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Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues

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Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues Sean Lowry Analyst in Public Finance March 13December 29, 2014 Congressional Research Service 7-5700 www.crs.gov R42770 Community Development Financial Institutions (CDFI) Fund: Programs and Policy IssueIssues Summary As communities face a variety of economic challenges, some are looking to local banks and financial institutions for solutions that address the specific development needs of low-income and distressed communities. Community development financial institutions (CDFIs) provide financial products and services, such as mortgage financing for homebuyers and not-for-profit developers,; underwriting and risk capital for community facilities; technical assistance; and commercial loans and investments to small, start-up, or expanding businesses. CDFIs include regulated institutions, such as community development banks and credit unions, and nonregulated institutions, such as loan and venture capital funds. The Community Development Financial Institutions Fund (theCDFI Fund), an agency within the Department of the Treasury, administers several programs that encourage the role of CDFIs, and similar organizations, in community development. Nearly 1,000 financial institutions located throughout all 50 states and the District of Columbia are eligible for the CDFI Fund’s programs to provide financial and technical assistance to meet the needs of businesses, homebuyers, community developers, and investors in distressed communities. In addition, the Fundfund allocates the New Markets Tax Credit to more than 5,000 eligible investment vehicles in low-income communities (LICs). This report begins by describing the CDFI Fund’s history, current appropriations, and each of its programs. A description of the Fundfund’s process of certifying certain financial institutions to be eligible for the Fundfund’s program awards follows. The next section provides an overview of each program’s purpose, use of award proceeds, eligibility criteria, and relevant issues for Congress. The final section analyzes four policy considerations of congressional interest, regarding the Fundfund and the effective use of federal resources to promote economic development. First, it analyzes the debate on targeting development assistance toward particular geographic areas or low-income individuals generally. Prior research indicates that geographically targeted assistance, like the Fundfund’s programs, may increase economic activity in the targeted place or area. However, this increase may be due to a shift in activity from an area not eligible for assistance. Second, it analyzes the debate over targeting economic development policies toward labor or capital. The Fundfund’s programs primarily rely on the latter, such as encouraging lending to small businesses, rather than targeting labor, such as wage subsidies. Research indicates the benefits of policies that reduce capital costs in a targeted place may not be passed on to local laborers, in the form of higher wages or increased employment. Third, it examines whether the Fundfund plays a unique role in promoting economic development, or and if it duplicates, complements, or competes with the goals and activities of other federal, state, and local programs. Although CDFIs are eligible for other federal assistance programs and other agencies have a similar mission as the Fundfund, the Fundfund’s programs have a particular emphasis on encouraging private investment and building the capacity of private financial entities to enhance local economic development Fourth, it examines assessments of the Fundfund’s management. Some argue that the Fundfund’s programs are not managed in an effective manner and are not held to appropriate performance measures. Others arguecontend that the Fundfund is fulfilling its mission and achieving its performance measures. Congressional Research Service Community Development Financial Institutions (CDFI) Fund: Programs and Policy IssueIssues Contents Introduction...................................................................................................................................... 1 CDFI and CDE Certification ........................................................................................................... 4 Programs .......................................................................................................................................... 7 CDFI Program ........................................................................................................................... 7 Native American CDFI Assistance .................................................................................... 10 Small and Emerging CDFI Assistance .............................................................................. 11 Capacity Building Initiative .............................................................................................. 11 Healthy Food Financing Initiative..................................................................................... 11 New Markets Tax Credit.......................................................................................................... 12 Bank Enterprise Award ............................................................................................................ 14 Bond Guarantee Program ........................................................................................................ 16 Capital Magnet Fund ............................................................................................................... 17 Policy Considerations .................................................................................................................... 1718 How Effective Are Geographically Targeted Economic Development Policies? .................... 1719 Should Economic Development Policies Target Capital or Labor? ........................................ 2022 Do the Fund’s Programs Duplicate Other Government Efforts? ............................................. 2123 Is the Fund Managed Effectively? ........................................................................................... 2324 Figures Figure 1. Certified CDFIs, Byby Location ........................................................................................... 5 Figure 2. Certified CDEs, ByCommunity Development Entities (CDEs), by Location ........................................................................................... 6 Tables Table 1. Community Development Financial Institutions (CDFI) Fund Programs Funding, FY2012 to FY2015 Request ........................................................................................................ 3 Table B-1. Certified Native CDFIs, by State ................................................................................. 29 Appendixes Appendix A. Inactive Programs ..................................................................................................... 2627 Appendix B. Certified Native CDFIs ............................................................................................ 29 Contacts Author Contact Information........................................................................................................... 29 Congressional Research Service Community Development Financial Institutions (CDFI) Fund: Programs and Policy IssueIssues Introduction Community development financial institutions (CDFIs) have been using small-scale, and locally developed strategies to stabilize and advance low-income and financially underserved communities for decades. CDFIs are specialized financial institutions that work in market niches that are underserved by traditional financial institutions. They provide a range of financial products and services in economically distressed markets, such as mortgage financing for lowincome and first-time homebuyers and not-for-profit developers, flexible underwriting and risk capital for needed community facilities, technical assistance, and commercial loans and investments to small start-up or expanding businesses in low-income areas. CDFIs exist in both rural and urban communities. CDFIs include regulated institutions, such as community development banks and credit unions, and nonregulated institutions, such as loan and Types of CDFIs venture capital funds. Community banks also play a role in economic recovery. The success of these banks is often linked with local communities; businesses and individuals need the financial services that community banks provide, whileand the banks need opportunities for profitable lending.1 Some are specifically concerned that a shortage of credit from community banks will reduce the abilities for new entrepreneurs opportunities for new entrepreneurs to establish a business, existing businesses to expand and hire new workers, and for consumers to acquire the credit they need to to buy or make improvements to a property. • Depository institutions offer a range of consumer and institutional savings, checking, and lending services. This group includes for-profit community development banks and nonprofit community development credit unions. These CDFIS are regulated and insured by the same agencies that govern other banks and credit unions. • Loan funds are nonregulated, nonprofit institutions that focus on one or more aspects of capital access and community development, such as small business lending, home mortgage financing, and community facilities development financing. • Community development venture capital funds are forprofit or nonprofit institutions that deliver equity capital to businesses in distressed communities. • Community development intermediaries facilitate various revitalization activities between large investors and a defined population of community development corporations, CDFIs, or nonprofit organizations. This report begins by describing the Community Development Financial Institutions Fund’s (CDFI Fund’s) history, current current appropriations, and each of its programs. The Source: Federal Reserve Bank of Richmond, “Community Development Financial Institutions: A programs. The next section of the report analyzes four policy Unique Partnership for Banks,” Community Development considerations of congressional interest,analyzes four policy considerations of Special Issue, 2011. congressional interest regarding the Fundfund and the effective use of federal resources to promote economic development. It analyzes the reasons why some individuals may choose not to locate in an underdeveloped community, why government policies may be justified to encouragein encouraging economic activity to relocate to underdeveloped communities, and which policies are more successful in addressing aspects of underdevelopment. Lastly, this report examines the CDFI Fund’s programs and management to see if they represent an effective and efficient government effort to promote economic development in low-income and distressed communities. 1 Ben S. Bernanke, “Community Banking,” Speech at the Independent Community Bankers of America National Convention and Techworld, Nashville, TN, March 14, 2012, at http://www.federalreserve.gov/newsevents/speech/ bernanke20120314a.htm. Congressional Research Service 1 Community Development Financial Institutions (CDFI) Fund: Programs and Policy IssueIssues The Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325) established the Community Development Financial InstitutionsCDFI Fund to assist CDFIs in providing coordinated development strategies across various sectors of the local economy. These coordinated development strategies are designed to encourage small businesses, affordable housing, the availability of commercial real estate, and human development.2 The legislation intended to improve the supply of capital, credit, private investment, and development services in economically distressed areas. In proposing the Fund fund, President Clinton stated that, “by ensuring greater access to capital and credit, we will tap the entrepreneurial energy of America’s poorest communities and enable individuals and communities to become self-sufficient.”3 ThoughAlthough the Riegle Act created the CDFI Fund as a wholly owned, independent government corporation, a supplemental appropriations bill moved the Fundfund into the Department of the Treasury (Treasury) in 1995.4 The Fundfund was moved within Treasury because of its focus on financial institutions and because other bank regulatory agencies (i.e., the Office of Thrift Supervision and Office of the Comptroller of the Currency) were already located within the agency.5 The Fundfund is a component of the programs of the Under Secretary’s Office of Domestic Finance, and it is directly under the Assistant Secretary for Financial Institutions.6 The CDFI Fund is headed by a director, who is appointed by the Secretary of the Treasury and not subject to Senate confirmation. Initially, the director served a three-year term, however the Fund. However the fund was led by approximately 10 directors in its first 15 years. To bring greater stability to the Fundfund’s leadership, the Secretary of the Treasury made the director’s position into a career appointment in 2010, meaning that there are no limits on the length of the director’s term. Annie Donovan has been director of the fund since December 2014.7 By statute, the Fundfund also has a 15-member Community Development Advisory Board. The board members include the Secretaries of Agriculture, Commerce, Housing and Urban Development (HUD), Interior, and the Treasury; the Administrator of the Small Business Administration (SBA); and nine private citizens appointed by the President. The Advisory Boardadvisory board’s function is to advise the director of the Fund on the fund on policies regarding the Fundfund’s activities. The Advisory Board is advisory board is not allowed, by law, to advise the Fundfund on the granting or denial of any particular application for monetary or nonmonetary awards. 2 2 U.S. Congress, House Committee on Banking, Finance, and Urban Affairs, Proposed Legislation: The Community Development Banking and Financial Institutions Act of 1993, Message from the President, 103rd Cong., 1st sess., July 15, 1993, H. Doc. 103-118 (Washington: GPO, 1993). 3 Ibid. 4 The Emergency Supplemental Appropriations for Additional Disaster Assistance, for Anti-terrorism Initiatives, for Assistance in the Recovery from the Tragedy that Occurred at Oklahoma City, and Rescissions Act, 1995 (P.L. 10419). 5 See Lehn Benjamin, Julia Sass Rubin, and Sean Zielenbach, “Community Development Financial Institutions: Current Issues and Future Prospects,” Proceedings, Board of Governors of the Federal Reserve System’s Community Affairs Research Conference, Sustainable Community Development: What Works, What Doesn't, and Why, March 28, 2003, p. 7, at http://www.federalreserve.gov/communityaffairs/national/CA_Conf_SusCommDev/pdf/ zeilenbachsean.pdf. 6 U.S. Department of the Treasury, “Organizational Structure,” August 11, 2011, at http://www.treasury.gov/about/ organizational-structure/Pages/default.aspx. 7 Donna Gambrell was appointed to a three-year term as the Fund’s director, which began in November 2007 and expired at the end of 2010. However, Ms. Gambrell has stayed on as director under Treasury’s new rulesSee U.S. Department of the Treasury, “U.S. Treasury Department Announces New Director of the Community Development Financial Institutions Fund,” press release, November 25, 2014, at http://www.treasury.gov/press-center/ press-releases/Pages/jl9709.aspx. Congressional Research Service 2 Community Development Financial Institutions (CDFI) Fund: Programs and Policy IssueIssues Although the CDFI Fund is organized within Treasury’s Office of Domestic Finance, in recent years years Congress has provided the Fundfund with its own budget authority line in annual financial services services appropriations bills.8 These appropriations go toward the administration of the Fund, itsfund’s administration, programs, and program awards. The Fundfund’s appropriations cover administration of approvals for allocations of the New Markets Tax Credit (NMTC); however, the actual tax credit is awarded through the Internal Revenue Code, not through the Fundfund’s appropriations. As shown in Table 1, the Fundfund’s total enacted budget authority for FY2014 is $226.0FY2015 is $230.5 million.9 Of this $226.0230.5 million, 65% (approximately $14666% ($152.4 million) is appropriated for the Fundfund’s core CDFI CDFI financial and technical assistance programs; 11% (approximately $24.610% ($23.1 million) is appropriated for administration of the Fund fund’s programs, including the NMTC; 8% ($18.0 million) is appropriated for the Bank Enterprise Award (BEA) program; and the remaining 16% ($37.0and the remaining 24% ($55 million) is appropriated for set-asidessetasides for other, specific programs. Table 1. Community Development Financial Institutions (CDFI) Fund Programs Funding, FY2012 to FY2015 Request (in millions of dollars) Budget Activity FY2012 FY2013 FY2014 FY2015 (Request) CDFI Program $146.0 $138.4 $146.4 $151.3152.4 Administration $23.0 $21.8 $24.6 $23.61 Healthy Food Financing Initiative $22.0 $20.8 $22.0 $3522.0 Bank Enterprise Award Program $18.0 $17.1 $18.0 $18.0 Native American CDFI Assistance $12.0 $11.4 $15.0 $15.0 Total Budget Authority $221.0 $209.4 $226.0 $224.9 Budget Activity Source: U.S. Department of 226.0 230.5 Sources: Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235); U.S. Department of the Treasury, Community Development Financial Institutions Fund FY2015 President’s Budget, March 2014, p. 3, at http://www.treasury.gov/about/budget-performance/CJ15/ 06.