Chairman Faircloth, Senator Bryan and distinguished members of the Subcommittee, it is a distinct pleasure to be before you today and represent the Community Development Financial Institutions Fund. I am Ellen Lazar and I have been the Director of the Fund since January of this year. Before I begin my testimony, I would like to introduce you to other members of the Fund who are with me: Paul Gentille, Deputy Director for Management/Chief Financial Officer of the Fund and Maurice Jones, Deputy Director for Policy and Programs at the Fund.
I would like to begin by thanking Chairman Faircloth, Ranking Member Bryan and other members of the Committee for your interest in the Community Development Financial Institutions Fund. The funding we provide is making a difference in the lives of people that are often left out of the economic mainstream.
As you are aware we have prepared legislation to reauthorize the Fund, which was originally >created by the Riegle Community Development and Regulatory Improvement Act of 1994.
The CDFI Fund was created to address the critical problems of urban, rural and Native American communities that often lack adequate access to capital. Access to capital is an essential ingredient for creating and retaining jobs, developing affordable housing, revitalizing and maintaining neighborhoods, building local economies, and enabling people to realize their hopes and dreams. There are significant capital gaps in distressed communities, and this market is not often recognized or well understood. This makes it difficult for conventional sources of capital to serve effectively low income people.
Despite the great strides that have been made in promoting access to credit in underserved neighborhoods, market imperfections still keep adequate capital out of these communities. Today, low income communities are faced with many challenges: moving families from welfare to work, providing basic financial literacy skills, and training unskilled workers to become job ready and CDFIs help to serve their unmet needs.
For example, there is the single mother of three in Charlotte, North Carolina who recently moved to escape an abusive spouse but found it impossible to service the debts caused by one of her children's past medical expenses on her modest salary as a teacher's aide. The School Workers Federal Credit Union was able to arrange a debt consolidation loan and help her not only better manage her debts but also begin a savings program. She has now been able to make a $1500 down payment on a house. Thanks to the $150,000 grant from the CDFI Fund it received last year, this credit union is now poised to help many others work their way out of debt and into asset building for their future.
The CDFI Fund represents a new direction in community development. The Fund's programs leverage limited public dollars to build the capacity of private sector institutions to finance community development needs, and the programs help forge partnerships between communities and mainstream financial institutions. The Fund's efforts are designed to help distressed communities become well functioning local economies.
The President and Congress working in partnership created the Fund in 1994. The Fund's vision and approach represent a true innovation as a Federal initiative. We are now beginning to see the first glimmer of what the Fund can accomplish by assisting communities as they seek to realize their full potential.
The Department's and my top priorities will continue to be strengthening management and internal systems and procedures of the Fund. Understanding the importance of a sound management structure that builds in accountability, I wish to assure you that I and the Department are committed to developing and implementing the necessary improvements to the Fund's financial and program management, reporting systems, internal controls, operating procedures, and awards monitoring. The Fund's new leadership is committed to improving financial management and awards monitoring by ensuring strong program and financial structure, effective internal controls, and increasing the use of information technology.
To date, we have already made significant strides toward achieving these objectives. In the Fund's first financial audit for Fiscal Years 1995 through 1997, it received an unqualified opinion from its outside independent auditors. As expected, the audit confirmed our own findings that the Fund had material weaknesses in prior fiscal years. Using the Fund's FMFIA and audit processes and corrective action plans, we will correct all material weaknesses and findings during FY 1998. As noted in our Annual Report, the Fund is taking critical steps to strengthen and build its management structure and staff. In the first quarter of 1998, a Deputy Director for Management/Chief Financial Officer, with significant financial management experience in government, was appointed. The Fund has also moved swiftly to fill other management positions that are critical for ensuring proper internal controls and accountability, including an awards manager, an accountant, a financial manager, a Deputy Director for Policy and Programs and program managers for each program. We have also begun hiring individuals to work with the program managers on each program and to support our research and evaluation efforts.
