(1) Require insured depositories to report data on loans to minority-owned small businesses in reports of condition, in accordance with Congressional intent. Two separate small business disclosure provisions were included in the Federal Deposit Insurance Corporation Improvement Act (FDICIA), enacted last year. The Federal Reserve was to be required to collect, among other things, information on credit availability to minority-owned small businesses. But in its proposed rule to make changes to call reports pursuant to these provisions, federal banking regulators have chosen not to collect any information on this important subject. It may be that the Fed is worried about what the data will show, but whatever the motivation, the proposed rule stands in clear contradiction to Congressional intent. I urge members of this Committee to communicate to the Fed the importance of obtaining information on lending to minority-owned businesses in quarterly call reports. The inclusion of such data would provide an invaluable source of data to guide future public policy discussions on this subject while constituting a minimal burden on depository institutions. (2) Expand the Home Mortgage Disclosure Act (HMDA) to include reporting on commercial loans. For well over 15 years, community groups have urged the Congress to amend HMDA to include information about extensions of small business credit on a geographic basis. As the HMDA data has shown, disclosure is a powerful tool for identifying gaps in credit delivery and for spurring change in the investment strategies of our nation's insured depositories. Lending to small businesses is part of the assessment process for compliance with the Community Reinvestment Act (CRA), but there is no database on originations of small business loans on a geographic basis with which to evaluate bank performance. Such reporting requirements could be incorporated into the compliance procedure under HMDA rapidly and easily. And the availability of such data would allow lenders to identify underserved markets and develop new products to meet legitimate credit demand. Such data would also shed new light on old questions of why some neighborhoods thrive, and others decay, and allow for better targeting of existing government programs to promote small business development and the creation of employment opportunities. (3) Support the efforts of Community-Based Development Corporations to act as Intermediaries in Micro-Enterprise Development. Over the last 15 years, ACORN has learned that in order for banks to enter and make money in inner-city mortgage markets, they must solicit the counsel and expertise of community-based institutions. ACORN has been successful at helping banks provide mortgage finance to our communities by performing a myriad of marketing and outreach activities for our banking partners-activities that might otherwise be prohibitively expensive or beyond the scope of increasingly distant and more wholesale bankers. After developing a mortgage product with a lender that employs flexible underwriting, ACORN markets the product in churches, through bank fairs, and in other ways penetrates the minority mar ket in a way that. conventional lenders could never do. ACORN then provides credit counseling to low- and moderate-income families, helping borrowers gather necessary documentation, and meet the lender's criteria. From the product development stage, to marketing, to the actual point of origination, ACORN acts as the lender's retail outlet in predominantly minority neighborhoods. I should add that given the historic distrust of banks by minority Americans, the involvement of trusted institutions in the community in the lending process is a necessity, not a luxury. It is worth noting that the extensive portfolios we have developed with lenders under these programs actually have a lower default and foreclosure rate than conventional portfolios. Our model is just one among many that have been employed by community-based development corporations in recent years to fostered sustainable community economic development. This entrepreneurial spirit in the non-profit sector has had numerous successes-like grass in the cracks of a sidewalk-over the last decade. Another successful model is the Good Will Fund pioneered by community development loan funds around the country, and the Elk Horn Bank in Arkansas—a community development bank modeled after the South Shore Bank in Chicago. Under this model, a pool of borrowers join together to secure micro-enterprise loans for start up financing. Four or five low-income individuals together form a risk pool, and the ability of any one individual to access capital is contingent on the repayment of loans by the group ash a whole. In effect, the banks delegates some of the underwriting authority to the group as a whole, which has a strong incentive to regulate and discipline the behavior of individual members. We urge that the Committee explore channelling federal resources for operational and capacity-building support for community-based development corporations along the lines established in the 1990 National Affordable Housing Act (NAHA) for communitybased housing development organizations. Investing in these non-profit firms will return long-term economic dividends to the taxpayer and to society at large. CDCs are staffed by dedicated personnel who are committed to securing investment over the long run for their communities-not just through the next boom and bust cycle. They are knowledgeable about the investment needs of their communities, attuned to the prospects and risks of individual businesses and able to assist in the economic development planning critical to fostering a sustained climate of investment. ACORN endorses the National Community Economic Partnership Act, S. 1866, sponsored by Sen. Kennedy, which would provide $250 million to CDC's over three years for job-creation and economic development in low-income communities. Enactment of S. 1866 would be an important first step in. empowering communities to promote economic development. (4) Expand the Public Mission of the Federal Home Loan Bank System to include support for the provision of small business credit to distressed communities. In 1932, the Congress created the Federal Home Loan Bank System to act as a reserve banking system to facilitate the provision of mortgage capital for American home buyers. As the mortgage market has changed over the last six decades, the Home Loan Bank system has outlived its original purpose and is in need of reform to justify its continued existence. Indeed, it might be said that the Home Loan Bank System is a delivery system without a purpose, and that inner-city lending is a purpose without a delivery system. We believe that the Home Loan Banks are ideally suited to assist insured depositories in the provision of credit for community economic development. The Home Loan Banks can raise funds cheaply in the capital markets, and deploy them through their growing membership base of thrifts and commercial banks to communities who lack access to credit. The Banks can also provide essential technical assistance to lenders who would otherwise be