%20CDFI%20Fund%20CJ.pdf; and U.S. Department of the Treasury, Community Development Financial Institutions Fund FY2014 President’s Budget, p. 3, at http://www.treasury.gov/about/budget-performance/CJ14/ 6.%20CDFI%20CJ%20FINAL%20ok.pdf. Note: Administration costs include administration of the New Markets Tax Credit. Total budget authority numbers might not add up to program totals due to rounding. As shown in Table 1, the Obama Administration’s latest budget request of $226.0 million for FY2015 is $1.1 million less than the level enacted for the Fund for FY2014. Specifically, the Administration has requested a $4.9 million increase in FY2015 (compared with FY2014) 8 During the Clinton administration8 During the Clinton Administration, funding was provided through the annual Veteran’s Affairs-HUD-Independent agencies appropriations. 9 These totals for FY2013 were verified by the CDFI Fund. For the most part, FY2013 appropriations can be calculated using the appropriations for FY2012 as a base before applying the 5% reduction from the sequester across all program categories and a 0.2% rescission across all program categories (before accounting for program transfers, surpluses in program subsidy costs, recoveries, etc.). See P.L. 112-74, the Consolidated Appropriations Act, 2012; U.S. Office of Management and Budget, OMB Report to the Congress on the Joint Committee Sequestration for Fiscal Year 2013, March 1, 2013, p. 47, at http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/ fy13ombjcsequestrationreport.pdf; P.L. 113-6, the Consolidated and Further Continuing Appropriations Act, 2013; and U.S. Office of Management and Budget, OMB Final Sequestration Report to the President and Congress for Fiscal Year 2013, at http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/sequestration/ sequestration_final_april2013.pdf. Congressional Research Service 3 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue funding for the core CDFI financial assistance program and a $13.0 million increase in the CDFI program’s support of the Healthy Food Financing Initiative (HFFI). The President is not requesting any funds for the Bank Enterprise Award (BEA) program for FY2015.Issues CDFI and CDE Certification To be eligible for certain CDFI Fund-related programs, an organization must be certified as either a a CDFI or a Community Development Entity (CDE). CDFI certification is a designation conferred conferred by the CDFI Fund and is a requirement for accessing financial award assistance from the CDFI CDFI Fund through the CDFI program, Native American CDFI Assistance (NACA) programs, and and certain benefits under the BEA program to support an organization’s established community development financing programs. An organization that does not meet each of the certification eligibility requirements at the time of application for Technical Assistancetechnical assistance is still eligible to apply for and receive Technical Assistancetechnical assistance. This may occur if the Fundfund determines that the organization’s application materials provide a realistic course of action to ensure that it will meet each of the certification requirements within two years of entering into an assistance agreement with the Fundfund. To be eligible for CDFI certification, the applicant must • be a legal entity; • have a primary mission of promoting community development; • primarily provide financial products, development services, or other similar financing in arms-length transactions; • primarily serve (direct at least 60% of financial product activities to) one or more geographic investment areas meeting certain poverty or income standards, lowincome targeted populations, or other targeted populations that lack adequate access to capital and historically have been denied credit; • provide development services, such as credit or home-buying counseling, in conjunction with financial products; • maintain accountability to defined target markets through representation on a governing or advisory board or through outreach activities; and • be a nongovernment entity and not under the control of any government entity (except tribal governments).10 10 U.S. Government Accountability Office (GAO), Community Development Financial Institutions and New Markets Tax Tax Credit Programs in Metropolitan and Nonmetropolitan Areas, GAO-12-547R, April 26, 2012, p. 4, at http://www.gao.gov/products/GAO-12-547R. Congressional Research Service 4 Community Development Financial Institutions (CDFI) Fund: Programs and Policy IssueIssues Figure 1. Certified CDFIs, Byby Location Source: Community Development Financial Institutions Fund, at http://www.cdfifund.gov/docs/certification/cdfi2014/Cert/ CDFI%20List%20-%2007-31-12.xls2010-31-14.xls. Note: CDFI counts are as of January 1October 31, 2014. As of January 1October 31, 2014, there were 807923 certified CDFIs (downup from 999887, as of July 31, 20122014).11 As shown in Figure 1, at least one CDFI is located in each of the 50 states, the District of Columbia, Guam, and Puerto RicoPuerto Rico, and the U.S. Virgin Islands. California and New York contain more certified CDFIs than any other U.S. state or territory. U.S. state or territory. Of the 923 certified CDFIs, 502 (54%) are loan funds, 241 (26%) are credit unions, 108 (12%) are banks or thrifts, 58 (6%) are depository institution holding companies, and 14 (2%) are venture capital funds.12 Of the 923 certified CDFIs, 71 (8%) are certified Native American CDFIs. CDE certification is required to receive an NMTC allocation. A certified CDE is a domestic corporation or partnership that is an intermediary vehicle for the provision of loans, investments, or financial counseling in low-income communities (LICs). CDEs use the NMTC to encourage investors to make equity investments in the CDE or its subsidiaries. To be eligible for CDE certification, the applicant must • be a legal entity and a domestic corporation or partnership for federal tax purposes; 11 For a list of these certified CDFIs with their contact information, see Community Development Financial Institutions (CDFI) Fund, “CDFI Certification,” at http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=9. Congressional Research Service 5 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue 12 CRS analysis of certified CDFI data in http://www.cdfifund.gov/docs/2014/Cert/CDFI%20List%2010-31-14.xls. Congressional Research Service 5 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues • be a legal entity and a domestic corporation or partnership for federal tax purposes; • have a primary mission of serving or providing investment capital to low-income communities or low-income individuals and target at least 60% of activities to these groups; and • maintain accountability to low-income communities through representation on a governing or advisory board.1213 Figure 2. Certified CDEs, By Location Source: Community Development Financial Institutions Fund, at http://www.cdfifund.gov/what_we_do/ programs_id.asp?programID=10Community Development Entities (CDEs), by Location Source: Data previously posted on the CDFI Fund website. Note: CDE counts are as of July 31, 2012. As of July 31, 2012, there were 5,780 certified CDEs (including their subsidiaries) located throughout the United States, Puerto Rico, and the U.S. Virgin Islands.1314 As shown in Figure 2, California and New York also contain more certified CDEs than any other U.S. state or territory. 12 Ibid. For a list of these certified CDEs (and their subsidiaries) with their contact information, see Community Development Financial Institutions Fund, “CDE Certification,” at http://www.cdfifund.gov/what_we_do/ programs_id.asp?programID=10. 1313 Ibid. The CDFI Fund has not updated its public counts of certified community development entities (CDEs) since this date and has removed the spreadsheet of certified CDEs from its website. 14 Congressional Research Service 6 Community Development Financial Institutions (CDFI) Fund: Programs and Policy IssueIssues Programs The Fundfund’s official mission is to increase economic opportunity and promote community development investments in low-income and distressed communities in the United States. To carry out this mission, the Fundfund is composed of several programs that address multiple needs of distressed communities. These programs encourage qualified entities to provide financial and technical assistance to meet the needs of local businesses, potential homebuyers, community developers, and potential investors in distressed and LICs. The Fund’s range of incentives low-income and distressed communities. The fund’s range of incentives includes equity investment in program awardees, tax credits, grants, loans, and deposits and credit union shares in insured CDFIs and state-insured credit unions.1415 All of the Fund’s programs share a common characteristic, in that they fund’s programs use geographically targeted incentives intended to increase community development in underserved and distressed communities, where certain types of economic activity might not otherwise occur. Ideas for geographically targeted community development policies were a feature of federal policy debates throughout the 1980s and early 1990s.1516 Despite bipartisan support for these policies at the time, they did not become more were not widely implemented, at the federal level, level until the Clinton Administration.1617 CDFI Program The Fund’s core CDFI program was authorized by the Community Development Banking and Financial Institutions Act of 1994 in the Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325) authorized the fund’s core CDFI program. The CDFI program provides two types of monetary awards, financial assistance (FA) and technical assistance (TA). These awards are given to CDFIs to build their capacity of CDFIs to serve low-income people and communities that lack access to affordable affordable financial products and services.17 14 12 C.F.R. §1805.401. For a historical analysis of these debates, see the Discussion18 To be eligible for an FA award, a CDFI must be certified by the fund before it applies for the award. Prospective applicants that are not yet certified must submit a separate certification application to be considered for an FA award during a funding round. Both certified and noncertified CDFIs are eligible to apply for TA awards. However, noncertified organizations must be able to become certified within two years after receiving a TA award. In evaluating and selecting applicants for awards, the fund evaluates the applicant’s likelihood of meeting its goals as described in a required comprehensive business plan. The fund also considers the applicant’s prior history of servicing distressed communities, operational capacity, financial track record, and other attributes.19 15 12 C.F.R. §1805.401. For a historical analysis of these debates, see the discussion section of CRS Report R41268, Small Business Administration HUBZone Program, by Robert Jay Dilger. 1617 These programs include the 1993 reform of the Community Reinvestment Act of 1977 (P.L. 95-128) and the Empowerment Zone program, established by the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66). 1718 Laws pertaining to the CDFI Fund’s FA and TAfinancial assistance (FA) and technical assistance (TA) are located in 46 U.S.C. §§1805.300-1805.303. 1519 12 C.F.R. §1805.701. 16 Congressional Research Service 7 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue To be eligible for an FA award, a CDFI must be certified by the Fund before it applies for the award. Prospective applicants that are not yet certified must submit a separate certification application to be considered for an FA award during a funding round. Both certified and noncertified CDFIs are eligible to apply for TA awards. However, noncertified organizations must be able to become certified within two years after receiving a TA award. In evaluating and selecting applicants for awards, the Fund evaluates the applicants’ likelihood of meeting its goals as described in a required comprehensive business plan. The applicants’ prior history of servicing distressed communities, its operational capacity, financial track record, and other attributes are also taken into consideration.18Issues Activities eligible for program awards must target a distressed community, which is defined by two requirements. First, the community (investment area) must meet minimum area requirements. The community must be a continuous area of general local government that (1) has a population of at least 4,000, if located in a metropolitan statistical area; (2) has a population of at least 1,000, in nonmetropolitan areas; or (3) is located entirely within an Indian reservation.20 Minimum Requirements for Meeting the CDFI Program’s Definition of a Distressed Community • A contiguous area located with a unit of General Local Government withgeneral local government that has a population, as determined determined by the most recent census data available, of at least 4,000, if any of the portion of the area is located with a Metropolitan Area with a with a metropolitan area with a population of 50,000; has a population of at least 1,000, in any other case; or beis located entirely within an Indian reservation; reservation. • At least 30% of the Eligible Residents have incomeseligible residents have incomes Second, at least 30% of eligible residents in that are less than the national poverty level, as the community must have incomes that are published by the U.S. Bureau of the Census in the most recent decennial census for which data is less than the national poverty level, as available; the unemployment rate is at least 1.5 published by the U.S. Bureau of the Census, times greater than the national average, as and the community must have an determined by the U.S. Bureau of Labor Statistics’ unemployment rate that is at least 1.5 times (BLS’s) most recent data, including estimates of greater than the national average, as unemployment developed using the BLS’s Census Share calculation method. determined by the U.S. Bureau of Labor Statistics’ most recent data. In addition, the • Such additional requirements as may be specified by CDFI Fund may specify other requirements in the CDFI Fund in the applicable notice of funds availability. a program’s applicable notice of funds 21 availability (NOFA). The fund’s online Source: 12 C.F.R. §1806.200(b). resource, CDFI Fund Mapping System (CIMS), designates which localities either fully qualify or partially qualify as distressed communities, based on the three criteria.22available; the unemployment rate is at least 1.5 times greater than the national average, as determined by the U.S. Bureau of Labor Statistics’ (BLS’s) most recent data, including estimates of unemployment developed using the BLS’s Census Share calculation method; or Activities eligible for program awards must • Such additional requirements as may be specified by target a distressed community, which is the Fund in the applicable notice of funds availability. defined by two requirements. First, the Source: 12 C.F.R. §1806.200(b). community (investment area) must meet minimum area requirements. The community must be a continuous area of general local government that either has (1) a population of at least 4,000, if located in a Metropolitan Statistical Area, (2) a population of at least 1,000, in nonmetropolitan areas, or (3) located entirely within an Indian reservation.19 Second, at least 30% of the eligible residents in the community must have incomes that are less than the national poverty level, as published by the U.S. Bureau of Labor Statistics (BLS), and the community must have an unemployment rate that is at least 1.5 times greater than the national average, as determined by the BLS’s most recent data. In addition, the Fund may specify other requirements in a program’s applicable notice of funds availability (NOFA).20 The Fund’s online resource, CDFI Fund Mapping System (CIMS), designates which localities either fully qualify or partially qualify as distressed communities, based on the three criteria.21 If the community does not meet the individual minimum area requirements, the applicant may select two or more geographic units which, in the aggregate, meet the minimum area eligibility requirements, provided that none of the geographic units has a poverty rate less than 20%.22 18 12 CFR §1805.701. 