A priority for the Fund during FY 1998 and FY 1999 will be to recruit, develop and retain highly qualified staff. Due to the unique and complex nature of the community development finance industry, the Fund requires a well trained and highly specialized staff. As we build and enhance our in-house capacity and expertise to meet the needs of the community development field, we will reduce our reliance on outside contractors. We will not employ management consultants in the foreseeable future.
The Fund is also committed to managing for results, and I and the rest of the Fund's management are working diligently in conducting a rigorous review of the Fund's current 5 year strategic plan, goals and performance measures. I intend to show an important linkage between the Fund's goals and measures and those goals and measures we require from our awardees. Our strategic plan will be accomplished with appropriate Congressional consultation and consultation with the General Accounting Office and other stakeholders, as required by Government Performance and Results Act, and I look forward to working with the Committee on this important planning process.
The Fund seeks to promote economic revitalization and community development through investment in and assistance to community development financial institutions (CDFIS) and through encouraging insured depository institutions to invest in CDFIs and increase lending, investment and services within distressed communities. The Fund's programs are built on several key principles:
The Fund has five programs that collectively address these principles: Its two main programs, the Community Development Financial Institutions (CDFI) Program and the Bank Enterprise Award (BEA) Program; and its other initiatives, the Training Program, Technical Assistance Program, and the Presidential Awards for Excellence in Microenterprise Development.
The CDFI Program seeks to stimulate markets and spark economic activity by funding organizations that emphasize private sector market discipline. The Fund makes investments in, and provides technical assistance to, CDFIs. CDFIs are private for-profit and nonprofit financial institutions with community development as their primary mission. CDFIs include community development banks, community development credit unions, non-profit loan funds, microenterprise loan funds, and community development venture capital funds.
The Fund began making awards until FY 1996. During its 1996 and 1997 rounds, the Fund awarded a total of $77.6 million in assistance to over 81 CDFIs serving urban, rural and Native American communities. These investments will leverage new capital and generate new community development activity over the next several years.
The CDFI Program also stimulates private investment by requiring that all financial assistance be matched on at least a one-to-one basis from sources other than the Federal government. As a result, the vast majority of all matching funds are raised from private sector sources. For example, during the 1996 funding round, nearly three-quarters of our awardees derived all of their matching funds from private sources including banks, corporations, foundations and individuals.
Collectively, 1996 and 1997 CDFI Program awardees are located in 30 states and the District of Columbia. Half of the awardees serve predominantly urban areas, one-third serve predominantly rural areas, and the balance serve a combination of the two. These organizations provide a wide range of lending products, investments and services within their communities. They finance affordable housing projects, small businesses, microenterprises, and community facilities. Awardees are selected based on factors including potential community development impact, financial strength, organizational capacity, and quality of their business plan.
The Fund's 1996 investment in Northeast Ventures of Duluth, Minnesota illustrates how the Fund sparks economic activity. Larry Van Iseghem is a chemist with an environmental mission. Larry's company, located in a rural and declining region of eastern Minnesota, developed and brought to market an environmentally benign, water based coating for heating and cooling equipment which adds energy efficiency to furnaces and air conditioners while preventing corrosion. An early investment by Northeast Ventures allowed Mr. Iseghem to start his company and to expand and move into development of new products. "Some potential investors were wary of my ideas, because they weren't sure environmental benefits and economic viability could go together," Larry explains, "Northeast Ventures Corporation didn't consider this a liability, but a plus. Environmental responsibility is one of their criteria."
In addition to CDFIs, traditional financial institutions play a key role in community development lending and investing. The Bank Enterprise Award (BEA) Program stimulates private markets by providing incentives for banks and thrifts to invest in CDFIs and to increase their community development lending, investment and service activities within distressed communities. In 1996 and 1997, the CDFI Fund made 92 awards totaling $30 million under the BEA Program. During these rounds, BEA awardees collectively provided $130 million in financial and technical assistance to CDFIs and generated $140 million in loans, investments and services within high poverty neighborhoods. The Program has served awardees in 24 states and the District of Columbia. The Program has awarded funds to banks and thrifts as small as $21 million in total assets to as large as $320 billion in total assets. Program participants represent a broad spectrum of the industry including national banks, state chartered commercial banks, Federal savings banks and thrifts, mutual savings banks and credit card banks.
