Chairman Bond, Senator Mikulski and distinguished Members of the Subcommittee, it is a pleasure to be before you today to represent the Community Development Financial Institutions (CDFI) Fund. I am Ellen Lazar, the Director of the Fund. Before I begin my testimony, I would like to introduce you to two other key members of the Fund who are with me today: Paul Gentille, Deputy Director for Management/Chief Financial Officer of the Fund, and Maurice Jones, Deputy Director for Policy and Programs at the Fund.

STRONG AND EFFECTIVE MANAGEMENT

When I testified before this Subcommittee this time last year, I described key steps that the Community Development Financial Institutions Fund (the CDFI Fund or the Fund) would take to develop and implement necessary improvements to the Fund's financial and program management, reporting systems, internal controls, operating procedures, and awards monitoring. I am very pleased to report to the Subcommittee that over the past twelve months we have made great progress in these areas.

In the Fund's financial audit for Fiscal Years 1995 through 1997, our independent auditors, KPMG Peat Marwick, LLP (KPMG), provided an unqualified opinion, affirming that our financial statements fairly presented the financial position of the Fund as of September 30, 1997, 1996, and 1995. KPMG also confirmed our identification of material weaknesses that we needed to correct.

KPMG recently completed the Fund's fiscal year 1998 audit, and I am pleased to report that we have again received an unqualified opinion. In addition, KPMG verified that we have successfully corrected all material weaknesses identified in last year's audit. They have reported no new material weaknesses for this year's audit.

We are in compliance with the Federal Managers' Financial Integrity Act (FMFIA). Our system of internal management, accounting and administrative control has been strengthened and is operating effectively. Our enhanced policies and procedures ensure that our programs achieve their intended results; our resources continue to be used in a manner that is consistent with our mission; and our programs and resources are protected from waste, fraud, and mismanagement.

As evidenced by our auditor's report, the Fund has taken critical steps to strengthen and build its infrastructure and hire staff. During FY 1998, a Deputy Director for Management/Chief Financial Officer, Awards Manager and Financial Manager were hired -- critical positions for ensuring proper internal controls and accountability. In addition, a Deputy Director for Policy and Programs was appointed and program managers for each program were hired. The Fund's legal department was substantially increased and additional staff have been hired to help carry out the Fund's many programs. Our enhanced internal procedures and staff capacity has helped us to deliver more effectively our award dollars to the institutions selected to receive awards. For example, with respect to our Core Component CDFI Program, all of our 1996 awardees have received disbursements and 84 percent of our 1997 awardees has received disbursements. We are currently disbursing the 1998 awards, which were announced in late September of last year. We anticipate disbursing funds to all 1998 awardees by August of this year. Our 1999 awards have not been determined yet.

As I discussed with the Subcommittee last year, the Fund is committed to managing for results. We have undertaken a rigorous review of the Fund's five-year strategic plan, goals, and performance measures. I am happy to report that we have completed this process and have forwarded to you a draft of our revised strategic plan for your consultation and consideration.

STRENGTHENING COMMUNITIES: PROVIDING ACCESS TO CAPITAL

Overview

The Fund's mission is to promote access to capital and local economic growth by directly investing in and supporting community development financial institutions (CDFIs) and expanding banks' and thrifts' lending, investment, and services within underserved markets.

Currently, the CDFI Fund pursues its mission primarily through five initiatives: the CDFI Program, which includes the Core, Technical Assistance and Intermediary Components; the Bank Enterprise Award (BEA) Program; the Presidential Awards for Excellence in Microenterprise Development; the Native American Lending Study and Action Plan; and our Policy and Research Programs. The CDFI Fund also administers a Certification Program for community development financial institutions.

CDFI Program and Certification

The CDFI Program has three funding components: Core, Intermediary and Technical Assistance. These three components promote the CDFI Fund's goal, articulated in its strategic plan, of strengthening the expertise and the financial and organizational capacity of CDFIs to address the needs of the communities that they serve. CDFIs include community development banks, community development credit unions, non-profit loan funds, micro-enterprise loan funds, and community development venture capital funds.