12 C.F.R. §1806.200(b)(1). 20 12 C.F.R. §1806.200(b)(2). 21 Community Development Financial Institutions Fund, “Community Development Financial Institutions Fund Mapping System (CIMS),” December 3, 2008, at http://www.cdfifund.gov/what_we_do/mapping.asp. 22 12 C.F.R. §1806.200(c). 19 Congressional Research Service 8 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue The Fund23 The fund makes awards up to $2 million to certified CDFIs under the FA component of the CDFI program.2324 A CDFI may use an FA award for lending, investing, enhancing liquidity, or other means of financing • commercial facilities that promote revitalization, community stability, or job creation or retention; • businesses that provide jobs to, are owned by, or enhance the availability of products and services to low-income individuals; 20 12 C.F.R. §1806.200(b)(1). 12 C.F.R. §1806.200(b)(2). 22 CDFI Fund, “Community Development Financial Institutions Fund Mapping System (CIMS),” December 3, 2008, at http://www.cdfifund.gov/what_we_do/mapping.asp. 23 12 C.F.R. §1806.200(c). 24 CDFI Fund, “Community Development Financial Institutions Program,” August 6, 2012, at http://www.cdfifund.gov/what_we_do/programs_id.asp?programid=7. 21 Congressional Research Service 8 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues • housing that is principally affordable to low-income persons, with some exceptions; • the provision of consumer loans; or • other businesses or activities as requested by the applicant and deemed appropriate by the Fund.24fund.25 The Fundfund awards grants of up $100,000 to certified CDFIs and established entities seeking to become certified under the TA component of the CDFI program. TA awards are intended to build a CDFI’s capacity to provide affordable financial products and services to low-income communities and families.2526 TA grants may be used for a variety of purposes, including • the purchasepurchasing equipment, materials, or supplies; • to payprocuring for consulting or contracting services; • to paypaying the salaries and benefits of certain personnel; • to traintraining staff or board members; and • orconducting other activities deemed appropriate by the Fund.26fund.27 FA and TA awards are both generally subject to two restrictions. First, the CDFI Fund typically requires requires an applicant to demonstrate that theyit can match from a nonfederal source, dollar-for-dollar, the the amount of money that they areit is requesting from the Fundfund. With regard to FA awards, the Fundfund is authorized to make awards to applicants in a like form to the matching funds secured by the awardee.2728 For example, the Fundfund can only match a nonfederal grant with an FA grant—not a loan. Second, the Fundfund generally limits any one entity or its affiliates from receiving more than $5 $5 million in awards from the Fundfund within a three-year period.2829 However, restrictions on the Fundfund’s awards have been subject to temporary legislative changes. For example, the American Reinvestment and Recovery Act (ARRA) of 2009 (P.L. 111-5) 23 Community Development Financial Institutions Fund, “Community Development Financial Institutions Program,” August 6, 2012, at http://www.cdfifund.gov/what_we_do/programs_id.asp?programid=7. 24 12 C.F.R. §1805.301. 25 Ibid. 26 12 C.F.R. §1805.303. 27 12 C.F.R. §1805.501. 28 waived the nonfederal, dollar-for-dollar matching requirement for three years.30 Thus, the fund did not require awards in FY2009, FY2010, and FY2011 to be matched by nonfederal sources.31 The matching requirement returned for awards in FY2012 for fund programs that did not receive 25 12 C.F.R. §1805.301. Ibid. 27 12 C.F.R. §1805.303. 28 12 C.F.R. §1805.501. 29 12 C.F.R. §1805.402(a). However, an entity and its affiliates may receive up to $8.75 million in awards from the Fundfund within a three year period if the entity serves an area wherein which there are no other applicants for awards. These exceptions to the $5 million cap are detailed in 12 C.F.R. §§1805.402(b)-(c). Congressional Research Service 9 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue waived the nonfederal, dollar-for-dollar matching requirement for three years.29 Thus, the Fund did not require awards in FY2009, FY2010, and FY2011 to be matched by nonfederal sources.30 The matching requirement returned for awards in FY2012 for Fund programs that did not receive a congressional wavier.31 30 American Recovery and Reinvestment Act of 2009 (P.L. 111-5), 123 Stat. 148. 31 Ibid. 26 Congressional Research Service 9 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues a congressional wavier.32 ARRA also waived the $5 million cap for FY2009, FY2010, and FY2011.3233 The Fundfund reported that it awarded 148133 FA awards and 4322 TA awards totaling $150.3160.8 million in FY2013.33FY2014.34 Native American CDFI Assistance The origin of the Native American CDFI Assistance (NACA) component of the CDFI program dates back to the Riegle Act of 1994. The Riegle Act mandated that the CDFUI Fund conduct a study of lending and investment practices on Indian reservations. The study was directed to identify and determine the impact of private-financing barriers on Native American populations.34 35 Since the November 2001 release of the Native American Lending Study, the Fundfund certifies Native CDFIs and provides assistance through the CDFI program’s authority. These programs are designed to reduce barriers preventing access to credit, capital, and financial services in Native American, Alaska Native, and Native Hawaiian communities (collectively referred to as Native Communities).3536 The Fundfund receives a separate appropriation for the NACA component of the CDFI program. Under the NACA component of the CDFI program, the Fundfund issues FA and TA awards to organizations with the primary mission of increasing access to capital in Native Communities. In addition, the NACA component provides TA grants to certified Native CDFIs, emerging Native CDFIs, and sponsoring entities (see below). TA awards may be used by the recipient to become certified as a Native CDFI or to create a new Native CDFI. A CDFI must be certified by the Fundfund as one of three types of entities to become eligible for NACA’s FA and TA awards:36 29 American Recovery and Reinvestment Act of 2009 (P.L. 111-5), 123 Stat. 148. Ibid. 3137 • certified Native CDFIs, organizations that direct at least 50% of their activities toward serving Native Communities; • emerging Native CDFIs, organizations that demonstrate to the satisfaction of the fund that they have a plan to achieve Native CDFI certification within a reasonable timeframe; or 32 For FY2012 funding rounds, Congress waived the matching funds requirement for Small and Emerging CDFI Assistance (SECA) program applicants and Financial Assistance (FA)FA applicants for the Native American CDFI Assistance (NACA) program. See Community Development Financial Institutions See CDFI Fund, “Matching Funds Update for CDFI and NACA Program Applicants,” press release, January 4, 2012, at http://www.cdfifund.gov/news_events/CDFI2011-41-Matching_Funds_Funding_Cap_Update_CDFI_Program_NACA_Program_Applicants.asp. 32CDFI-2011-41Matching_Funds_Funding_Cap_Update_CDFI_Program_NACA_Program_Applicants.asp. 33 See Catalog of Federal Domestic Assistance, “Community Development Financial Institutions Program,” program information, accessed August 13, 2012, at https://www.cfda.gov/?s=program&mode=form&tab=step1&id= 18dd106bf98422454e41f434ed2856d8. 33 Community Development Financial Institutions Fund, “Treasury Awards Over $172 Million To Organizations Serving Low-Income Communities,” September 24, 2013, at http://www.cdfifund.gov/news_events/CDFI-2013-40TREASURY_AWARDS_OVER_$172_MILLION_TO_ORGANIZATIONS_SERVING_LOWINCOME_COMMUNITIES.asp. 3434 CDFI Fund, “CDFI Program Award Book, FY2014,” at http://www.cdfifund.gov/docs/2014/CDFI/ 2014%20CDFI%20Program%20Award%20Book.pdf. 35 P.L. 103-325, Section 117(c). 3536 For the results of this study, see Community Development Financial InstitutionsCDFI Fund, The Report of the Native American Lending Study, November 2001, at http://www.cdfifund.gov/docs/2001_nacta_lending_study.pdf. 36 Community Development Financial Institutions37 CDFI Fund, “Native American Initiatives Program,” at http://www.cdfifund.gov/what_we_do/programs_id.asp? programid=3. 30 Congressional Research Service 10 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue • certified Native CDFI, an organization must direct at least 50% of its activities toward serving Native Communities; • emerging Native CDFI, an organization must demonstrate to the satisfaction of the Fund that is has a plan to achieve Native CDFI certification within a reasonable timeframe; orIssues • sponsoring entity, an organizationentities, organizations (typically a tribetribes or tribal entity) must pledge that it will create a separate legal entity, which will eventually become certified as a Native CDFIentities) that pledge to create separate legal entities that will eventually become certified as Native CDFIs. Table B-1 summarizes the locations of Certified Native CDFIs, by state. Hawaii and Oklahoma contain more certified Native CDFIs than any other U.S. state. Small and Emerging CDFI Assistance The Small and Emerging CDFI Assistance (SECA) component of the CDFI program is designed to assist small or emerging CDFIs. It provides the same type of FA and TA awards as the general CDFI program. It distinguishes small or emerging CDFIs from other CDFIs using two eligibility criteria, as announced in the annual notice of funds availability. For FY2014 awards, a certified CDFI met the eligibility criteria of being a small or emerging CDFI if theyit had financial holdings below certain caps (based on theirthe respective type of financial institution), or if they began operations it began operations after January 1, 2010.372011.38 Awards provided through the SECA application are subject to caps on the size of the awards. For . For FY2014, these caps include $700,000 in general FA funds, up to and including $5 million funds under the FA funds designated for the Healthy Food Financing Initiative, and up to $100125,000 in TA funds for capacity-building activities.3839 Capacity Building Initiative The Fundfund provides technical assistance and training opportunities for CDFIs through its Capacity Building Initiative. The Capacity Building Initiative is a combination of online and in-person resources.3940 The Fundfund’s website provides a collection of best practices related to topics, such as microfinance operations, foreclosure intervention counseling, and healthy food retail financing in low-income communities. The Fundfund also offers a limited number of in-person training events on similar topics in different locations across the United States. Healthy Food Financing Initiative The Fundfund has used its authority within its CDFI program to support the Healthy Food Financing Initiative (HFFI), which began in FY2011. The Fundfund’s HFFI is part of a multi-agency HFFI, 37involving Treasury, the U.S. Department of Agriculture (USDA), and the U.S. Department of Health and Human Services (HHS).41 The HFFI represents the federal government’s effort to expand the supply and demand for nutritious foods, including increasing the distribution of agricultural products, developing and equipping grocery stores, and strengthening producer-to38 For regulations, see Department of the Treasury, “Notice of Funds Availability (NOFA) Inviting Applications for the Community Development Financial Institutions Program (CDFI Program) FY 20142015 Funding Round (FY 20142015 Funding Round),” 78 FR 6543179 FR 58404 Federal Register 65431 - 65440, October 31, 2013. 38 Ibid. 39 Community Development Financial Institutions58404 - 58416, September 29, 2014. 39 Ibid. 40 CDFI Fund, “Capacity Building Initiative,” March 25, 2010, at http://www.cdfifund.gov/what_we_do/ programs_id.asp?programID=13. 41 CDFI Fund, “Community Development Financial Institutions Fund Announces $25 Million in Healthy Food Financing Initiative Awards,” press release, September 14, 2011, at http://www.cdfifund.gov/news_events/CDFI-201118-CDFI-Fund-Announces-$25-Million-in-Healthy-Food-Financing-Initiative-Awards.asp. Congressional Research Service 11 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues consumer relationships. Through its role in the HFFI, the fundprograms_id.asp?programID=13. Congressional Research Service 11 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue involving Treasury, the U.S. Department of Agriculture (USDA), and the U.S. Department of Health and Human Services (HHS).40 The HFFI represents the federal government’s effort to expand the supply and demand for nutritious foods, including increasing the distribution of agricultural products, developing and equipping grocery stores, and strengthening producer-toconsumer relationships. Through its role in the HFFI, the Fund provides grants for organizations serving low-income neighborhoods with limited access to affordable and nutritious food. The Fundfund reported that it awarded 1012 HFFI awards (totaling $22.4 million) in FY2014.42 million) in FY2013, on top of the more than $172 million in FA and TA awards through its core CDFI program.41 New Markets Tax Credit Congress established the New Markets Tax Credit (NMTC) program as part of the Community Renewal Tax Relief Act of 2000, contained within the Consolidated Appropriations Act, 2001 (P.L. 106-554), to encourage investors to make investments in impoverished, low-income communities (LICs) that traditionally lack access to capital. The NMTC is designed to increase private investment in LICs, where conventional access to credit and investment capital for developing small businesses, creating and retaining jobs, and revitalizing neighborhoods is often limited.4243 The NMTC is a nonrefundable tax credit intended to encourage qualified investment groups to support CDEs that operate in eligible, LICs.4344 Although the NMTC is credited through the federal tax code, the CDFI Fund is responsible for awarding the tax credit allocations to eligible eligible CDEs through a competitive award process. The credit provided to the investor totals 39% of the amount of the investment made in a CDE and is claimed over a seven-year credit allowance allowance period.4445 In each of the first three years, the investor receives a credit equal to 5% of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is 6% annually. Investors must retain their interest in a qualified equity equity investment throughout the seven-year period, or risk forfeiture of that interest.4546 Under the tax code’s NMTC provisions, only eligible investments in qualifying LICs can receive the NMTC. Qualifying LICs include census tracts that have at least one of the following criteria: (1) a poverty rate of at least 20%; (2) is located in a metropolitan area, a median family income below 80% of the greater of the statewide, or metropolitan area median family income; or (3) if 40 Community Development Financial Institutions Fund, “Community Development Financial Institutions Fund Announces $25 Million in Healthy Food Financing Initiative Awards,” press release, September 14, 2011, at http://www.cdfifund.gov/news_events/CDFI-2011-18-CDFI-Fund-Announces-$25-Million-in-Healthy-FoodFinancing-Initiative-Awards.asp. 41 Community Development Financial Institutions Fund, “Treasury Awards Over $172 Million To Organizations Serving Low-Income Communities,” September 24, 2013, at http://www.cdfifund.gov/news_events/CDFI-2013-40TREASURY_AWARDS_OVER_$172_MILLION_TO_ORGANIZATIONS_SERVING_LOWINCOME_COMMUNITIES.asp. 42 U.S. Government Accountability Office, New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified, GAO-10-334, January 2010, p. 1, at http://www.gao.gov/ new.items/d10334.pdf. 43 A nonrefundable tax credit, like the NMTC, can be used to reduce tax liability toward, but not below, zero. In contrast, a refundable tax credit can be used to reduce tax liability beyond zero, enabling a taxpayer to receive a tax refund from the Internal Revenue Service. 