FROM THE OFFICE OF PUBLIC AFFAIRS

Chairman Lewis, Congressman Stokes and distinguished members of the Subcommittee, it is a distinct pleasure to be before you today and represent the Community Development Financial Institutions Fund. I am Ellen Lazar and I have been the Director of the Fund for two months. Before I begin my testimony, I would like to introduce you to other members of the Fund who are with me: Paul Gentille, Deputy Director for Management/Chief Financial Officer of the Fund and Maurice Jones, Deputy Director for Policy and Programs at the Fund.

I would like to begin by thanking Chairman Lewis, Ranking Member Stokes and other members of the Committee for your continued support for the Community Development Financial Institutions Fund. For your efforts, the Treasury Department and I are deeply grateful. The funding you provide is making a difference in the lives of people that are often left out of the economic mainstream.

The CDFI Fund, which was authorized by the Community Development and Regulatory Improvement Act of 1994, was created to address the critical problems of urban, rural and Native American communities that often lack adequate access to capital. Access to capital is an essential ingredient for creating and retaining jobs, developing affordable housing, revitalizing and maintaining neighborhoods, building local economies, and enabling people to realize their hopes and dreams. There are significant capital gaps in distressed communities, and this market niche is not often recognized or well understood. This makes it difficult for conventional sources of capital to effectively serve low income people.

Despite the great strides that have been made as a result of a strengthened Community Reinvestment Act in promoting access to credit in underserved neighborhoods, market imperfections still keep capital out of these communities. Today, low income communities are faced with many challenges -- such as moving families from welfare to work, providing basic financial literacy skills, and training unskilled workers to become job ready.

For example, there is the single mother of three in Charlotte, North Carolina who recently moved to escape an abusive spouse but found it impossible to service the debts caused by one of her children's past medical expenses on her modest salary as a teacher's aide. The School Workers Federal Credit Union was able to arrange a debt consolidation loan and help her not only better manage her debts but also begin a savings program. She has now been able to make a $1500 down payment on a house. Thanks to the $150,000 grant from the CDFI Fund it received last year, this Credit Union is now poised to help many others work their way out of debt and into asset building for their future.

The CDFI Fund represents a new direction in community development. The Fund's programs leverage limited public dollars to build the capacity of private sector institutions to finance community development needs, and the programs help forge partnerships between communities and mainstream financial institutions. The Fund's efforts are designed to turn dysfunctional markets into well functioning local economies.

The President and Congress working in partnership created the Fund in 1994. The Fund's vision, and its approach represent a true innovation as a Federal initiative. We are now beginning to see the first glimmer of what the Fund can accomplish by assisting communities to realize their potential.

BUILDING STRONG AND EFFECTIVE MANAGEMENT SYSTEMS

The Department's and my top priorities will continue to be strengthening management and internal systems and procedures of the Fund. Understanding the importance of a sound management and program infrastructure, I wish to assure you that I and the Department are committed to developing and implementing the necessary improvements to the Fund's financial and program management, reporting systems, internal controls, operating procedures, and awards monitoring. The Fund's new leadership is committed to improving financial management and awards monitoring by ensuring strong program and financial structure, effective internal controls, and increasing the use of information technology.

To date, we have already made significant strides toward achieving these objectives. I am very pleased to report to the Subcommittee that in the Fund's first financial audit for Fiscal Years 1995 through 1997, it received an unqualified opinion which means that our auditors opined that our financial statements fairly and accurately present the financial position of the Fund. As expected, the audit confirmed our own findings that the Fund had material weaknesses in prior fiscal years. Using the Fund's FMFIA and audit processes and corrective action plans, we will correct all material weaknesses and findings during FY 1998. As noted in our Annual Report, the Fund is taking critical steps to strengthen and build its management structure and staff. In the first quarter of 1998, a Deputy Director for Management/Chief Financial Officer, with significant financial management experience in government, was appointed. The Fund has also moved swiftly to fill other management positions that are critical for ensuring proper internal controls and accountability including an awards manager, an accountant, a Deputy Director for Policy and Programs and program managers for each program.