The Core Component builds the financial capacity of CDFIs by providing equity investments, grants, loans or deposits to enhance the capital base the underlying financial strength of these organizations so that they can better address the unmet community development needs of their target markets. In addition, under the Core Component, the Fund provides technical assistance grants in conjunction with loans and investments in order to maximize the community development impact of the Fund's awards.

The Fund selects awardees that clearly demonstrate private sector market discipline and the capacity to positively impact underserved communities. The Core Component leverage encourages additional private and public sector investments into these same organizations through its one-to-one non-federal match requirement.

The Intermediary Component allows the Fund to invest in additional CDFIs indirectly, through intermediary organizations that support CDFIs. These intermediary entities, which are also CDFIs, generally provide intensive financial and technical assistance to small and growing CDFIs, thereby strengthening the industry's financial and institutional capacity.

Since inception, under the Core and Intermediary Components, the Fund has made 123 awards totaling $122 million.

The Technical Assistance (TA) Component of the CDFI Program is the Fund's newest funding program. Introduced in 1998, this component builds the capacity of startup, young and small institutions. The TA Component allows the Fund to direct relatively small amounts of funds to CDFIs that demonstrate significant potential for generating community development impact but whose institutional capacity needs to be strengthened before they can fully realize this potential.

In the first TA Component round held in 1998, the Fund awarded $3 million to 70 institutions.

In 1998, the Fund awarded a total $47 million to 112 institutions through its CDFI Program. In 1998 as in all previous years, demand for CDFI Program funding far exceeded the funding we announced as available. Under the Core and Technical Assistance Components we announced the availability of approximately $45 million. We received requests for more than $176 million.

For 1999, with the help of the $95 million appropriated to the Fund for FY 99, we anticipate that we will make $62 million in awards to 130 institutions under the CDFI Program. In October, the Fund published the FY 99 Notice of Funds Availability (NOFA) for both the Core and Intermediary Components, announcing a total of $57.5 million available, $50 million for the Core Component and $7.5 million for the Intermediary Component. We received 153 Core applications requesting a total of $184 million. We anticipate making approximately 55 Core awards. We received eight Intermediary applications requesting a total of $16 million. We anticipate making five Intermediary awards. In January, we published the FY 99 NOFA for the Technical Assistance Component. With the $5 million available for TA awards, we anticipate making 75 awards.

To date, institutions in 43 states plus Puerto Rico and the District of Columbia have received CDFI Program awards. To encourage applications from a diverse pool of applicants, the Fund is conducting a record number of informational workshops. Among the nineteen Core and Intermediary workshops conducted in 1998, five were located in States that have not had previous Core or Intermediary Awardees. This month the Fund will hold eighteen informational workshops on the Technical Assistance Component around the country, again selecting several regions in which there are no current awardees.

To further our goal of building the institutional capacity of the CDFI field, we provide debriefings to applicants that were not selected for an award. To date in fiscal year 1999, the Fund is responding to 92 requests for debriefings. Applicants are given valuable feedback about strengths and weaknesses of their applications as observed by those community development professionals involved in reviewing their requests for funding. Many of these applicants use the information gathered from the debriefing to build the strength of their operations and to improve their performance.

In addition to our CDFI funding programs, the Fund administers a CDFI Certification Program. CDFI certification increases the credibility of community lending organizations in the eyes of potential funders and investors. An organization that is certified is better able to attract private sector investments from local banks, corporations, foundations, and individuals. To date, we have certified a total of 280 organizations in 45 states, plus the District of Columbia and Puerto Rico. New applications arrive each month. Currently, applications are pending for the Virgin Islands, plus two of the five states that do not currently have any certified CDFIs.