44 Laws pertaining to the NMTC are located in 26 U.S.C. §45D. 45 For more details on the NMTC, see CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry. Congressional Research Service 12 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue located outside a metropolitan area, a median family income below 80% of the median statewide family income. As defined by the criteria above, about 39% of the nation’s census tracts covering nearly 36% of the U.S. population are eligible for the NMTC.46 In addition, designated targeted populations may be treated as LICs. As a result of the definition of qualified LICs, virtually all of the country’s census tracts are potentially eligible for the NMTC.47 Qualified investment groups can apply to the Fund for an allocation of the NMTC. CDEs seek individuals who can benefit from tax preferences to make qualifying equity investments in the CDE.48 statewide or metropolitan area median family income if the LIC is located in a metropolitan area; or (3) a median family income below 80% of the median statewide family income if the LIC is located outside a metropolitan area. As defined by these criteria, about 39% of the nation’s census tracts covering nearly 36% of the U.S. population are eligible for the NMTC.47 In addition, designated targeted populations may be treated as LICs. As a result of the definition of qualified LICs, virtually all of the country’s census tracts are potentially eligible for the NMTC.48 Qualified investment groups can apply to the fund for an allocation of the NMTC. CDEs seek individuals who can benefit from tax preferences to make qualifying equity investments in the 42 CDFI Fund, “CDFI Program Award Book, FY2014,” at http://www.cdfifund.gov/docs/2014/CDFI/ 2014%20CDFI%20Program%20Award%20Book.pdf. 43 GAO, New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified, GAO-10-334, January 2010, p. 1, at http://www.gao.gov/new.items/d10334.pdf. 44 A nonrefundable tax credit, like the New Markets Tax Credit (NMTC), can be used to reduce tax liability toward, but not below, zero. In contrast, a refundable tax credit can be used to reduce tax liability beyond zero, enabling a taxpayer to receive a tax refund from the Internal Revenue Service. 45 Laws pertaining to the NMTC are located in 26 U.S.C. §45D. 46 For more details on the NMTC, see CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry. 47 CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry. 48 Ibid. Congressional Research Service 12 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues CDE.49 The CDE then makes equity investments in LICs and low-income community businesses, all of which must be qualified. After the CDE is awarded a tax credit allocation, the CDE is authorized to offer the tax credits to private equity investors in the CDE. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended NMTC authorization through 2011 at $3.5 billion per year. The American Taxpayer Relief Act (ATRA; H.R. 8, as enacted) extended the NMTC through 2012 and 2013 with an authority of $3.5 billion per year. The Tax Increase Prevention Act of 2014 (P.L. 113-295) extended the NMTC through 2014 at $3.5 billion. The NMTC expired at the end of 20132014 along with with dozens of other temporary, “tax extender” provisions.4950 The Government Accountability Office (GAO) has issued several reports examining the NMTC’s overall performance and ability to benefit certain types of LICs. A 2007 GAO report contains survey results from a sample of NMTC recipients suggesting that the NMTC influenced the decisions of investors to invest in LICs.5051 GAO published a 2009 report responding to congressional concerns about the low success rate of minority-owned CDEs in obtaining NMTC allocations. GAO found that although a CDE’s resources and experience are important factors in successfully obtaining an NMTC allocation, minority status is associated with a lower probability of receiving an allocation, when controlling for other factors. GAO could not determine why this relationship exists or whether any actions (or lack of) by the Department of the Treasury contributed to minority CDEs’ lower probability of success, given that the Fundfund provides assistance that is available to all CDEs that do not receive awards detailing some of the weaknesses in its applications.5152 In a 2012 report, GAO concluded that although the NMTC directed most awards and tax credits to metropolitan areas, it generally met proportionality goals of nonmetropolitan areas.5253 Another GAO report released in 2012 reported that the effects of the NMTC are difficult to assess because of information gaps in the collection of tax data.53 46 CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry. Ibid. 48 If an investor does not have a tax liability, then the investor would not benefit from the nonrefundable NMTC. 49 For more information on tax extenders, see CRS Report R43124, Tax Provisions Expiring in 2013 (“Tax Extenders”), by Molly F. Sherlock. 50 U.S. Government Accountability Office, New Markets Tax Credit Appears to Increase Investment by Investors in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance, GAO-07-296, January 2007, p. 35, at http://www.gao.gov/new.items/d07296.pdf. 51 U.S. Government Accountability Office, New Markets Tax Credit: Minority Entities Are Less Successful in Obtaining Awards Than Non-Minority Entities, GAO-09-536, April 2009, at http://www.gao.gov/new.items/ d09536.pdf. 52 U.S. Government Accountability Office, Community Development Financial Institutions and New Markets Tax Credit Programs in Metropolitan and Nonmetropolitan Areas, GAO-12-547R, April 2012, at http://www.gao.gov/ assets/600/590432.pdf. 53 U.S. Government Accountability Office, Limited Information on the Use and Effectiveness of Tax Expenditures Could be Mitigated Through Congressional Action, GAO-12-262, February 2012, at http://gao.gov/assets/590/ (continued...) 47 Congressional Research Service 13 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue In addition, the NMTC’s complex application and administration have been the focus of GAO reports, which have provided recommendations to make the program simpler and more accessible to those in LICs. For example, a 2010 GAO report noted that the complexity of NMTC transaction structures appears to make it more difficult for CDEs to execute smaller transactions and results in less equity ending up in low-income community businesses than would likely end up there were the transaction structures simplified.54 In a 2011 report, GAO suggested that Congress convert at least part of the NMTC to a grant program to increase the amount of federal subsidy reaching businesses in impoverished, LICs.5554 In addition, GAO reports have focused on the NMTC’s complex application and administration and have provided recommendations to make the program simpler and more accessible to those in LICs. For example, a 2010 GAO report noted that the complexity of NMTC transaction structures appears to make it more difficult for CDEs to execute smaller transactions and results in less equity ending up in low-income community businesses than would likely end up there were the transaction structures simplified.55 In a 2011 report, GAO suggested that Congress convert at least part of the NMTC to a grant program to increase the amount of federal subsidy reaching 49 If an investor does not have a tax liability, then the investor would not benefit from the nonrefundable NMTC. See CRS Report R43541, Recently Expired Community Assistance Related Tax Provisions (“Tax Extenders”): In Brief, by Sean Lowry; and CRS Report R43124, Expired and Expiring Temporary Tax Provisions (“Tax Extenders”), by Molly F. Sherlock. 51 GAO, New Markets Tax Credit Appears to Increase Investment by Investors in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance, GAO-07-296, January 2007, p. 35, at http://www.gao.gov/ new.items/d07296.pdf. 52 GAO, New Markets Tax Credit: Minority Entities Are Less Successful in Obtaining Awards Than Non-Minority Entities, GAO-09-536, April 2009, at http://www.gao.gov/new.items/d09536.pdf. 53 GAO, Community Development Financial Institutions and New Markets Tax Credit Programs in Metropolitan and Nonmetropolitan Areas, GAO-12-547R, April 2012, at http://www.gao.gov/assets/600/590432.pdf. 54 GAO, Limited Information on the Use and Effectiveness of Tax Expenditures Could be Mitigated Through Congressional Action, GAO-12-262, February 2012, at http://gao.gov/assets/590/588978.pdf. 55 See GAO, New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified, GAO-10-334, January 2010, p. 41, at http://www.gao.gov/new.items/d10334.pdf. 50 Congressional Research Service 13 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues businesses in impoverished LICs.56 In a 2014 report, GAO found that the financial structures of NMTC investments have become more complex and less transparent over time.57 The complexity is due, in part, to combining financing from multiple sources (including multiple governmentbased development incentives) and can sometimes lead to higher fees or interest rates charged by CDEs.58 Bank Enterprise Award The Bank Enterprise Award (BEA) was originally authorized by the Bank Enterprise Act of 1991 in the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 1992 (P.L. 102-142). Prior to the creation of the Fundfund, the BEA was administered by the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC). Section 114 of the Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325) moved the BEA under the operations of the Fundfund. The Fundfund’s BEA program provides formula-based grants to FDIC-insured banks and thrifts to expand investments in CDFIs and to increase lending, investment, and service activities within economically distressed communities. The Fundfund measures increases in an applicant’s lending, investment, and service activities relative to a baseline of similar, qualified activities conducted by the applicant in the previous application cycle. BEA rewards are retrospective, awarding applicants for activities they have already completed, in contrast to the Fundfund’s primary CDFI program—, which typically awardawards applicants based on their plans for the future.5659 The BEA provides formula-based grants to qualified banks and thrifts based on three categories: • CDFI-related activities include equity investments (e.g., grants, stock purchases, purchases of partnership interests, or limited liability company membership interests), equity-like loans, and support activities (e.g., loans, deposits, or technical assistance), to certified CDFIs.57 (...continued) 588978.pdf. 54 See U.S. Government Accountability Office, New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified, GAO-10-334, January 2010, p. 41, at http://www.gao.gov/ new.items/d10334.pdf. 55 U.S. Government Accountability Office60 • Distressed community financing activities include loans or investments for home mortgages, housing development, home improvement, commercial real estate development, small businesses, and education financing in distressed communities. 56 GAO, Opportunities to Reduce Potential Duplication of Government Programs, Save Tax Dollars, and Enhance Revenue, GAO-11-318SP, March 2011, at http://www.gao.gov/new.items/ d11318sp.pdf. 56 The 57 GAO, Better Controls and Data Are Needed to Ensure Effectiveness, GAO-14-500, July 2014, at http://www.gao.gov/products/GAO-14-500. 58 Ibid., p.20. 59 The CDFI Fund publishes a more in-depth account of its BEABank Enterprise Award (BEA) application evaluation process regularly in the program’s notice of funds availability. For example, see Department of the Treasury, “Community Development Financial Institutions Fund - Notice of Funds Availability (NOFA) inviting Applications for the FY 2012 Funding Round of the Bank Enterprise Award (BEA) Program,” 77 Federal Register 37742-37749, June 22, 2012. 57 Community Development Financial Institutions 22, 2012. 60 CDFI Fund, “FY 2012 Funding Round of BEA Program Now Open,” press release, June 30, 2012, at http://www.cdfifund.gov/news_events/CDFI-2012-24FY_2012_Funding_Round_of_BEA_Program_Now_Open24-FY_2012_Funding_Round_of_BEA_Program_Now_Open.asp. Congressional Research Service 14 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue • Distressed community financing activities include loans or investments for home mortgages, housing development, home improvement, commercial real estate development, small businesses, and education financing in distressed communities.Issues • Service activities include the provision of financial services (e.g., check-cashing or money order services, electronic transfer accounts, and individual development accounts).5861 FDIC-insured financial institutions that are dedicated to financing and supporting economic development in qualified communities are eligible for the BEA. No applicant may receive a BEA if it has (1) an application pending for assistance under the current round of the awards under the CDFI program; (2) been awarded assistance from the Fundfund under the CDFI program within the 12-month period prior to the date the Fundfund selects the applicant to receive a BEA; or (3) ever received assistance under the CDFI program for the same activities for which it is seeking a BEA.5962 Applicants may apply for both a CDFI program award and a BEA program award in a given year; however, receiving a CDFI program award removes an applicant from eligibility for a BEA in the same year.6063 The President has not recommendeddid not recommend funding for the BEA program for FY2015.6164 However, the Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235) appropriated $18.0 million for the BEA program for FY2015. According to a GAO report, the Fundfund’s authorizing statute places no restrictions on how BEA recipients may use their award.6265 In this same report, the Fundfund agreed with GAO’s interpretation of its authorizing statute.6366 However, the Fundfund changed the terms of the program’s award agreements in 2009.6467 Recipients must now use the award, or an amount equivalent to the award amount, for BEA -qualified activities in a distressed community.6568 This change in the BEA program generated public requests for the Fundfund to provide further guidance on an awardee’s reporting requirements.6669 As part of the BEA award agreement, the Fundfund now requires BEA recipients to account and track the use of the award (or an amount equivalent to the award amount) and verify that this amount was used in accordance with performance goals designated by the Fund. 58fund. The BEA program’s effect on investment in distressed communities is the topic of multiple GAO reports to Congress. In 1998, GAO reported that, according to the fund, most of the 1996 61 12 C.F.R. §1806.101(3)(c). 12 C.F.R. §1805.102, and U.S. Department of the Treasury, “Community Development Financial Institutions Fund Notice of Funds Availability (NOFA) inviting Applications for the FY 2012 Funding Round of the Bank Enterprise Award (BEA) Program,” 77 Federal Register 37743, June 22, 2012. 6063 Ibid. 6164 U.S. Department of the Treasury, Community Development Financial Institutions Fund FY2015 President’s Budget, March 2014, p. 3, at http://www.treasury.gov/about/budget-performance/CJ15/06.%20CDFI%20Fund%20CJ.pdf. In a phone call with the author on March 5, 2013, the CDFI Fund’s congressional affairs office indicated that the decision to zeroout zero-out the BEA program reflected the President’s decision to prioritize funding for the core, CDFI program. 62 U.S. Government Accountability Office65 GAO, Treasury’s Bank Enterprise Award Program: Impact on Investments in Distressed Communities Is Difficult to Determine, but Likely Not Significant, GAO-06-824, July 2006, p. 6, at http://www.gao.gov/new.items/d06824.pdf. 6366 Ibid., p. 28. 