A priority for the Fund during FY 1998 and FY 1999 will be to recruit, develop and retain high caliber staff. The Fund requires a highly trained staff due to the complexities and diversity of the community development finance industry. We will reduce our reliance on outside contractors and enhance our in-house capacity and expertise to meet the needs of the community development field. Special emphasis is being placed on the recruitment and hiring of additional Fund staff and the dramatic reduction of the utilization of outside contractors.

The Fund is committed to managing for results and I am planning to lead our management in a rigorous review of the Fund's current 5 year strategic plan, goals and performance measures within the next couple of months. If appropriate, I will revise our 5 year strategic plan and goals. I intend to show an important linkage between the Fund's goals and measures and those goals and measures we require from our awardees. Our strategic plan will be accomplished with appropriate Congressional consultation, as required by GPRA, and I look forward to working with the Committee on this important planning process.

PROGRAM OVERVIEW AND PRINCIPLES

The Fund seeks to promote economic revitalization and community development through investment in and assistance to community development financial institutions (CDFIs) and through encouraging insured depository institutions to invest in CDFIs and increase lending, investment and services within distressed communities. The Fund's programs are built on several key principles. First, stimulation of private markets is critical for rebuilding economically distressed areas. Second, building the capacity of community based institutions is critical for providing localities with the tools necessary to serve many underserved communities. And third, an initiative that promotes private sector strategies to achieve public policy goals must be based on performance and maximizing impact. The Fund has four programs that collectively address these principles: Its two main programs - the Community Development Financial Institutions (CDFI) Program and the Bank Enterprise Award (BEA) Program; and its other initiatives, the Training Program, Technical Assistance Program, and the Presidential Awards for Excellence in Microenterprise Development.

Stimulating Private Markets

The CDFI Program seeks to stimulate markets and spark economic activity by funding organizations that emphasize private sector market discipline. The Fund makes investments in, and provides technical assistance to, CDFIs. CDFIs are private for-profit and nonprofit financial institutions with community development as their primary mission. CDFIs include community development banks, community development credit unions, non-profit loan funds, micro-enterprise loan funds, and community development venture capital funds.

During its 1996 and 1997 rounds, the Fund awarded a total of $75.5 million in assistance to nearly 75 CDFIs serving urban, rural and Native American communities. These investments will leverage new capital and generate new community development activity over the next several years.

The CDFI Program also stimulates private investment by requiring that all financial assistance be matched on at least a one-to-one basis from sources other than the Federal government. As a result, the vast majority of all matching funds are raised from private sector sources. For example, during the 1996 funding round, nearly three-quarters of our awardees derived all of their matching funds from private sources including banks, corporations, foundations and individuals.

Collectively, 1996 and 1997 CDFI Program awardees are located in 30 states and the District of Columbia. Half of the awardees serve predominantly urban areas, one-third serve predominantly rural areas, and the balance serve a combination of the two. These organizations provide a wide range of lending products, investments and services within their communities. They finance affordable housing projects, small businesses, microenterprises, and community facilities. Awardees are selected based on factors including potential community development impact, financial strength, organizational capacity, and quality of their business plan.

The Fund's 1996 investment in Northeast Ventures of Duluth, Minnesota illustrates how the Fund sparks economic activity. Larry Van Iseghem is a chemist with an environmental mission. Larry's company, located in a rural and declining region of eastern Minnesota, developed and brought to market an environmentally benign, water based coating for heating and cooling equipment which adds energy efficiency to furnaces and air conditioners while preventing corrosion. An early investment by Northeast Ventures allowed Mr. Iseghem to start his company and to expand and move into development of new products. "Some potential investors were wary of my ideas, because they weren't sure environmental benefits and economic viability could go together," Larry explains, "Northeast Ventures Corporation didn't consider this a liability, but a plus. Environmental responsibility is one of their criteria."