Bank Enterprise Award Program

The Bank Enterprise Award (BEA) Program is the Fund's primary tool for pursuing its strategic plan goal of expanding banks' and thrifts' community development lending and investment activity. By providing incentives to these mainstream financial institutions, the Fund encourages them to increase their investments in underserved communities. These financial institutions do this in two ways: by providing loans, investments and services directly to the communities in need; and indirectly, by investing in local CDFIs or other community development programs, that then provide financial and development services to the communities.

The leveraging involved in this program is impressive. To date, 124 banks and thrifts in 30 states have received $58 million in BEA funding. This $58 million actually translates into investments in underserved communities of $983 million, seventeen times the amount of the CDFI Fund's investment. The awardees have invested $712 million in direct loans, investments and services to the community, and $271 million into CDFI's.

The Fund dramatically increased our BEA awards in 1998 when we made 79 awards totaling $28 million. In 1996, we made 38 awards totaling $13.1 million; in 1997 we made 54 awards totaling $16.5 million. The three-year total for the 171 BEA awards is $57.5 million. For the FY 99 funding round, we conducted twelve informational workshops around the country and received 139 applications. The Fund anticipates selecting approximately 80 of these institutions to receive awards totaling $25 million.

Presidential Awards for Excellence in Microenterprise Development

The Presidential Awards for Excellence in Microenterprise Development is a non- monetary program administered by the Fund that recognizes and seeks to bring attention to organizations that have demonstrated excellence in promoting micro-entrepreneurship. By recognizing outstanding microenterprise organizations, the Presidential Awards seek to promote best practices and bring wider public attention to the important role and successes of microenterprise development especially in enhancing economic opportunities among women, low income people and minorities who have historically lacked access to traditional sources of credit. This program is one of the ways that the Fund is promoting performance best practices in the industry.

In February of this year, the President presented awards to six organizations for their work in the microenterprise industry.

Native American Lending Study and Action Plan

Our Native American Lending Study and Action Plan is intended to stimulate private investment on Indian Reservations and other land held in trust by the United States. The first step in accomplishing this goal is identifying the barriers to private financing in these areas. In 1998, we launched an action plan that will examine lending and investment practices on Native American lands, identify lending and investment barriers and their impacts, and make recommendations for removing them. As part of that plan, we will be holding workshops in 13 cities across the country this year. The workshops will involve the Native American community, financial institutions, state agencies and community development organizations. With the assistance of the participants in these workshops, we anticipate that the study will be completed in fiscal year 2000.

Policy and Research

The Fund is perhaps the largest single source of capital available to the CDFI industry nationwide. It has access to data from hundreds of community development financial institutions nationwide. This includes information about the institutions as well as their target markets. In addition to baseline data derived from the process of certifying or funding applicants, the Fund collects longitudinal data on all of its awardees over at least a five-year period. Our policy and research goals include: measuring and reporting on the performance and outcomes of the Fund and its awardees and seeking to advance the CDFI industry as a whole through involvement in industry-wide research and development efforts.

In 1998, we moved forward on the first of these, measuring and reporting on the performance and outcomes of Fund awardees. As you know, the Fund invests in CDFIs to promote their long-term viability and ability to serve distressed communities. Today, I am pleased to be able to report some preliminary findings of our efforts thus far with respect to the accomplishments of our awardees.

PERFORMANCE AND IMPACT

Surveys

Using surveys, the Fund collected performance and outcome data on 30 of our 31 first- round CDFI Core Component awardees. These awardees were chosen in 1996. We began our evaluation on only first round awardees because they have had at least a year to absorb the Fund's investments and put them to work. Our sample of 30 first round awardees includes six credit unions, fourteen loan funds, three community development banks, three venture capital funds, two microenterprise programs, and two multifaceted CDFIs. Together, they received $34 million in CDFI awards. What has our $34 million helped these institutions to accomplish?