6467 Department of the Treasury, “Community Development Financial Institutions Fund 12 CFR Part 1806,” 74 Federal Register 5790, January 30, 2009. 6568 12 C.F.R. §1806.101(c). 6669 Letter from Joseph Pigg, Vice President and Senior Counsel, to Jodie Harris, Associate Program Manager Community Development Financial Institutions Fund, March 24, 2010, at http://www.aba.com/Issues/Documents/ c7e6303e475b4085afef85855eb422f632410TreasuryBankEnterpriseAwardProgramBEA.pdf. 5962 Congressional Research Service 15 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue The BEA program’s effect on investment in distressed communities is the topic of multiple GAO reports to Congress. In 1998, GAO reported that, according to the Fund, most of the 1996 Issues awardees reported using their awards to further the objectives of the BEA program even though the program’s authorizing legislation did not place restrictions on the use of the awards.6770 Each of GAO’s five case study banks also reported using its award money to expand its existing investments in community development.6871 In a 2006 report, GAO concluded that the extent to which the BEA program may provide banks with incentives to increase their investments in CDFIs and lending in distressed communities is difficult to determine, but available evidence GAO reviewed suggested that the program’s impact has likely not been significant. Award recipients GAO interviewed said that the BEA program lowers bank costs associated with investing in a CDFI or lending in a distressed community, allowing for increases in both types of activities. However, other economic and regulatory incentives also encourage banks to undertake award-eligible awardeligible activities, and it is difficult to isolate and distinguish these incentives from those of a a BEA award.6972 Treasury disputed GAO’s findings and questioned GAO’s methodology ofin evaluating the BEA program. Bond Guarantee Program The Small Business Jobs Act of 2010 (P.L. 111-240) authorized the Bond Guarantee program on September 27, 2010.7073 The CDFI Fund’s Bond Guarantee program is designed to provide a low-cost lowcost source of long-term, patient capital to CDFIs.7174 Treasury may issueguarantee up to 10 bonds per year, each at a minimum of $100 million. The total of all bonds cannot exceed $1 billion per year. Each Each bond is fully guaranteed by the United States and offered at a cost equivalent to the current Treasury rates for comparable maturities. The bonds cannot exceed a maturity of 30 years, are taxable, and do not qualify for Community Reinvestment Act (CRA) credit.7275 Treasury guarantees the full amount of notes or bonds issued to support CDFIs that make investments for eligible community or economic development purposes.7376 Authorized uses of the loans financed may include a variety of financial activities that constitute community or economic development in low-income or underserved areas (e.g., the provision of basic financial services, housing that is principally affordable to low-income individuals, and businesses that provide jobs for low-income people or are owned by low-income individuals).7477 By legislative design, the Bond Guarantee program is a zero -subsidy credit program and does not require annual appropriations funding. SinceBecause the bonds will be guaranteed by the United States, in accordance with federal credit policy, the Federal Financing Bank (FFB), a U.S. government 67 Ibid. Ibid., p. 54. 69 See U.S. Government Accountability Office government corporation under the general supervision and direction of Treasury, will purchase 70 Ibid. Ibid., p. 54. 72 See GAO, Treasury’s Bank Enterprise Award Program: Impact on Investments in Distressed Communities is Difficult to Determine, but Likely Not Significant, GAO-06-824, July 2006, p. 4, at http://www.gao.gov/new.items/ d06824.pdf. 7073 Laws pertaining to the CDFI Fund’s Bond Guarantee program are located in 12 U.S.C. §4713a. 7174 Patient capital refers to an investment in which the investor has little expectation of earning a short-term return, in anticipation of earning more substantial returns in the longer-run. 72 Community Development Financial Institutions run. 75 CDFI Fund, “CDFI Bond Guarantee Program,” at http://www.cdfifund.gov/what_we_do/programs_id.asp? programID=14. 7376 Ibid. 7477 Ibid. 6871 Congressional Research Service 16 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue corporation under the general supervision and direction of Treasury, will purchase the bonds Issues the bonds issued by qualified issuers.7578 Qualified issuers will lend the bond proceeds to eligible CDFIs. The FFB finances obligations that are fully guaranteed by the United States, such as the bonds or notes issued by CDFIs under the CDFI Bond Guarantee program. Despite being first authorized in 2010, the Bond Guarantee program has been slow to develop. Congress reduced the program’s potential lending authority of $4 billion ($1 billion annually for four years of authorization) to $1 billion between 2010 and 2014. The President has requested that requested that Congress reauthorize the Bond Guarantee Program for an additional year (through FY2015).76 In 2013, the Fund approved term sheets for $325 million in bonds that, when issued, will be used for “affordable multi-family rental housing, healthcare facilities, charter schools, and commercial real estate in low-income or underserved rural areas.”77 The Fund plans to open the FY2014 round of the Bond Guarantee program in early 2014.78 Policy Considerations This section analyzes four policy considerations that may generate congressional attention, regarding the Fund’s use of federal resources to promote economic development. First, it analyzes the debate on targeting development assistance toward people versus places. Second, it analyzes the debate over targeting economic development policies toward labor or capital. Third, it examines whether the Fund plays a unique role in promoting economic development, or if it duplicates, complements, or competes with the goals and activities of other federal, state, and local programs. Fourth, it examines assessments of the Fund’s management. How Effective Are Geographically Targeted Economic Development Policies? From an economic perspective, what theoretical basis is there for the promotion of development in distressed communities? Economic theory suggests that firms and workers will locate to the most efficient and productive areas to do business in the long run, without the assistance of government policy. From this perspective, government policies, such as tax exemptions or tax expenditures, that create incentives to locate in one area at the expense of another results in net social loss of efficiency—where finite resources are not being used to produce their maximum output for the lowest cost.79 Economic theory indicates that these policies create a distortion in 75 Catalog of Federal Domestic Assistance, “Community Development Financial Institutions Bond Guarantee Program,” at https://www.cfda.gov/?s=program&mode=form&tab=step1&id=90977a236dc41c64b428744a8180642b. 76 Ibid. 77 U.S. Department of the Treasury, The Budget in Brief FY2015, March 3, 2014, p. 39, at http://www.treasury.gov/ about/budget-performance/budget-in-brief/Documents/Treasury_FY_2015_BIB.pdf. 78 Community Development Financial Institutions Fund, “Year End Message from the Director,” December 2013, at http://www.cdfifund.gov/who_we_are/director/directors_message.asp. 79 Economists typically view the most efficient means of production as the one that provides the most benefit at the lowest cost. Congressional Research Service 17 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue the market, such that resources are directed from an area of higher potential productivity to an area of lower potential productivity.80 However, government policy may be economically justified if business investment in distressed communities would generate positive externalities.81program for an additional year (through FY2015).79 The Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235) limited the total loan principal for the Bond Guarantee program in FY2015 to $750 million. The fund announced recipients of bond guarantees totaling $525 million for FY2014.80 Capital Magnet Fund The Housing and Economic Recovery Act (HERA) of 2008 (P.L. 110-289) established the Capital Magnet Fund (CMF) for CDFIs and other nonprofits to expand financing for the development, rehabilitation, and purchase of affordable housing and economic development projects in distressed communities.81 Through the CMF, the CDFI Fund provided competitively awarded grants to CDFIs and qualified nonprofit housing organizations. CMF awards could be used to finance affordable housing activities as well as related economic development activities and community service facilities. Awardees were able to use financing tools, such as loan loss reserves, loan funds, risk-sharing loans, and loan guarantees, to produce eligible activities whose aggregate costs are at least 10 times the size of the award amount.82 Three types of organizations were eligible to apply for a CMF award. An organization applying for a CMF award had to either (1) be certified as a CDFI by the CDFI Fund; (2) have an application for CDFI certification pending with the CDFI Fund, provided such application was submitted prior to the due date specified in the applicable notice of funds availability; or (3) be a nonprofit organization having as one of its principal purposes the development or management of affordable housing.83 As authorized in HERA, the CMF was to receive funding via a set-aside from governmentsponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac. However, such contributions 78 Catalog of Federal Domestic Assistance, “Community Development Financial Institutions Bond Guarantee Program,” at https://www.cfda.gov/?s=program&mode=form&tab=step1&id=90977a236dc41c64b428744a8180642b. 79 Ibid. 80 See U.S. Department of the Treasury, “U.S. Treasury provides $325 million in bond guarantees for investment in underserved communities,” press release, August 20, 2014, at http://www.cdfifund.gov/news_events/ US_Treasury_Provides_$325_Million_in_Bond_Guarantees_for_Investments_in_Underserved_Communities.pdf; and CDFI Fund, “Treasury Guarantees Additional $200 Million in Bond Funding for Nationwide Community and Economic Development Projects,” press release, October 2, 2014, at http://www.cdfifund.gov/news_events/CDFI2014-42Treasury_Guarantees_Additional_$200_Million_in_Bond_Funding_for_Nationwide_Community_and_Economic_Dev elopment_Projects.asp. 81 Laws pertaining to the Capital Magnet Fund (CMF) are located in 46 U.S.C. §1807. 82 CDFI Fund, “Capital Magnet Fund,” June 8, 2012, at http://www.cdfifund.gov/what_we_do/programs_id.asp? programID=11. 83 Ibid. Congressional Research Service 17 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues have been suspended indefinitely. The GSEs never made contributions to the CMF, as was originally expected under HERA, due to their financial condition and status under conservatorships.84 Instead, the Consolidation Appropriations Act, 2010 (P.L. 111-117) appropriated $80 million in initial funding for the CMF for FY2010.85 Funding for the CMF was discontinued for FY2011, and contributions from the GSEs remained suspended. In 2014, a group of 33 Senators and a group of 78 Representatives sent letters to Mel Watt, director of the Federal Housing Finance Agency (FHFA), asking that the FHFA cease its suspension of contributions to the CMF (issued when Fannie Mae and Freddie Mac entered into conservatorship).86 On December 11, 2014, Director Watt sent letters to the GSEs instructing them to begin making their first-ever financial contributions to the CMF.87 The CDFI Fund awarded grants to 23 CDFIs and qualified nonprofit housing organizations serving in FY2010.88 It received a total of 230 applications requesting $1 billion for the FY2010 CMF funding round.89 In March 2014, the CDFI Fund released an impact assessment report for the CMF’s initial investments.90 Policy Considerations This section analyzes four policy considerations that may generate congressional attention regarding the CDFI Fund’s use of federal resources to promote economic development. First, it analyzes the debate on targeting development assistance toward people versus places. Second, it examines the debate on targeting economic development policies toward labor or capital. Third, it analyzes whether the fund plays a unique role in promoting economic development or whether it duplicates, complements, or competes with the goals and activities of other federal, state, and local programs. Fourth, it examines assessments of the fund’s management. 84 U.S. Congress, House Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises, Transparency, Transition, and Taxpayer Protection: More Steps to End the GSE Bailout, 112th Cong., 1st sess., May 25, 2011, 112-33 (Washington: GPO, 2011), p. 10. 85 Department of the Treasury, Community Development Financial Institutions Fund - Agency Financial Report FY 2011, November 16, 2011, p. 8, at http://www.cdfifund.gov/news_events/ CDFI%20Fund%20FY%202011%20Agency%20Financial%20Report%20FINAL%2011%2016%2011.pdf. 86 See Letter from Senator Jack Reed et al. to Mel Watt, director of the Federal Housing Finance Agency, January 1, 2014, at http://www.reed.senate.gov/news/releases/33-us-senators-urge-fhfa-to-revisit-affordable-rental-housing; and letter from Representative Keith Ellison et al. to The Honorable Mel Watt, Director of the Federal Housing Finance Agency, July 21, 2014, at http://nlihc.org/sites/default/files/CMF_letter_to_Mel_Watt.pdf. 87 See Federal Housing Finance Agency (FHFA), “FHFA Statement on the Housing Trust Fund and Capital Magnet Fund,” press release, December 11, 2014, at http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Statement-on-theHousing-Trust-Fund-and-Capital-Magnet-Fund.aspx; and for more information, see CRS Report IN10201, Fannie Mae and Freddie Mac to Begin Contributions to Affordable Housing Funds, by Katie Jones. 