In addition to CDFIs, traditional financial institutions play a key role in community development lending and investing. The Bank Enterprise Award (BEA) Program stimulates private markets by providing incentives for banks and thrifts to invest in CDFIs and to increase their community development lending, investment and service activities within distressed communities. In 1996 and 1997, the CDFI Fund made 92 awards totaling $30 million under the BEA Program. During these rounds, BEA awardees collectively provided $130 million in financial and technical assistance to CDFIs and generated $140 million in loans, investments and services within high poverty neighborhoods. The Program has served awardees in 24 states and the District of Columbia. The Program has awarded funds to banks and thrifts as small as $21 million in total assets to as large as $320 billion in total assets. Program participants represent a broad spectrum of the industry including national banks, state chartered commercial banks, Federal savings banks and thrifts, mutual savings banks and credit card banks.

The Bank of America Community Development Bank (B of A) was awarded $1.6 million in the 1996 funding round for increasing its multifamily housing, commercial real estate and business loans in distressed communities across California. The Bank made nearly $25 million in loans in targeted neighborhoods meeting the BEA Program's distress criteria, including $9.5 million in commercial real estate loans, $13.2 million in multifamily loans, and $2.2 million in business loans. The Bank projects that these loans will generate more than 185 units of affordable housing and 300 jobs. B of A's increased multifamily lending activity has helped provide a vital source of affordable housing for low-income families in targeted neighborhoods in San Francisco, Modesto, and Los Angeles, including the projects described below:

• a $2.6 million construction loan to support the acquisition and rehabilitation of a deteriorated residential hotel in San Francisco's Tenderloin neighborhood into 58 units of quality affordable housing for formerly homeless individuals; and
• a $6.8 million loan to support construction of a new 79-unit apartment building located in Downtown Los Angeles. The building serves households earning less than 60% of Los Angeles County's median income.

In addition to significantly increasing its lending activity in eligible distressed neighborhoods - activity that qualified it for its award - B of A, together with Bank of America, F.S.B., has invested its entire combined Bank Enterprise Award back into the community. $1.1 million of the award money has been used to established the Bank of America Leadership Academy, a nine-month program that provides training for senior management of community development organizations. The B of A Leadership Academy is funded jointly by Bank of America Community Development Bank, Bank of America, F.S.B., and the Local Initiatives Support Corporation (a certified CDFI and a 1996 CDFI Program awardee); and is conducted by the Development Training Institute. The B of A Leadership Academy is funded for three nine-month programs. Each session trains 35 executive directors or senior staff of community-based development organizations that are at least five years old and have completed at least three projects.

An additional 20 percent of the combined awards will go to the Low Income Housing Fund, a certified CDFI and a 1996 CDFI Program awardee which provides loans for very low-income housing development across the country.

Capacity Building

The Fund builds the financial capacity of CDFIs by providing financial assistance in the form of equity investments, grants, loans or deposits to enhance the capital base -- or the financial muscle -- of these organizations to make loans, investments, provide technical assistance or otherwise address unmet community development needs. Unlike programs in which resources are provided for specific projects, under the CDFI Program the Fund invests in CDFIs as institutions in order to promote their long-term viability and ability to serve distressed communities.

Appalbanc, a multifaceted CDFI that serves 85 extremely distressed counties in West Virginia, Kentucky, Tennessee, and Virginia, has developed an effective strategy to promote housing development and homeownership. Since its inception, Appalbanc and its affiliates have financed the development or rehabilitation of more than 20,000 homes. The $1.33 million in assistance provided by the CDFI Fund will be used to expand Appalbanc's activities in this very needy region.

The Fund builds the organizational capacity of CDFIs through several mechanisms. First, as part of the CDFI Program funding rounds, the Fund conducts "debriefings" with each applicant that was turned down for funding. Through this debriefing, applicants are given valuable feedback about the strengths and weaknesses of their organizations as observed by those involved in reviewing their requests for funding. Many of these organizations have used the information from these debriefings to address their weaknesses, build on the strengths of their operations and improve performance.

Second, the Fund provided assistance to two national intermediaries in 1997 who will provide intensive financial and technical assistance to small, nascent and growing CDFIs. CDFI Intermediaries are organizations that focus their financing activities primarily on other CDFIs. By providing financial assistance to specialized intermediaries, the Fund strengthens its capacity to support the development and enhancement of the CDFI industry. Together, the two national intermediaries selected by the Fund in 1997 are expected to serve nearly 200 CDFIs over the next five years.