The Bank of America Community Development Bank (B of A) was awarded $1.6 million in the 1996 funding round for increasing its multifamily housing, commercial real estate and business loans in distressed communities across California. The Bank made nearly $25 million in loans in targeted neighborhoods meeting the BEA Program's distress criteria, including $9.5 million in commercial real estate loans, $13.2 million in multifamily loans, and $2.2 million in business loans. The Bank projects that these loans will generate more than 185 units of affordable housing and 300 jobs. B of A's increased multifamily lending activity has helped provide a vital source of affordable housing for low-income families in targeted neighborhoods in San Francisco, Modesto, and Los Angeles, including the projects described below:
In addition to increasing significantly its lending activity in eligible distressed neighborhoods activity that qualified it for its award - B of A, together with Bank of America, F.S.B., has invested its entire combined Bank Enterprise Award back into the community. $1.1 million of the award money has been used to establish the Bank of America Leadership Academy, a ninemonth program that provides training for senior management of community development organizations. The B of A Leadership Academy is funded jointly by Bank of America Community Development Bank, Bank of America, F.S.B., and the Local Initiatives Support Corporation (a certified CDFI and a 1996 CDFI Program awardee); and is conducted by the Development Training Institute. The B of A Leadership Academy is funded for three nine- month programs. Each session trains 35 executive directors or senior staff of community-based development organizations that are at least five years old and have completed at least three projects.
An additional 20 percent of the combined awards will go to the Low Income Housing Fund, a certified CDFI and a 1996 CDFI Program awardee which provides loans for very low-income housing development across the country.
The Fund builds the financial capacity of CDFIs by providing financial assistance in the form of equity investments, grants, loans or deposits to enhance the capital base -- or the financial muscle of these organizations to make loans, investments, provide technical assistance or otherwise address unmet community development needs. Unlike programs in which resources are provided for specific projects, under the CDFI Program the Fund invests in CDFIs as institutions in order to promote their long-term viability and ability to serve distressed communities.
Appalbanc, a multifaceted CDFI that serves 85 extremely distressed counties in West Virginia, Kentucky, Tennessee, and Virginia, has developed an effective strategy to promote housing development and homeownership. Since its inception, Appalbanc and its affiliates have financed the development or rehabilitation of more than 20,000 homes. The $1.33 million in assistance provided by the CDFI Fund will be used to expand Appalbanc's activities in this very needy region.
The Fund builds the organizational capacity of CDFIs through several mechanisms. First, as part of the CDFI Program funding rounds, the Fund conducts "debriefings" with each applicant that was turned down for funding. Through this debriefing, applicants are given valuable feedback about the strengths and weaknesses of their organizations as observed by those involved in reviewing their requests for funding. Many of these organizations have used the information from these debriefings to address their weaknesses, build on the strengths of their operations and improve performance.
Second, the Fund provided assistance to two national intermediaries in 1997 and a third organization in 1998 that will provide financial and technical assistance to small, nascent and growing CDFIS. CDFI Intermediaries are organizations that focus their financing activities primarily on other CDFIs. By providing financial assistance to specialized intermediaries, the Fund strengthens its capacity to support the development and enhancement of the CDFI industry. Together, the three national intermediaries selected by the Fund in 1997 and 1998 are expected to serve nearly 250 CDFIs over the next five years.
Finally, this year the Fund has launched a new initiative to build the organizational capacity of CDFIs. This initiative is a $5 million technical assistance program that will provide grant monies to CDFIS for capacity building activities. A second initiative, to be launched in the next two months, is a new training program that will enhance skill development among CDFIS and other members of the financial services industry that are engaged in community development finance activities. The Fund expects to provide up to $15 million for this program.
By building the capacity of CDFIS, the Fund helps these organizations to enhance the economic well being of people in their communities.