incapable of tapping investment opportunities in distressed communities. I have attached a brief summary of a proposed reform of the Community Investment Program at the Home Loan Banks that we believe will help facilitate participation by local lenders in community economic development and small business growth. This proposal is modest and is consistent with recent initiatives of the Federal Housing Finance Board to respond to credit demand in South Central Los Angeles. If the Home Loan Banks can help Los Angeles rebuild, they can surely lend assistance to hundreds of other credit starved urban communities. Conclusion Expanding access to credit to creditworthy individuals in innercity neighborhoods for small business growth and development must be at the top of any urban agenda for the 1990's. If we are to extend the promise of economic opportunity to all hardworking citizens regardless of race or neighborhood of residence, the Congress must take a firm and unequivocal stance against the pernicious practice of redlining, which has strangled hope in all too many neighborhoods in this country. Increased disclosures, support for grassroots innovation by community-based CDCs, and reforms to the public mission of the Federal Home Loan Bank System. will plant the seeds of tomorrow's neighborhood revitalization. Thank you, Mr. Chairman, that concludes my statement. FEDERAL HOME LOAN BANK The 1989 FIRREA legislation amended the Federal Home Loan Bank Act to create a Community Investment Program at each of the 12 District Federal Home Loan Banks. The program was designed to facilitate member institution financing of community economic development, small business lending and affordable housing. To date, the promise of the CIP program has remained unfulfilled. A reformed Community Investment Program: (1) Better targeted housing development for qualifying CIP advances.Current law permits CIP advances to fund housing affordable to households up to 115 percent AMI. A maximum ceiling of 80 percent AMI is appropriate. (2) Each Home Loan Bank should be directed to hold, as a percent of that Bank's total assets, CIP investments. Given inadequate Bank marketing of CIP advances a firm target, or goal, is necessary to generate adequate CIP activity. 5 percent of total assets is appropriate. (3) Grant District Home Loan Banks the authority to purchase qualifying CIP loans. The Banks should be provided flexibility to meet their CIP goals either through direct advances or through loan purchase arrangements with their participating members. Purchase authority will spur member interest in CIP development and will permit the Banks to offer expanded community development services and products. (4) Ensure goal performance by granting the Federal Housing Finance Board enforcement powers, general prior program approval and underwriting guideline authority for Bank initiated CIP products. (5) Require that not less than 50 percent of CIP assets be in qualifying small business and community economic development loans. 6) Encourage maximum local advisory council input into Bank CIP program design and marketing. Implementing these reforms will up date the public mission of the Federal Home Loan Bank System by meeting specific financial needs of member institutions whose investment strategies include community investment, small business and affordable housing financing. The proposed CIP reforms will reduce interest rate risk for member institutions, provide liquidity for originations of new rounds of qualifying CIP loans and will assist in the adequate provision of capital for community economic development. 1.0 EXECUTIVE SUMMARY OPPORTUNITY FUNDING CORPORATION EXECUTIVE SUMMARY 1.1 Purpose of Study Project The Minority Business Development Agency (NBDA) is responsible for coordinating and initiating programs to assist in the development of minority business enterprise (MBE). The NBDA's assessment of the minority business environment indicates that minority business owners and potential entrepreneurs do not have access to capital at the same level as non-minorities. The MBDA currently does not have a Capital Development Program to address this issue. Access to capital is essential for entrepreneurs to initiate, develop, and operate viable businesses. The lack of access to capital is the single most important obstacle to individuals who want to start and/or operate a business. Consequently, the business partici pation rate for minorities is much lower than for non-minorities. This primarily is due to the inaccessibility of capital sources, and if capital is made available, it is at higher costs, shorter terms, and requires higher collateral. The problem is two-fold: lack of access to capital, and the need for the development of alternatives to conventional financial instruments and intermediaries. The purpose of the study project is to verify the extent of this hypothesis, its effect on MBE development; and, to recommend private/public partnership intervention strategies to improve minority business finance. The OFC Project Team Through its nineteen years of experience in minority business financing; providing loans, loan guarantees, and equity investments, OFC is uniquely qualified to assist MBDA in developing programs for minority business financing. OFC accomplishments include the design, implementation, and capitalization of two successful venture funds that are industry leaders in minority business financing. With an expert management team and a national board of prominent, well-known business leaders, OFC has established a national reputation of solid, equitable, minority business financing transactions. The OFC Project Team was engaged to accomplish the following objectives in response to MBDA requirements: ⚫ to perform necessary research to inventory and document the demand for and available supply of capital for minority business • to explore possible designs for capital access/allocation vehicles drawing investment funds from private sector capital markets • to explore reasonable state and local government alternatives • to recommend an implementation strategy In performance of these tasks, OFC was joined by Hansen, McOuat & Associates (HMA), a financial consulting and development firm with an impressive history of capital market involvement in both private and public markets; and, the Corporation for Enterprise Development (CfED), which has a record of expert research and evaluation of state and local development finance programs. 1.1.1 Project Findings Demand for Capital In examining what is presently known about the supply and demand for capital for investment in minority business enterprises (MBEs) through our literature search, augmented by questionnaires and interviews of both suppliers and users of capital and studies by the OFC Team of nine minority financing intermediaries, our findings confirmed the widely held opinion that lack of capital (the capital gap) is a major impediment to minority enterprise development. We found this conclusion to be valid for all sectors of capital: preseed and seed; working capital; expansion financing; and secured financing. In many respects, the capital gap grows from the lack of |