Finally, this year the Fund will launch two new initiatives to build the organizational capacity of CDFIs and other organizations engaged in community development finance activities. The first initiative is a $5 million technical assistance program that will provide grant monies to CDFIs for capacity building activities. The second initiative is a new training program that will enhance skill development among CDFIs and other members of the financial services industry that are engaged in community development finance activities. The Fund expects to provide up to $15 million for this program.

The Fund expects to publish a Notice of Funds Availability regarding the first round of the technical assistance program this month. Later in 1998, the Fund will launch the second prong of this strategy. It will select organizations to provide, on the Fund's behalf, training to CDFIs and other members of the financial services industry.

By building the capacity of CDFIs, the Fund helps these organizations to enhance the economic well being of people in their communities.

Promoting Performance and Impact

The Fund's investments are making a difference in communities. For example, one 1996 CDFI Program Awardee, Cascadia Revolving Fund, made a loan to Nancy Stratton of Port Haddock, WA to open a day care center in her home. Nancy knew that her previous credit problems and lack of business experience would prevent her from obtaining financing through traditional sources. Cascadia worked with Nancy to refine her business plan and make a loan to help her start a now successful business. A 1996 BEA Program Awardee, Central Bank of Kansas City, was awarded $99,869 for increasing its deposit-taking activities and consumer and commercial real estate, housing, and business loans in distressed neighborhoods. During the first six months of 1996, this bank provided more than $8.3 million in loans and services. In addition to facilitating neighborhood redevelopment through its single- and multi-family housing activities, the bank made a significant loan to help a major manufacturer and employer remain in the community.

As you know, the Fund also promotes performance and impact by requiring all CDFIs selected to receive assistance to enter into an agreement to meet performance goals. These performance goals are tailored to each CDFI based on its Comprehensive Business Plan. Performance goals may be based on the amount of lending or investment activity projected, the number of people to receive technical assistance, or other measures of a CDFI's success in meeting its community development objectives. The performance levels for each CDFI are intended to be challenging and are based on the projections made in an Awardee's application for funding, the amount of assistance provided by the Fund, and the CDFI's financial and organizational capacity.

In the Fund's Bank Enterprise Award Program, the Fund encourages performance by requiring awardees to fully complete their projected activities before their awards will be disbursed. Thus, each Federal dollar disbursed has already made an impact within a local community before it is received by an Awardee.

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

We are beginning to see the impact that the Fund can make in underserved communities and among people that are often left out of the economic mainstream. This year, the Fund will be launching an impact analysis project that will provide valuable information on how the Fund's investments have created benefits within communities. As part of demonstrating impact, the Fund will continue to expand its communication tools, including development of a web site and publication of regular newsletters designed to publicize information about community development finance industry trends and best practices, as well as the Fund's activities.

In FY 1998, the Fund was appropriated $80 million. The Fund intends to use these funds on the Core Component of the CDFI Program, the Intermediary Component of the CDFI Program, the BEA Program, a new Technical Assistance Program and a new Training Program. The Fund expects to use $5.5 million for its operations.

The Fund has established key goals with respect to its program activities. Under the CDFI Program, the Fund will seek to increase the cumulative number of CDFIs receiving financial and technical assistance under the CDFI Program. For this purpose, the Fund has requested a budget increase in FY 1999 to $125,000,000.

Increased funding will allow the Fund to increase the cumulative number of CDFIs receiving financial and technical assistance under the CDFI program. Financial assistance to CDFIs enhances private sector capacity, directly addresses community development financing needs in distressed communities, and strengthens CDFI's long term capacity to help restore healthy private market activity. The increased funding will also be used to expand the BEA Program, training program and technical assistance program and in part to help accelerate the development of a secondary market for community development loans.

Summary

Mr. Chairman, members of the Committee, thank you for giving me this opportunity to provide an overview of the Fund's mission, it's accomplishments and plans for the future.

I also look forward to working with you over the course of this year's appropriations process. I would be very pleased to respond to any questions you may have about my testimony or about the Fund and its activities. Thank you.