealth families across the country, and another 2,000 new home owners. Even more promising, if this and other initiatives can demonstrate to mainstream capital markets and the key secondary market players that these loans represent acceptable risks, the central obstacle to home loan financing for families of modest means will be removed.
Research and Development:
This illustrates what I think is the third major benefit of the CDFI fund: it enables organizations like Self-Help to be the outreach and "research and development" arms of the government and private sector. Whether it's expanding the home loan secondary market, enhancing the SBA microloan or FHA rehabilitation programs, building child care networks, or a hundred other community development issues, CDFIs are an excellent way for the government to disperse risks among multiple communities and players and learn the best lessons from each -- what works AND what doesn't. The community development issues run too deep and are too complex for any one group to tackle on their own, and we need a strategy which capitalizes on the strengths of each group. CDFIs have the flexibility and community knowledge to develop effective solutions, and government and private sector have the capital and scale to expand them. The CDFI fund is the vital link between them.
I urge you to support the reauthorization of the CDFI Fund at the $125 million level so that more CDFIs like Self-Help can access the capital to support their growth and increase impact. Averaging just $2.5 million per state, the $125 million level is really not enough.
I also urge you to adopt the following changes to the bill:
On a related matter, I would like to advocate for a small change in legislation governing the Federal Home Loan Bank system. Many of the soundest and most effective CDFIs are non-depository institutions or have nonprofit affiliates that are currently unable to access FRLBank advances. Allowing CDFIs this access would dramatically increase the impact that they can have on underserved communities. Such a change would further the intent of the FHLBank System to promote community development that benefits underserved families and neighborhoods. Allowing access would impose no greater credit risk to the FHLBank System, since only the most well-managed and secure CDFIs would meet the Bank's strict collateral tests.
Mr. Chairman, I appreciate the opportunity to testify today. With increased resources, the CDFI
Fund can play a significant role in helping CDFIs be an important part of the solution to the
challenges and opportunities facing our nation's most economically distressed urban and rural
communities.
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