88 U.S. Department of the Treasury, Community Development Financial Institutions Fund: Agency Financial Report FY 2012, November 2011, at http://www.cdfifund.gov/news_events/ CDFI%20Fund%20FY%202011%20Agency%20Financial%20Report%20FINAL%2011%2016%2011.pdf. 89 U.S. Department of the Treasury, Community Development Financial Institutions Fund - Agency Financial Report FY 2011, November 16, 2011, p. 30, at http://www.cdfifund.gov/news_events/ CDFI%20Fund%20FY%202011%20Agency%20Financial%20Report%20FINAL%2011%2016%2011.pdf. 90 CDFI Fund, “CDFI Fund Releases Interim Impact Assessment for Capital Magnet Fund,” March 24, 2014, at http://www.cdfifund.gov/news_events/CDFI-2014-06CDFI_Fund_Releases_Interim_Impact_Assessment_for_Capital_Magnet_Fund.asp. Congressional Research Service 18 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues How Effective Are Geographically Targeted Economic Development Policies? From an economic perspective, what theoretical basis is there for the promotion of development in distressed communities? Economic theory suggests firms and workers will locate to the most efficient and productive areas to do business in the long run, without the assistance of government policy. From this perspective, government policies, such as tax exemptions or tax expenditures, that create incentives to locate in one area at the expense of another result in net social loss of efficiency—where finite resources are not being used to produce their maximum output for the lowest cost.91 Economic theory indicates that these policies create a distortion in the market, such that resources are directed from an area of higher potential productivity to an area of lower potential productivity.92 However, government policy may be economically justified if business investment in distressed communities would generate positive externalities.93 Positive externalities, also known as spillover benefits, occur when the actions of one individual or firm benefit others in society. Because a given business will tend to only consider its own (private) benefit from an activity, and not the total benefit to society, too little of the positive externality-generating activity may be undertaken from society’s perspective. Governments, however, may intervene through the use of taxes, subsidies, and other forms of assistance to align the interests of individual businesses with the interests of society to achieve a more economically efficient outcome. How may government policy generate positive externalities within a community? It is possible that potential investors may invest in an underdeveloped community as long as the potential return on that investment exceeds the potential risk. If investors are not attracted to a particular community, however, government incentives may be able to change investors’ perceived return and risk calculations. If this initial group of businesses is successful, due in part to the government’s incentives, then theythat success may send positive signals about potential return for other other businesses that choose to locate in the community. In addition, if government incentives encourage employment in the communities, employees may feel they have more of a stake in the community and participate positively in activities outside of work. Although government incentives initially benefit particular businesses or investments, they may also allow the broader community to capture these spillover benefits. Empirical evaluations of geographically targeted economic development policies have been mixed.8294 Evaluations differ, in part, due to several factors, including the use of different evaluation criteria for economic development, different policies or sample areas used for analysis, or the use of different empirical strategies. Many of these studies are based on variations of state and local enterprise zones and federal empowerment zones. Enterprise zones typically provide certain tax incentives and regulatory relief for distressed communities, whereas federal Empowerment Zones provide certain tax exemptions and employer tax credits for hiring new employees. Some studies have found that geographically targeted policies have a positive effect on several indicators of economic activity in the targeted area. These studies cite that these policies facilitate entrepreneurship and increase employment in the targeted area.83 Ham et al. find that 80 91 Economists typically view the most efficient means of production as the one that provides the most benefit at the lowest cost. 92 Herbert G. Grubel, “Review of Enterprise Zones: Greenlining the Inner Cities, by Stuart M. Butler,” Journal of Economic Literature, vol. XX (December 1982), pp. 1614-1616. 8193 A noneconomic justification for a governmental role in targeted economic development policy is that these lowincome communities are largely composed of minority or low-education populations. Although this argument is outside of the scope of this paper, more information on this policy justification can be found in Timothy Bartik, Who Benefits From State and Local Economic Development Policies? (Kalamazoo, MI: W. E. Upjohn Institute for Employment Research, 1991). 8294 Terry F. Buss, “The Effect of State Tax Incentives on Economic Growth and Firm Location Decisions: An Overview of the Literature,” Economic Development Quarterly, vol. 15, no. 1 (February 2001), pp. 90-105. 83 For other studies that have found that geographically targeted development policies have positive effects on economic activity in the target area, see Stephen Billings, “Do Enterprise Zones Work? An Analysis at the Borders,” Public Finance Review, vol. 37, no. 1 (2008), pp. 68-93, and Douglas Krupka and Douglas Noonan, “Empowerment Zones, Neighborhood Change, and Owner Occupied Housing,” Regional Science and Urban Economics, vol. 39, no. 4 (2009), pp. 386-396. Congressional Research Service 18 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue Empowerment Zone Congressional Research Service 19 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues or the use of different empirical strategies. Many of these studies are based on variations of state and local enterprise zones and federal empowerment zones. Enterprise zones typically provide certain tax incentives and regulatory relief for distressed communities, whereas federal empowerment zones provide certain tax exemptions and employer tax credits for hiring new employees. Some studies have found that geographically targeted policies have a positive effect on several indicators of economic activity in the targeted area. These studies cite that such policies facilitate entrepreneurship and increase employment in the targeted area.95 John Ham et al. find that an empowerment zone designation reduces local unemployment and poverty rates by 8.7% and 8.8%, respectively, whereas an enterprise zone designation reduces local unemployment and poverty poverty rates by 2.6% and 20%, respectively.8496 Leslie Papke’s review of surveys from participants in multiple U.S. enterprise zones indicates that start-up firms average approximately 25% of new businesses businesses within the targeted zones.8597 Barry Rubin and Margaret Wilder’s analysis of Indiana’s Enterprise Zone enterprise zone indicates that 76% of the 1,878 jobs created between the beginning of the program in 1983 and 1986 could not be attributed to regional or sectoral growth.8698 Assuming that these residual jobs were created in large part due to policy, the researchers calculated that the creation of each of these 1,430 jobs cost taxpayers $1,372 per job, annually.87 On the other hand99 By contrast, other evaluations indicate that these policies have little effect on economic activity activity within the targeted area, or or that they do not contribute to a net increase of economic activity throughout the larger economy. These studies find that geographically targeted policies encourage some types of economic activity at the detriment of others—thus rearranging the mix of economic activity within the target area.88100 For example, Andrew Hanson and Shawn Rohlin indicate that 95 For other studies that have found that geographically targeted development policies have positive effects on economic activity in the target area, see Stephen Billings, “Do Enterprise Zones Work? An Analysis at the Borders,” Public Finance Review, vol. 37, no. 1 (2008), pp. 68-93, and Douglas Krupka and Douglas Noonan, “Empowerment Zones, Neighborhood Change, and Owner Occupied Housing,” Regional Science and Urban Economics, vol. 39, no. 4 (2009), pp. 386-396. 96Rohlin indicate that location based-tax incentives have a positive effect on the firm location in industries that benefit the most from the tax incentives, but net growth in new establishments is offset by declines or slower growth in other industries that are less likely to use the tax incentives.89 In addition, some studies indicate that geographically targeted policies may shift activity from a comparative area toward the targeted zone, rather than create new economic activity. For example, Gurley-Calvez et al. find that the NMTC may have led to an increase in corporate investment within the targeted areas, but did not lead to a net increase in corporate investment.90 These authors conclude that the NMTC might encourage investment to shift from one low- 84 John C. Ham et al., “Government Programs Can Improve Local Labor Markets: Evidence from State Enterprise Zones, Federal Empowerment Zones, and Federal Enterprise Communities,” Journal of Public Economics, vol. 95, no. 7-8 (July 2011), pp. 779-797. 8597 Leslie Papke, “What Do We Know About Enterprise Zones?,” in Tax Policy and the Economy, ed. James Poterba, vol. 7 (Cambridge, MA: MIT Press, 1993), pp. 32-72. 8698 Barry M. Rubin and Margaret G. Wilder, “Urban Enterprise Zones: Employment Impacts and Fiscal Incentives,” Journal of the American Planning Association, vol. 55, no. 4 (Autumn 1989), pp. 418-431. 8799 Rubin and Wilder’s cost estimates are among the lowest in the literature. In Helen Ladd’s review of six studies of enterprise enterprise zones, the basic annual cost estimates of various programs ranged from $1,633 to $53,507 per job, depending on on methodology used to calculate costs. Bartik’s (1992) review of 57 studies of state and local tax incentives found annual annual cost estimates ranging from $2,000 to $11,000 per job. See Helen F. Ladd, “Spatially Targeted Economic Development Development Strategies: Do They Work?,” Cityscape, vol. 1, no. 1 (August 1994), pp. 193-218, and Timothy J. Bartik, “The Effects of State and Local Taxes on Economic Development: A Review of Recent Research,” Economic Development Development Quarterly, vol. 6, no. 1 (1992), pp. 102-111. 88100 For studies that have found that geographically targeted development policies have little or no positive effects on economic activity in the target area, see Marlon Boarnet and William Bogart, “Enterprise Zones and Employment: Evidence from New Jersey,” Journal of Urban Economics, vol. 40, no. 2 (1996), pp. 198-215; Danielle Bondonio and John Engberg, “Enterprise Zones and Local Employment: Evidence from the States’ Programs,” Regional Science and Urban Economics, vol. 30, no. 5 (2000), pp. 519-549; Robert Greenbaum and John Engberg, “The Impact of State Enterprise Zones on Urban Manufacturing Establishments,” Journal of Policy Analysis and Management, vol. 23, no. 2 (2004), pp. 315-339; and David Neumark and Jed Kolko, “Do Enterprise Zones Create Jobs? Evidence from California’s Enterprise Zone Program,” Journal of Urban Economics, vol. 68, no. 1 (2010), pp. 1-19. 89 Andrew Hanson and Shawn Rohlin, “Do Location-Based Tax Incentives Attract New Business Establishments?,” Journal of Regional Science, vol. 51, no. 3 (2011), pp. 427-449. 90 Tami Gurley-Calvez et al., “An Analysis of the New Markets Tax Credit,” Public Finance Review, vol. 37, no. 4 (July 2009), pp. 371-398. Congressional Research Service 19 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue income community (LIC) to another close substitute, as some corporate investors might already be investing in LICs to fulfill Community Reinvestment Act requirements.91 Congressional Research Service 20 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues location-based tax incentives have a positive effect on the firm location in industries that benefit the most from the tax incentives, but net growth in new establishments is offset by declines or slower growth in other industries that are less likely to use the tax incentives.101 In addition, some studies indicate that geographically targeted policies may shift activity from a comparative area toward the targeted zone, rather than create new economic activity. For example, Tami Gurley-Calvez et al. find that the NMTC may have led to an increase in corporate investment within the targeted areas but that it did not lead to a net increase in corporate investment.102 These authors conclude that the NMTC might encourage investment to shift from one LIC to another close substitute, as some corporate investors might already be investing in LICs to fulfill Community Reinvestment Act requirements.103 The effect of geographically targeted economic development policies on local property prices is also an area of contention among researchers.92104 From a theoretical perspective, government incentives to increase the supply of affordable property increase the demand for that property. That increase ingreater demand drives rents higher. If local residents do not benefit from the increase in economic activity, then higher property values may encourage those with lower incomes to move out of the community.93105 Given the lack of consensus among researchers on the effectiveness of geographically targeted economic policies, policy makers may opt to more narrowly define the coreprimary objective of development. At its core, the debate is a question of whether development policies should help people or places. If the primary objective is to improve business and employment opportunities relative to other areas, then these policies might be effective. If the primary objective of such policies is to create new jobs, then the effect of these policies may be limited. If policy makers wish to help the poor, then it might be asked why should government assistance should only be extended to the poor living in distressed communities (as opposed to the poor living in nondistressed communities)?. Each standard for evaluation implies a different set of metrics and results in a different set of trade-offs. Should Economic Development Policies Target Capital or Labor? Assuming that geographically targeted policies can positively affect economic development within the intended community, then what type of benefit is most effective? Policies can provide a benefit related to labor costs, capital costs, or both (i.e., total costs). In other words, should development policies target workers, business owners, or both? When a geographically targeted subsidy is applied to one of these two factors of production, economic theory suggests that two behavioral responses occur. The first response is that total output (i.e., economic activity) increases. This increase in total output increases the use of both capital and labor, to some degree. Economists label this the output effect of production. The second response is a substitution effect, whereby firms use one factor of production at the detriment of the other. The net effect of the output effect and substitution effect determines the 91101 Andrew Hanson and Shawn Rohlin, “Do Location-Based Tax Incentives Attract New Business Establishments?,” Journal of Regional Science, vol. 51, no. 3 (2011), pp. 427-449. 102 Tami Gurley-Calvez et al., “An Analysis of the New Markets Tax Credit,” Public Finance Review, vol. 37, no. 4 (July 2009), pp. 371-398. 103 The Community Reinvestment Act (CRA), passed by Congress in 1977, encourages financial institutions to help meet their communities’ needs through safe and sound lending practices and by providing retail banking and community development services. The Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision are responsible for enforcing the CRA. Banks are evaluated for their CRA performance according to various criteria. See Federal Reserve Bank of Atlanta, “Standards Used to Evaluate Your Bank’s CRA Performance,”at http://www.frbatlanta.org/pubs/cra/ standards_used_to_evaluate_your_banks_cra_performance.cfm. 92104 For studies that have model the effects of geographically targeted development policies on property values in the target area, see Douglas Krupka and Douglas Noonan, “Empowerment Zones, Neighborhood Change, and Owner Occupied Housing,” Regional Science and Urban Economics, vol. 39, no. 4 (2009), pp. 386-396 and Andrew Hanson, “Local Employment, Poverty, and Property Value Effects of Geographically-Targeted Tax Incentives: An Instrumental Variables Approach,” Regional Science and Urban Economics, vol. 39, no. 6 (November 2009), pp. 721-731. 