Our preliminary findings demonstrate that these awardees have accomplished significant community development impact over the past three years. For example, they have made $565 million in community development loans and investments. These loans and investments have helped to create or expand 1,895 microenterprises and 1,148 businesses; create or retain 12,412 jobs; develop 8,617 units of affordable housing, 98 childcare centers serving 7,168 children, 17 health care facilities serving 32,723 clients and 170 additional community, cultural, human services and educational facilities. Further, these awardees have provided business training, credit counseling, homebuyer training and other development services to 10,641 individuals.

Based on our sample, 70 percent of the clients of the average 1996 awardees are low- income individuals. Sixty percent are minority individuals. Fifty percent are women. Fifty- three percent live in the inner city. Eleven percent live in rural communities. Thirty-six percent live in suburban areas.

Since receiving their Fund awards, the 1996 awardees in our sample have strengthened their capacities to deliver products and services to their target communities. Their total assets have increased by 122 percent, growing from $473 million in the aggregate before they received their awards to $1.05 billion in the aggregate in 1998.

Case Studies

In addition to the outcomes surveys, the Fund is conducting in-depth case studies of a sample of awardees. The case studies include on site evaluations by the Fund to examine the CDFI's activities within the local economic development context. To date, we have completed three case studies. We anticipate completing several more in the coming year. The three case studies that have been completed thus far have been in Boston, Massachusetts, San Antonio, Texas and Santa Cruz, California. Our initial research suggests how CDFIs are positively affecting their communities.

In Boston, many of the city's poorer neighborhoods did not benefit from the economic growth in the 1980s; their conditions actually worsened during that period. Yet these same neighborhoods have experienced notable improvements in the past 10 years, thanks in no small part to the work of CDFIs such as the Boston Community Loan Fund and the Local Initiatives Support Corporation, two CDFI Fund awardees. These CDFIs have been critical behind-the- scenes actors. They have provided badly needed financial and technical support to two of the city's most effective community development corporations (CDCs), enabling the groups to develop the scale necessary to carry out affordable housing and commercial projects that have revitalized long-declining communities such as East Boston and Egleston Square. Since the mid-1980s, the CDFIs have provided over $7.5 million to the CDCs, which in turn have: built or rehabbed over 800 units of affordable housing; managed an additional 900 apartments and commercial properties; and operated after-school and other programs for 150 neighborhood youths. The CDFIs have also played a crucial intermediary role, working with bankers, city officials, and corporate and foundation leaders to encourage additional targeted investment in these neighborhoods. A number of bankers view the CDFIs as important partners in their community development work, crediting the CDFIs with effectively serving organizations and individuals that the banks cannot afford to serve.

All around San Antonio, public and private sector institutions recognize the important work of ACCION Texas, a CDFI Fund Awardee. From the city's Economic Development Office to local Chambers of Commerce to banks ranging in size from local independent banks to Chase Manhattan, ACCION is viewed as the source of financial services for a previously neglected B yet significant B segment of the population: the low- and moderate-income micro entrepreneurs who live and work in some of the city's poorest neighborhoods. ACCION is seen as the organization that can get loan capital into the hands of this underserved population B and just as important -- get it back. ACCION's 400 clients include plumbers, electricians, seamstresses, independent taxi drivers, and street vendors. They are primarily Hispanic. Without ACCION, they would not have access to credit for their businesses. The stories are by now familiar: these micro entrepreneurs do not have sufficient collateral; they don't have good business records; or they don't need enough money to make them attractive to a bank. With ACCION, they are able to get the financial and technical assistance they need to grow their businesses and to make them more prosperous through better business management. ACCION's success in San Antonio has led it to begin opening offices around the state, in the Rio Grande Valley, Houston, Dallas, Austin, and Fort Worth.