The Fund's investments are making a difference in communities. For example, one 1996 CDFI Program Awardee, Cascadia Revolving Fund, made a loan to Nancy Stratton of Port Haddock, WA to open a day care center in her home. Nancy knew that her previous credit problems and lack of business experience would prevent her from obtaining financing through traditional sources. Cascadia worked with Nancy to refine her business plan and make a loan to help her start a now successful business.
The Fund also promotes performance and impact by requiring all CDFIs selected to receive assistance to enter into an agreement to meet performance goals. These performance goals are tailored to each CDFI based on its Comprehensive Business Plan. Performance goals may be based on the amount of lending or investment activity projected, the number of people to receive technical assistance, or other measures of a CDFI's success in meeting its community development objectives. The performance levels for each CDFI are intended to be challenging and are based on the projections made in an Awardee's application for funding, the amount of assistance provided by the Fund, and the CDFI's financial and organizational capacity.
In the Fund's Bank Enterprise Award Program, the Fund encourages performance by requiring awardees to complete their projected activities before their awards will be disbursed. Thus, each Federal dollar disbursed has already made an impact within a local community before it is received by an Awardee.
The Fund also encourages performance within the CDFI industry by promoting best practices. For example, the Fund's Presidential Awards for Excellence in Microenterprise Development is a non-monetary program that recognizes and seeks to bring attention to organizations that have demonstrated excellence in promoting micro entrepreneurship. By recognizing outstanding microenterprise organizations, the Presidential Awards seek to promote sound lending practices and bring wider public attention to the important role and successes of microenterprise development especially in enhancing economic opportunities among women, low income people, and minorities who have historically lacked access to traditional sources of credit. The first Presidential Awards for Excellence in Microenterprise Development were made in January of 1997. We have opened the application process for the second round and expect to make awards this Fall.
We are hiring an individual to manage our Native American lending study, which we will begin this year and expect to complete during FY 2000. Our goal is to learn more about barriers to lending in Native American communities and find solutions that will provide those communities with greater access to capital.
We are beginning to see the impact that the Fund can make in underserved communities and among people that are often left out of the economic mainstream. We are establishing monitoring procedures that will allow us greater insight into CDFI performance. This year, the Fund will be launching an impact analysis project that will provide valuable information on how the Fund's investments have created benefits within communities. As part of demonstrating impact, the Fund will continue to expand its communication tools, including development of a web site and publication of regular newsletters designed to publicize information about community development finance industry trends and best practices.
Our objectives over the next four years include increasing investments in CDFIs, increasing their capacity and expertise, promoting the microenterprise industry and micro entrepreneurship and expanding financial service organizations' lending and investment in underserved communities. I believe we can do this through the Core Component of the CDFI Program, the Intermediary Component of the CDFI Program, the Bank Enterprise Award Program, the Technical Assistance Program and the Training Program. We also plan to develop programs authorized in the Fund's enabling legislation: capitalization assistance to enhance liquidity and the capital access program.
It is our intention to learn from what we have done thus far, and through appropriate evaluation ensure that our programs are helping to build viable, sustainable organizations, stimulating investments and creating community development impact that, in turn, is helping to build assets in distressed rural, urban and Native American communities.
We will be expanding our program activities and seek to increase the cumulative number of CDFIs receiving financial and technical assistance. The FY 1999 budget request of $125 million is fully justified. Of the $125 million, we expect to spend approximately $79.7 million on financial and technical assistance to CDFIs; $39.8 million for the Bank Enterprise Award Program; and $5.5 million on administrative expenses.
Increased funding will allow the Fund to increase the cumulative number of CDFIs receiving financial and technical assistance under the CDFI program. Financial assistance to CDFIs enhances private sector capacity, directly addresses community development financing needs in distressed communities, and strengthens CDFI's long term capacity to help restore healthy private market activity. The increased funding will also be used to expand the BEA Program,
training program and technical assistance program and in part to help accelerate the development of a secondary market for community development loans.
Mr. Chairman, members of the Committee, thank you for giving me this opportunity to provide
an overview of the Fund's mission, its accomplishments and plans for the future. I also look
forward to working with you over the course of this year's reauthorization process. I would be
very pleased to respond to any questions you may have about my testimony or about the Fund
and its activities.
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