93105 Andrew Hanson and Shawn Rohlin, “The Effect of Location Based Tax Incentives on Establishment Location and Employment Across Industry Sectors,” Public Finance Review, vol. 39, no. 2 (March 2011), pp. 195-225. Congressional Research Service 2021 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue total effect of the policy. In other words, the total effect reflects whether the policy benefits labor more than capital,Issues Should Economic Development Policies Target Capital or Labor? Assuming geographically targeted policies can positively affect economic development within the intended community, what type of benefit is most effective? Policies can provide a benefit related to labor costs, capital costs, or both (i.e., total costs). In other words, should development policies target workers, business owners, or both? When a geographically targeted subsidy is applied to one of these two factors of production, economic theory suggests two behavioral responses occur. The first response is that total output (i.e., economic activity) increases. This increase in total output increases the use of both capital and labor, to some degree. Economists label this the output effect of production. The second response is a substitution effect, whereby firms use one factor of production at the detriment of the other. The net effect of the output effect and substitution effect determines the total effect of the policy. In other words, the total effect reflects whether the policy benefits labor more than capital or vice versa. For example, a labor subsidy, such as a payroll tax credit for hiring a worker, provided within a particular area will encourage labor-intensive firms to locate within that same area. All firms (whether attracted by the labor subsidy or already operating in the area) will tend, in addition to expanding operations, to substitute their use of labor for capital. If the objective of the labor subsidy is to promote employment, then the substitution effect (the use of more labor, relative to capital) reinforces the benefits of the output effect (the use of more labor, due to expanded operation). In other words, the policy is expected to result in a net increase in employment. By contrast, a capital subsidy, such as tax deductions for capital investments, provided within a particular area will encourage capital-intensive firms to locate within thethat area. All firms (whether attracted by the capital subsidy or already operating in the area) will tend, in addition to expanding operations, to substitute their use of capital for labor. If the objective of the capital subsidy is to promote employment, then the substitution effect (the use of more capital, relative to labor) offsets the benefits of the output effect (the use of more labor, due to expanded operation). Moreover, if the substitution effect is more powerful than the output effect, a capital subsidy may end up decreasing employment in the area.94106 In this instance, the net effect of the capital subsidy is less employment in the area than before the policy. Policies that relate to total costs may balance the trade-off between the promotion of capital or labor in the targeted area. If producers are indifferent between using labor or capital, then a policy that provides equally weighted incentives toward the employment of labor and capital will result in a positive income effect, with no substitution effect. However, if producers use relative factor price differentials to inform the mix of capital and labor they employ, then the result of a policy that relates to total costs will depend on the strength and direction of the substitution effect. Studies indicate that geographically targeted tax incentives for business owners (e.g., the NMTC) have a positive, but limited effect in increasing the economic well-being of other individuals living within the target area. Timothy Bartik’s review of 57 empirical studies on the effect of state and and local preferential tax incentives for employers in a state or metropolitan area found that 57% of of the studies found at least one statistically significant effect on generating development in the 106 CRS Report 92-476 S Enterprise Zones: The Design of Tax Incentives, by Jane G. Gravelle (out of print; available by request) models this possible effect of geographically targeted tax incentives. Congressional Research Service 22 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues target area.107target area.95 Bartik found that the average measure of responsiveness, or elasticities, or change between tax measures and economic activity in a targeted state or metropolitan area rangeranges from -0.25 across all studies to -0.51 for studies that include statistical controls for both public service and fixed effects. In other words, the study concluded that a 10% reduction in all taxes within a particular geographic zone would generate a 2.5% to 5.1% increase in economic activity within the same zone. Do the Fund’s Programs Duplicate Other Government Efforts? There has been growing legislativeLegislative interest in identifying duplicative federal programs, has grown as some Members of Congress have become concerned about the size or efficient management of federal 94 CRS Report 92-476 S Enterprise Zones: The Design of Tax Incentives, by Jane G. Gravelle (out of print; available by request) models this possible effect of geographically targeted tax incentives. 95 Bartik (1992). Congressional Research Service 21 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue budgetary budgetary resources. GAO defines duplicative programs as federal programs that overlap with the goals or activities of other federal, state, or local policies.96108 Some say that the Fund the fund’s programs duplicate other federal, state, local, and private-sector efforts to to increase economic development in distressed and low-income communities. The Fund’s website fund’s website contains a guide that provides a list of possible financing sources for CDFIs.97109 At the federal federal level, various programs exist as possible sources of finance for CDFIs. These programs are are managed by executive agencies, such as USDA, SBA, HHS, HUD, Interior, Treasury, and Commerce. Based on this variety of possible funding sources for CDFIs, the Office of Management and Budget (OMB), under President George W. Bush, said that the Fundthe fund’s core CDFI CDFI program was not unique, as because several states administer similar programs and CDFIs can use private-sector equity investment to accomplish activities that they would otherwise accomplish with the Fund with the fund’s awards.98110 In addition, the NMTC is not the only tax incentive designed to encourage economic development in distressed communities. The Senate Committee on the Budget Print on Tax Expenditures lists several other tax incentives that are meant to achieve similar goals as the NMTC. These incentives provide short-term development assistance (e.g., disaster relief provisions), enhance tribal area development, and encourage business and capital investment in target communities.99111 The Bush era’s OMB also stated that the NMTC was not unique because other federal, state, and local tax credit programs are available through agencies, such as HUD and Commerce’s Economic Development Agency.100 On the other hand, there are those that believe that the Fund plays a unique or complementary role to the programs mentioned above. First, Fund supporters most commonly argue that community lenders are ready and willing to fill financing gaps, but they often struggle to find the amount of capital and liquidity they need to meet loan demand in distressed communities.101 Although certain CDFIs may be eligible for similar forms of assistance from other federal programs (e.g., guaranteed loans from SBA), the Fund’s limitations to activities in distressed communities allows CDFIs to compete with other entities that face similar economic, 96 U.S. Government Accountability Office and Commerce’s Economic Development Agency.112 107 Bartik (1992). GAO, Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue, GAO-12-342SP, February 28, 2012, p. 1, http://www.gao.gov/products/GAO-12342SP. 97 Community Development Financial Institutions12-342SP. 109 CDFI Fund, Financial Resources Catalog, June 11, 2012, at http://www.cdfifund.gov/what_we_do/resources/ Financial%20Resources%20Catalogue%20PDF.pdf. 98110 The Office of Management and Budget (OMB) under President George W. Bush maintained ExpectMore.gov, a website that listed performance evaluations and issued budgetary recommendations across executive branch agencies. OMB under President Bush implemented the Program Assessment Rating Tool (PART), as a means to assess the effectiveness of federal programs and help inform management actions, budget requests, and legislative proposals. For OMB’s last PART assessment of the CDFI Fund and the NMTC, see Office of Management and Budget, FY 2009 Budget Budget Performance: Community Development Financial Institutions Fund, pp. 15-16, at http://www.treasury.gov/ about/ budget-performance/Documents/CJ%20FY09-CDFI.pdf. 99111 See U.S. Congress, Senate Committee on the Budget, Tax Expenditures: Compendium of Background Material on Individual Provisions, committee print, prepared by the Congressional Research Service, 111th Cong., 2nd sess., December 2010, S.Prt.111-58 (Washington: GPO, 2002), pp. 566-599. 100112 Office of Management and Budget, FY 2009 Budget Performance: Community Development Financial Institutions Fund, pp. 15-16, at http://www.treasury.gov/about/budget-performance/Documents/CJ%20FY09-CDFI.pdf. 101 U.S. Congress, House Committee on Financial Services, Community Development Financial Institutions (CDFIs): Their Unique Role and Challenges Serving Lower-Income, Underserved, and Minority Communities, 111th Cong., 2nd sess., March 9, 2010, 111-106 (Washington: GPO, 2010), p. 99. Congressional Research Service 22 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue environmental, and geographic challenges. Second, Fund programs have supported alternatives to predatory lending institutions in distressed communities—notably in tribal communities.102 Third, some argue that the Fund’s programs complement, not compete with, the goals and programs of other federal initiatives. For example, former-Assistant Secretary for Financial Institutions Michael Barr testified before the House Committee on Financial Services that funding for the Community Reinvestment Act encourages more entities to invest in CDFIs.103 In contrast to the assessment by the Bush era’s OMB, some say that the Fund provides incentives for activity that private-sector investors would not otherwise engage in. For example, the Fund enables more CDFIs to provide affordable, critical-gap financing for businesses.104 In other words, the Fund encourages CDFIs to provide short-term loans to businesses or homebuyers to cover financial obligations in the meantime, while that borrower secures sufficient funds to make a full payment or find a more stable financing scheme. In addition, CDFIs also provide technical assistance and training to borrowers to reduce default risk. For these reasons, some representatives from national banking chains argue that CDFIs complement traditional banking products in distressed communities and LICs and help these financial markets operate more efficiently.105 Is the Fund Managed Effectively? Concerns over the Fund’s management primarily involve questions over the transparency and consistency of the Fund’s award evaluation processes. In March 1997, as a result of complaints (continued...) 108 Congressional Research Service 23 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues However, others believe the fund plays a unique or complementary role to the programs mentioned above. First, fund supporters most commonly argue that community lenders are ready and willing to fill financing gaps, but they often struggle to find the amount of capital and liquidity they need to meet loan demand in distressed communities.113 Although certain CDFIs may be eligible for similar forms of assistance from other federal programs (e.g., guaranteed loans from SBA), the fund’s limitations to activities in distressed communities allows CDFIs to compete with other entities that face similar economic, environmental, and geographic challenges. Second, fund programs have supported alternatives to predatory lending institutions in distressed communities—notably in tribal communities.114 Third, some argue that the fund’s programs complement, not compete with, the goals and programs of other federal initiatives. For example, former Assistant Secretary for Financial Institutions Michael Barr testified before the House Committee on Financial Services that funding for the Community Reinvestment Act encourages more entities to invest in CDFIs.115 In contrast to the assessment by the Bush era’s OMB, some say the fund provides incentives for activity that private-sector investors would not otherwise engage in. For example, the fund enables more CDFIs to provide affordable, critical-gap financing for businesses.116 In other words, the fund encourages CDFIs to provide short-term loans to businesses or homebuyers to cover immediate financial obligations while that borrower secures sufficient funds to make a full payment or find a more stable financing scheme. In addition, CDFIs provide technical assistance and training to borrowers to reduce default risk. For these reasons, some representatives from national banking chains argue that CDFIs complement traditional banking products in distressed communities and LICs and help these financial markets operate more efficiently.117 Is the Fund Managed Effectively? Concerns over the CDFI Fund’s management primarily involve questions over the transparency and consistency of the fund’s award evaluation processes. In March 1997, as a result of complaints about the selection process used in the first round of grants announced in July 1996, Representative Spencer Bachus, chairman of the General Oversight and Investigations Subcommittee (the Subcommittee) of the House Committee on Banking and Financial Services, requested requested information about management practices at the Fundfund from Treasury. At Chairman Bachus’s request, the majority staff of the subcommittee published a report that reviewed the management management practices at the Fundfund. The majority staff report indicated that the Fundfund had failed to employ an objective scoring system in selecting award winners in its first round of allocations, and that the director and deputy director of the Fund had participated in making awards to firms with that they had been previously associated.106 Chairman Bachus asserted that the Fund’s award evaluation process had been politically motivated by the White House, naming Shorebank of Chicago, Illinois, and several other community development organizations affiliated with Shorebank among the award-recipients.107 The majority staff report also indicated that, when it 102 employ an (...continued) Fund, pp. 15-16, at http://www.treasury.gov/about/budget-performance/Documents/CJ%20FY09-CDFI.pdf. 113 U.S. Congress, House Committee on Financial Services, Community Development Financial Institutions (CDFIs): Their Unique Role and Challenges Serving Lower-Income, Underserved, and Minority Communities, 111th Cong., 2nd sess., March 9, 2010, 111-106 (Washington: GPO, 2010), p. 99. 114 U.S. Congress, Senate Committee on Indian Affairs, Predatory Lending in Indian Country, 110th Cong., 2nd sess., June 5, 2008, 110-484 (Washington: GPO, 2008), p. 13. 103115 U.S. Congress, House Committee on Financial Services, Community Development Financial Institutions (CDFIs): Their Unique Role and Challenges Serving Lower-Income, Underserved, and Minority Communities, 111th Cong., 2nd sess., March 9, 2010, 111-106 (Washington: GPO, 2010), p. 7. 104116 Federal Reserve Bank of Richmond, “Community Development Financial Institutions: A Unique Partnership for Banks,” Community Development Special Issue, 2011, p. 2, at http://www.richmondfed.org/community_development/ announcements/2011/pdf/cdfi-special-2011.pdf. 105 Ibid. 106 U.S. Congress, House Committee on Banking and Financial Services, Subcommittee on General Oversight and Investigations, Review of Management Practice at the Treasury Department’s Community Development Financial Institutions Fund, committee print, prepared by Majority Staff, 105th Cong., 2nd sess., June 1998, 105-2 (Washington: GPO, 1998), pp. 1-9. 