In Santa Cruz county in California, the third largest community credit union in the nation, the Santa Cruz Community Credit Union (SCCCU), offers a wide range of financial products and services designed to meet the financial needs of a predominantly rural low income population. The need is perhaps greatest in Watsonville, where the unemployment rate is 15.8 percent B more than three times the national average. This area has been hard hit by recent plant closings resulting from import competition from Mexico. Adding to the unemployment rate are the once-migrant agricultural workers who are settling in the area in increasing numbers, even though agricultural work remains seasonal. The employment and income figures highlighted the importance of focusing on the Watsonville population. With the help of its CDFI Fund award, the Santa Cruz Community Credit Union opened a branch in Watsonville so that it could ensure credit and banking access for all citizens, especially the Latino population which had historically distrusted traditional banking enterprises due to discrimination and neglect.

THE YEAR AHEAD: FY 2000

The President's FY 2000 budget requests $125 million in appropriations for the Fund. This request is $30 million above FY 1999 funding levels. The Fund proposes to use $15 million of the increase to enhance its core programs; thus, $110 million will be used to administer the CDFI, BEA, Training, Policy and Research and Secondary Market Programs and the Native American Lending Study and Action Plan. The remaining $15 million will be used to launch a new initiative, the Program for Investment in Microentrepreneurs (PRIME).

In FY 2000 and beyond, the CDFI Program will continue to focus on building the capacity of the CDFI industry to facilitate access to capital in underserved and low-income markets. I believe the Fund will be able to build on its previous years' experience and findings from its first outcomes surveys to inform our practice in identifying organizations that can maximize impact in needy communities. We will also seek to enhance the performance and impact of the industry through our Technical Assistance Program. Through the BEA Program, the Fund will continue its efforts to facilitate community reinvestment by providing incentives for banks and thrifts to reach new markets through partnerships with CDFIs and by targeting lending, investment and services in the most distressed neighborhoods. Finally, the Fund will seek to enhance the effectiveness and impact of CDFIs, banks, thrifts and others engaged in community development finance through its Training Program.

In FY 2000, the Fund will complete its Native American Lending Study. We plan to make recommendations to the President and Congress on needed statutory and regulatory amendments to existing Federal programs and other needed policy changes to improve access to capital for Native Americans.

Based on a feasibility study to be conducted in FY 99, in FY 2000, the Fund plans to launch a secondary market program for loans made by CDFIs and examine the potential role of the Fund in creating and sustaining these efforts.

I believe one of the most exciting proposals in the President's budget is the creation of the Program for Investment in Microentrepreneurs (PRIME). The $15 million PRIME Act was introduced in the Senate on February 10 of this year. Senator Kennedy introduced the bill. Senators Domenici, Reid, Grassley, Abraham, Robb, Collins, Boxer, Santorum, Sarbanes and Snowe are also sponsors of the bill. The bill was introduced in the House on January 19 of this year by Congressman Bobby Rush. House Banking Chairman James Leach and Ranking Member John LaFalce are among the bill's sponsors.

This program will allow the Fund to meet a growing need that we currently cannot address. This is the need to strengthen organizations that are providing critical training and technical assistance to the most vulnerable population of entrepreneurs: low-income and disadvantaged microentrepreneurs. One of the clearest lessons that has emerged from the first decade of microenterprise development in the United States is that provision of training and technical assistance is a necessary ingredient for building successful entrepreneurs. In the highly developed U.S. economy, starting and running a successful business requires a solid understanding of business regulations, tax issues, record keeping, and marketing. Many of the thousands of people who have started microenterprises to make ends meet do not have these skills.

Many of the organizations that provide training and technical assistance to microentrepreneurs are not currently eligible for Fund assistance because they do not meet our financing entity test under the CDFI Program. PRIME will allow the Fund to reach these organizations. The PRIME Act first, provides training and technical assistance to low income and disadvantaged microentrepreneurs; second, builds the capacity of microenterprise organizations so that they can better serve their low-income clients; and third, supports best practices research and development. I believe that PRIME complements the Fund's existing programs and will be a key tool for creating opportunity for low-income people.

CONCLUSION

Mr. Chairman, Members of the Committee, thank you for giving me the opportunity to provide you with this information on the Fund's current activities and its plans for the future. I look forward to working with you over the course of this year's appropriations process. I would be happy to respond to any questions you may have.