FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, members of the Subcommittee, it is a pleasure to speak with you today about the Community Development Financial Institutions (CDFI) Fund. I am joined by Ellen Lazar, the new Director of the CDFI Fund.

The CDFI Fund is a critical component of our strategy to promote private sector-led growth in economically distressed areas. The Fund's primary mission is to expand access to credit and financial services in low income urban, rural, and Native American communities, areas where one of the biggest obstacles to economic growth is a lack of access to private sector capital. As you know, we have submitted proposed legislation to reauthorize the Fund. The legislation would make technical corrections in the existing law to reflect the status of the Fund within the Treasury Department, would extend the authorization for the CDFI Fund, and would make other amendments to increase the Fund's ability to help revitalize economically distressed communities.

Community development financial institutions are specialized intermediaries that serve economically distressed communities. They include credit unions, microenterprise funds, development banks, and equity or loan funds that share this common mission: providing financial services to people and communities typically overlooked by traditional financial providers. For many years, institutions such as these have defied conventional wisdom by making loans to people that could not get financing elsewhere, and these borrowers have repaid with interest. Often, CDFIs are the pioneers in their communities, making the leading edge investments based on their community knowledge and demonstrating to traditional lenders that these are viable markets. These CDFIs are expanding the reach of the private sector marketplace.

The role of the CDFI Fund is to further strengthen these institutions. The Fund provides equity, loans, grants and technical assistance to CDFIs so that they can attract more investors and depositors, and make more private-sector investments and loans to hard working Americans who have been for too long left behind. With CDFI, I believe we have a new, more market-driven approach to community development. By filling market niches and drawing mainstream financial institutions into low income communities through partnerships, CDFIs help to make our financial system work better for more Americans.

The CDFI Fund has two main programs: the core CDFI program, which assists CDFIs, and the Bank Enterprise Act (BEA) Awards program, which makes awards to financial institutions that demonstrably increase their lending and other financial services in distressed communities. The two programs are complementary and mutually reinforcing -- one working with leading edge CDFIs and the other supporting innovative banks. By working through local institutions, both programs respond to communities' individual financial services needs, whether it is helping families to buy a house, or a budding entrepreneur to start a business, or a community to provide the child care facilities working families need.

The program is still young, but we are already seeing signs of success. Thus far, the Fund has awarded over $77.6 million to 81 CDFIs and intermediaries around the country. The leveraging of the federal investment is strong. Although actual leverage numbers vary from institution to institution, let me give you one example of how leverage works in a community development credit union: The CDFI Fund investment must be matched at least one-to-one with non-Federal dollars. The Fund's investment and the match become part of the credit union's capital base, which enables it to raise additional customer deposits, all of which become credit union resources available for lending to its members. Industry-wide, community development credit unions have a loan-to-capital ratio of 6.65 to 1, so each dollar of capital supports $6.65 of loans by the credit union. Because each federal dollar invested in a credit union must be matched by another non-federal dollar, a $1 investment by the Fund has the capacity to generate $13.30 in loans by the credit union.

These investments are making a difference. For example, Bethex Federal Credit Union in the South Bronx, a small financial institution originally founded in 1970 by former welfare recipients, received a $100,000 grant from the CDFI Fund to expand its financial services and increase its business lending. Over the past 18 months, Bethex's membership has grown from 1,270 to 3,000 and its assets have increased from $1.6 million to $3 million. In addition, Bethex has launched "School Banking," to encourage savings among students.

Earlier today, you heard from Self-Help of North Carolina, which operates a credit union and a venture capital fund that secured $3 million from the Fund. I recently visited Self-Help and some its borrowers, and their work is enormously impressive.

I saw first hand how a young man who had been running a marginal fresh fish business, was able to get a $1,000 micro-loan from Self-Help to buy a fish fryer and thereby offer more fast food menu choices to his customers. His business began to grow, and now he employs two full-time and two part-time helpers. He has been able to expand by buying another fryer and a stove, and now this determined young man wants to borrow $15,000 to purchase a refrigerated truck that will enable him to pick up his own fish. We often forget how much difference even a very small loan can make for a small business entrepreneur with creativity and a drive to be financially successful, and that's one of the things that CDFIs can do very well.

I also had the opportunity to visit a low-income neighborhood in Durham, where Self-Help was rehabilitating rental properties and selling them back to former tenants. I spoke to a minister there who told me that just a few years ago, no one dared to sit on their front steps or go down the street to the store for fear of becoming victims to drug-trafficking violence. But with funding from Self-Help and other sources, the neighborhood is now beginning to turn around. Houses are being repaired, and families have been given the opportunity to own their own homes for the first time. It has made the neighborhood safer, and has encouraged the homeowners to become more involved in their community.

With respect to the BEA program, more banks and thrifts than ever before are reaching out to their communities and are investing in CDFIs. This year, the Fund received 104 applications, a 40 percent increase over last year's applications. The Fund's $30 million in BEA investments have already leveraged $273 million in bank activities. Moreover, many of the awardees are choosing to reinvest the awards they receive for past performance back into community development projects. In this way, the CDFI Fund is getting increased private sector leverage for federal dollars.

Central Bank of Kansas City, Missouri, for example, was awarded $99,869 for increasing its loans and services in distressed neighborhoods by more than $8.3 million during the first half of 1996. In addition to loans for housing and other purposes, the bank made a significant loan to help a major manufacturer and employer remain in the community.

Though the CDFI Fund has accomplished much in a short time, as with any new organization, there have been some growing pains. In my judgment, we have dealt with those problems thoroughly and effectively, and they are behind us. In fact, the Fund was recently given an unqualified audit of its financial statements since inception. The audit also confirmed the findings of the Fund's management that material weaknesses had existed in the past, and that the Fund had corrected or was in the process of correcting each of those weaknesses. (I am attaching a chart showing exactly where CDFI stands in its efforts to cure those deficiencies.) More broadly, let me emphasize that congressional oversight has been useful in helping the Fund to strengthen its internal controls, and we will continue to improve procedures as this program grows and matures.

We are moving this program forward with the new leadership of Ellen Lazar, who I believe brings to the job the dedication, the many years of experience in community development, and the energy needed to implement the CDFI Fund's important work in the years ahead.

As we discuss the work of the fund today, we should keep in mind that the program is only three years old. And the nature of its work is such that it necessarily takes time for the impact to be felt. Moreover, we are beginning a new impact analysis that will provide important date on how the work of the Fund is benefitting communities.

Mr. Chairman, the Fund's vision for stimulating private sector investment in distressed areas makes sense, and the Fund's investments are beginning to make a difference in people's lives. Since its inception, CDFI has enjoyed bipartisan support. I look forward to working with all of you to enact the CDFI Fund's reauthorization, so that CDFI can use its innovative, private-sector oriented approach to help more local communities across the country rebuild neighborhoods, create jobs, and restore hope. CDFI is a solid investment in the long-term economic well being of not only those communities, but all of us.

Thank you very much.