107 Ibid., p. (v) and 9. Note 1 on p. 9 details the majority staff’s views on the connections between Shorebank, its affiliates, First Lady Hillary Clinton, and President Clinton. Congressional Research Service 23 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue made its first round of awards, the Fund117 Ibid. Congressional Research Service 24 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues objective scoring system in selecting award winners in its first round of allocations and that the director and deputy director of the fund had participated in making awards to firms with which they had been previously associated.118 Chairman Bachus asserted that the fund’s award evaluation process had been politically motivated by the White House, naming Shorebank of Chicago, Illinois, and several other community development organizations affiliated with Shorebank among the award recipients.119 The majority staff report also indicated that, when it made its first round of awards, the fund did not follow the recommendations of Treasury’s Office of Inspector General (OIG) to adopt draft procedures for a numerical scoring system, a procedure similar to that used by other federal grant programs to ensure objectivity in the review process.108120 In August 1997, Treasury Secretary Robert Rubin replied to a request from Chairman Leach of the Senate Banking Committee by providing a detailed outline of procedural and organization reforms to be implemented by the Fundfund in its 1997 funding round.109121 These reforms included the development of selection criteria, a conflict of interest policy for Fundfund reviewers, and other tools and procedures to encourage consistent evaluation of award applications. Secretary Rubin’s letter also announced the resignations of the Fundfund’s director and deputy director. The subcommittee’s staff conducted a review of the Fundfund’s second round of awards in 1997. Although the majority staff report recommended further actions to enhance the fund’s management and review processes, subcommittee staff concluded that the Fundfund “appeared to make great strides in documenting the grant process.”110122 In addition, some have expressed concern about the Fundfund’s ability to develop clear performance goals. In 1998, GAO released a report on the Fundfund’s performance.111123 GAO acknowledged that assessing the Fundfund’s performance was difficult, as the Fund because the fund’s authorizing legislation provides limited guidance for evaluating performance measures and staffing limits delayed the Fundfund’s ability to develop mandated monitoring and evaluation systems.112124 GAO stated that until the Fundfund identifies the types of data needed to monitor and evaluate awardees and incorporates these data needs in a formal system, it will be hampered in its ability to report on its progress toward achieving its stated goals and objectives.113125 GAO also noted that the Fundfund could fulfill its strategic strategic goal to coordinate its strategies with other Treasury bureaus and agencies with similar missions (e.g., HUD and the SBA).114 According to GAO, interagency coordination is important for ensuring that crosscutting programs are mutually reinforcing and efficiently implemented. Therefore, the Fund’s strategic plan would be strengthened if it identified and incorporated some descriptions of other agencies’ programs with similar missions and discussed their influence on the Fund’s strategic objectives.115 Some Members of Congress have expressed concern regarding the lack of CDFIs that serve U.S. territories and rural communities.116 However, a 2012 GAO report concluded that the policies and 108 Ibid., p. 4. Ibid., p. 95. 110 Ibid., p. 96. 111 missions 118 U.S. Congress, House Committee on Banking and Financial Services, Subcommittee on General Oversight and Investigations, Review of Management Practice at the Treasury Department’s Community Development Financial Institutions Fund, committee print, prepared by Majority Staff, 105th Cong., 2nd sess., June 1998, 105-2 (Washington: GPO, 1998), pp. 1-9. 119 Ibid., p. (v) and 9. Note 1 on p. 9 details the majority staff’s views on the connections between Shorebank, its affiliates, First Lady Hillary Clinton, and President Clinton. 120 Ibid., p. 4. 121 Ibid., p. 95. 122 Ibid., p. 96. 123 Section 112(c)(3) of the Riegle Act mandated the Comptroller General (Director of GAO) to submit to the President and the Congress a study evaluating the structure, governance, and performance of the CDFI Fund. However, GAO, in consultation with the four congressional committees thatto which the report was submitted to, only examined the Fundfund’s performance measures in its 1998 study, due to a concurrent audit of structure and governance issues being conducted by Treasury’s Inspector General. See the correspondence of Judy A. England-Joseph, GAO Director of Housing and Community Development Issues to Congressional Committees in U.S. General Accounting Office, Community Development Financial Institutions Fund Can Improve Its Systems to Measure, Monitor, and Evaluate Awardees’ Performance, GAO/RCED-98-225, July 1998, at http://www.gao.gov/assets/160/156245.pdf. 112124 Ibid., p. 6. 113 Ibid., p. 63. 114 Ibid., p. 62. 115 Ibid. 116 U.S. Congress, House Committee on Appropriations, Financial Services and General Government Appropriations Bill, 2013, 112th Cong., 2nd sess., June 26, 2012, H.Rept. 112-550 (Washington: GPO, 2012), p. 16. 109 Congressional Research Service 24 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue procedures of the CDFI and NMTC Programs125 Ibid., p. 63. Congressional Research Service 25 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues (e.g., HUD and the SBA).126 According to GAO, interagency coordination is important for ensuring that crosscutting programs are mutually reinforcing and efficiently implemented. Therefore, the fund’s strategic plan would be strengthened if it identified and incorporated some descriptions of other agencies’ programs with similar missions and discussed their influence on the fund’s strategic objectives.127 Some Members of Congress have expressed concern regarding the lack of CDFIs that serve U.S. territories and rural communities.128 However, a 2012 GAO report concluded that the policies and procedures of the CDFI and NMTC programs help ensure that awards and allocations generally are proportionate to the numbers of qualified applicants that serve metropolitan and nonmetropolitan areas.117129 In addition, some Members of Congress have expressed interest in the performance of CDFIs compared with their non-CDFI, peers.118130 In addition, some Members of Congress have raised concerns over the use of funds from the Troubled Asset Relief Program (TARP) for assistance to CDFIs. President Obama authorized a program that made certified CDFIs eligible to receive capital investments at a discounted dividend, with the intent of increasing the supply of credit to community banks.119131 Some maintained that TARP’s temporary funds were not intended to target regional banks, and that the program functionally resulted in a bypass of the typical appropriations process for the Fund.120 117 U.S. Government Accountability Officefund.132 126 Ibid., p. 62. Ibid. 128 U.S. Congress, House Committee on Appropriations, Financial Services and General Government Appropriations Bill, 2013, 112th Cong., 2nd sess., June 26, 2012, H.Rept. 112-550 (Washington: GPO, 2012), p. 16. 129 GAO, Community Development Financial Institutions and New Markets Tax Credit Programs in Metropolitan and Nonmetropolitan Areas, GAO-12-547R, April 26, 2012, p. 4, http://www.gao.gov/assets/600/590432.pdf. 118130 U.S. Congress, House Committee on Financial Services, Community Development Financial Institutions (CDFIs): Their Unique Role and Challenges Serving Lower-Income, Underserved, and Minority Communities, 111th Cong., 2nd sess., March 9, 2010, 111-106 (Washington: GPO, 2010), pp. 19 and 24. 119131 U.S. Department of the Treasury, “Obama Administration Announces Enhancements for TARP Initiative for Community Development Financial Institutions,” press release, February 3, 2010, at http://www.cdfifund.gov/docs/ 2010/cdfi/Obama-Administration-Announces-Enhancements-Tarp-Initiative-for-Community-Dev-Fin-Inst.pdf. 120132 U.S. Congress, House Committee on Financial Services, Community Development Financial Institutions (CDFIs): Their Unique Role and Challenges Serving Lower-Income, Underserved, and Minority Communities, 111th Cong., 2nd sess., March 9, 2010, 111-106 (Washington: GPO, 2010), p. 8. 127 Congressional Research Service 2526 Community Development Financial Institutions (CDFI) Fund: Programs and Policy IssueIssues Appendix A. Inactive Programs Bank on USA Program In his FY2011 budget request, President Obama proposed the Bank on USA program as a means to facilitate access to, and evaluate the effectiveness of, affordable, high-quality financial products, services, and education to unbanked and underbanked individuals.121133 Title 12 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) authorized the Community Development Financial Institutions (CDFI) Fund to “encourage initiatives for financial products and services that are appropriate and accessible for millions of Americans who are not fully incorporated into the financial mainstream.”122134 Although the President requested more than $41 million in funding for Bank on USA for FY2012 and $20 million for FY2013, Congress did not approve funding for the program.123 There was no request for Bank on USA appropriations in the President’s FY2014 budget request. Capital Magnet Fund The Housing and Economic Recovery Act (HERA) of 2008 (P.L. 110-289) established the Capital Magnet Fund (CMF) for CDFIs and other nonprofits to expand financing for the development, rehabilitation and purchase of affordable housing and economic development projects in distressed communities.124 Through the CMF the Fund provided competitively awarded grants to CDFIs and qualified nonprofit housing organizations. CMF awards could be used to finance affordable housing activities as well as related economic development activities and community service facilities. Awardees were able to use financing tools, such as loan loss reserves, loan funds, risk-sharing loans, and loan guarantees, to produce eligible activities whose aggregate costs are at least 10 times the size of the award amount.125 Three types of organizations were eligible to apply for a CMF award. An organization applying for a CMF Award had to either (1) be certified as a CDFI by the Fund; (2) have an application for CDFI certification pending with the CDFI Fund, provided such application was submitted prior to the due date specified in the applicable notice of funds availability; or (3) be a nonprofit organization having as one of its principal purposes the development or management of affordable housing.126 As authorized in HERA, CMF was to receive funding via a set-aside from government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac. However, such contributions have been 121 Community Development Financial Institutions Fund, FY2013 President’s Budget Submission, , p. 9, at http://www.treasury.gov/about/budget-performance/Documents/7%20-%20FY%202013%20CDFI%20CJ.pdf. 122 Community Development Financial Institutions Fund, FY 2013 President’s Budget Submission, p.12, at http://www.treasury.gov/about/budget-performance/Documents/7%20-%20FY%202013%20CDFI%20CJ.pdf. 123 Ibid., p. 11. 124 Laws pertaining to the CMF are located in 46 U.S.C. §1807. 125 Community Development Financial Institutions Fund, “Capital Magnet Fund,” June 8, 2012, at http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=11. 126 Ibid. Congressional Research Service 26 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue suspended indefinitely. The GSEs never made contributions to the CMF, as was originally expected under HERA, due to their financial condition and status under conservatorships.127 Instead, the Consolidation Appropriations Act, 2010 (P.L. 111-117) appropriated $80 million in initial funding for the CMF for FY2010.128 Funding for the CMF was discontinued for FY2011. The Fund awarded grants to 23 CDFIs and qualified nonprofit housing organizations serving in FY2010.129 The Fund received a total of 230 applications requesting $1 billion for the FY2010 CMF funding round.130 135 There was no request for Bank on USA appropriations in the President’s FY2014 budget request. Financial Education and Counseling Pilot Program The Financial Education and Counseling (FEC) pilot program provided grants through FY2010 to organizations that provided financial education and counseling services to prospective homebuyers. The goals of the FEC pilot program were to increase the financial knowledge and decision-making capabilities of prospective homebuyers, assist prospective buyers to plan for major purchases, and provide information on how to improve credit scores. Certified CDFIs, a HUDHousing and Urban Development-approved housing counseling agency, credit union, or government entity could request FEC funding for administrative expenses for FEC-related programs.131136 Section 1132 of HERA of 2008 (P.L. 110-289) authorized the Secretary of the Treasury to create FEC pilot programs. For FY2009, Congress appropriated $2 million to the CDFI Fund for the FEC FEC program.132 Treasury selected five organizations to receive $400,000 for their services toward the mission of the program.133 In FY2010, Congress appropriated $4.15 million, of which $3.15 million was designated for an eligible organization in Hawaii.134 A 2011 GAO report concluded that Treasury’s process for selecting FEC grantees was applied consistently using established criteria. In 2010, the four grantees served a combined total of 311 127 U.S. Congress, House Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises, Transparency, Transition, and Taxpayer Protection: More Steps to End the GSE Bailout, 112th Cong., 1st sess., May 25, 2011, 112-33 (Washington: GPO, 2011), p. 10. 128 Department of the Treasury, Community Development Financial Institutions Fund - Agency Financial Report FY 2011, November 16, 2011, p. 8, at http://www.cdfifund.gov/news_events/ CDFI%20Fund%20FY%202011%20Agency%20Financial%20Report%20FINAL%2011%2016%2011.pdf. 129 U.S. Department of the Treasury, Community Development Financial Institutions Fund: Agency Financial Report FY 2012, November 2011, at http://www.cdfifund.gov/news_events/ CDFI%20Fund%20FY%202011%20Agency%20Financial%20Report%20FINAL%2011%2016%2011.pdf. 130 Department of the Treasury, Community Development Financial Institutions Fund - Agency Financial Report FY 2011, November 16, 2011, p. 30, at http://www.cdfifund.gov/news_events/ CDFI%20Fund%20FY%202011%20Agency%20Financial%20Report%20FINAL%2011%2016%2011.pdf. 131137 Treasury selected five organizations to receive $400,000 for their services 133 CDFI Fund, FY2013 President’s Budget Submission, p. 9, at http://www.treasury.gov/about/budget-performance/ Documents/7%20-%20FY%202013%20CDFI%20CJ.pdf. 134 CDFI Fund, FY 2013 President’s Budget Submission, p.12, at http://www.treasury.gov/about/budget-performance/ Documents/7%20-%20FY%202013%20CDFI%20CJ.pdf. 135 Ibid., p. 11. 136 For further details about the objective and eligibility criteria of the FEC pilot program, see Community Development Financial InstitutionsFinancial Education and Counseling (FEC) pilot program, see CDFI Fund, “Financial Education and Counseling Pilot Program,” June 5, 2012, at http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=8. 132137 U.S. Department of the Treasury Office of Inspector General, Audit of the Community Development Financial Institutions Fund’s Fiscal Years 2010 and 2009 Financial Statements, Department of the Treasury, OIG-11-024, November 15, 2010, at http://www.treasury.gov/about/organizational-structure/ig/Documents/ oig11024%20%28CDFI%20Financials%20FY%2010%29.pdf. 133 U.S. Government Accountability Office, Financial Education and Counseling, GAO-11-737R, July 27, 2011, p. 2, at http://www.gao.gov/new.items/d11737r.pdf. 134 Ibid. Congressional Research Service 27 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issue clients.135 Congressional Research Service 27 Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues toward the mission of the program.138 In FY2010, Congress appropriated $4.15 million, of which $3.15 million was designated for an eligible organization in Hawaii.139 A 2011 GAO report concluded that Treasury’s process for selecting FEC grantees was applied consistently using established criteria. In 2010, the four grantees served a combined total of 311 clients.140 However, GAO could not meaningfully assess the impact of the program or the effectiveness of individual grantees because grantees had been providing services under the FEC program for less than a year.136 135 141 138 GAO, Financial Education and Counseling, GAO-11-737R, July 27, 2011, p. 2, at http://www.gao.gov/new.items/ d11737r.pdf. 139 Ibid. 140 According to the 2011 GAO report, one grantee, the New Hampshire Housing Finance Authority, used theirits FEC award to develop an interactive financial education website that had not been launched when GAO reports were due. 136141 Ibid. Congressional Research Service 28 Community Development Financial Institutions (CDFI) Fund: Programs and Policy IssueIssues Appendix B. Certified Native CDFIs Table B-1. Certified Native CDFIs, by State State Certified Native CDFIs Hawaii 11 Oklahoma 10 Alaska 6 Arizona 6 South Dakota 6 Minnesota 5 Montana 4 California 3 Colorado 3 New Mexico 3 Washington 3 Wisconsin 3 Michigan 2 North Carolina 2 Maine 1 Mississippi 1 North Dakota 1 Oregon 1 Wyoming 1 Total 728 Oklahoma 8 Arizona 6 New Mexico 5 South Dakota 5 Alaska 4 California 4 Minnesota 4 Montana 4 Washington 4 Wisconsin 4 Colorado 3 Michigan 3 North Dakota 2 Maine 1 Mississippi 1 Nebraska 1 New York 1 North Carolina 1 Oregon 1 Wyoming 1 Total 71 Source: Community Development Financial Institutions (CDFI) Fund, at http://www.cdfifund.gov/docs/certification/cdfi/ CDFI%20List%20-%2007-31-12.xls2014/ Cert/CDFI%20List%2010-31-14.xls. Note: CDFI counts are as of July 31, 2012October 31, 2014. Author Contact Information Sean Lowry Analyst in Public Finance slowry@crs.loc.gov, 7-9154 Congressional Research Service 29