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H.R. 3617REAUTHORIZATION OF THE COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS FUND
WEDNESDAY, JUNE 17, 1998
U.S. House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Banking and Financial Services,
The subcommittee met, pursuant to call, at 2:30 p.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema, [chairwoman of the subcommittee], presiding.
Present: Chairwoman Roukema; Representatives Bachus, Kelly, Vento, Bentsen, Kilpatrick, and Sherman.
Chairwoman ROUKEMA. We will call the hearing to order. I regret that I was late, but as long as my Ranking Member is here, I think we can start, although we were waiting for Mr. Bachus to arrive. I understand that he will be here momentarily. In any event, I think it would be appropriate for me to begin with an opening statement, and we will take it from there, given the uncertain voting schedule this afternoon.
Certainly I am pleased to have our panelists here and all who are participating today. As you know, we are holding the hearing on reauthorizing the Community Development Financial Institutions Fund program, better known as or otherwise known as CDFI. The program was initially authorized in 1994 and is part of the Treasury Department responsibility. Its goal is to promote economic revitalization and community development through investment and assistance to community development financial institutions at the local level.
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Before proceeding further with a description of the program, I would like to raise one of the issues concerning therather, approach an issue regarding the Fund that may or may not be of controversy. At least it has to be brought into focus. This government program has been, it seems, particularly identified as troubled. A full airing of these problems and the steps which the Treasury Department has taken and is intending to take to correct them is part of the congressional oversight responsibility. I am sure all those here are familiar with that.
I say with all sincerity, and I have talked to a number of individuals that are concerned with this question, that I certainly look forward to hearing from Under Secretary Hawke, who is quite knowledgeable, a report on the progress that has been made with the CDFI Fund. The Fund administers two separate programs, the program which makes awards to community development financial institutions based upon proposed development activities, and the Bank Enterprise Award Program, which makes awards to any type of financial institution that has demonstrated a commitment to community development lending.
The first round of the awards came inthis is obvious since it was only just authorized in 1994, it is a relatively new programthe first round of the awards only came into effect or into being in July of 1996. The award was for $37.2 million for 32 awardees and $13.1 million to 38 financial institutions under the Bank Enterprise Awards.
The second round of awards came in September of 1997. I will not go into the details of that. We will probably hear about that and we have been educated on that subject through Mr. Bachus' committee report. The third round of awards came in March of this year.
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The CDFI's Fund authorization expires this year, September 30, 1998. Mr. Vento and I have introduced H.R. 3617, at the Administration's request, for reauthorization. It would reauthorize the Fund and make several technical changes, including amendments to certain programs including the small business capital enhancement program.
The legislation will provide permanent authorization. As introduced, it would provide permanent authorization for the CDFI Fund. As we will hear, I am sure, during this hearing, there are some different positions, different opinions as to whether it should be a permanent or temporary reauthorization. We will move, and this is certainly my intention, to mark up the reauthorization legislation in the near future.
Before we go to my first panel, my colleague, Mr. Bachus, the Chairman of the Committee on House Oversight, had wanted to provide an opening statement. I would just ask approval that when it seems appropriate and Mr. Bachus has arrived that we will offer that opportunity to him.
I have a number of the major problems that have been uncovered here. I will not go into them now, but the panelists that are here today are fully aware of the GAO report and the committee report and the articles in the press that have outlined those problems. We will go through them during the questioning period following the testimony.
I will now just identify that the first panel.
Mr. VENTO. Madam Chairwoman, I have a statement.
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Chairwoman ROUKEMA. I will be with you in a moment.
The first panel is, of course, the Treasury Department CDFI Fund officials, and we will be able to hear from them. We believe that we have covered the waterfront, so to speak, with respect to the second panel as well, that will compliment the first panel by giving objective data in terms of the General Accounting Office report, the Inspector General's Office of the Department of Treasury, and KPMG Peat Marwick. I believe we will go into that a little later.
We do appreciate the fact that all have been so willing to modify their schedules to be with us here today. We do feel we are under a bit of a deadline here. We hope that this can be done in ample time before the September deadline.
With that, I will turn to Mr. Vento, the Ranking Member, for his opening statement and observations.
Mr. VENTO. Thank you, Madam Chairwoman, for holding the hearing this afternoon and for joining me in introducing by request the Treasury Department's recommendation for the reauthorization of the CDFI program. I very much appreciate that and your comments about moving forward with this and using this measure as a markup vehicle.
The bill, H.R. 3617, of course is a first step, and this hearing today the orderly next step in doing our job to review the present and future of the Community Development Financial Institutions Fund program for CDFI and other financial institutions that are benefited through the Bank Enterprise Act program or BEA.
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Since first in place, this program has received a lot of attention. It was conceived in a high-profile manner, and it certainly has been the subject of intense scrutiny. The scrutiny is deserved and hopefully most constructive and positive.
The fact is that on the learning curve, CDFI's every mistaken musical note has been so amplified as to lose the melody of the music. That is to say, I think that what has been forgotten is what, after all, this program is supposed to do. What we have heard a lot about is some of the, as I said, the notes and errors that have occurred.
The new CDFI program, oversight and reaction to it, however, may have unfortunately even contributed to some of the well-publicized problems in the first and second rounds of the CDFI grants. Additionally, in light of the findings of various reviews, and as we will hear anew today, the CDFI Fund has taken a multitude of correctional actions. The Fund has also retained new experienced staff to lead them, tempered by the miscues that have been experienced.
I certainly want to acknowledge our colleague, the Chairman of the Oversight subcommittee, for his identification of incidents and information that resulted in the resignation of senior CDFI staff. He has also made some recommendations as a result of his work which we should be mindful of, as they would serve to improve the CDFI Fund programs.
Today's hearing will no doubt touch on some of the problems of the past, hopefully with an acknowledgment that all of these problems have been addressed, are work in progress or a result. The hearing on the reauthorization should be a process to determine if we need legislative language to ensure that such problems do not occur in the future.
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However, we should put our strongest focus on the question of the positive impacts that the CDFI Fund programs have had or will have, if given enough time to demonstrate them in the many communities that are being rebuilt and that are growing. Furthermore, our oversight and hearing should look to improvements in programs and the avoidance of problems, not the rediscovery of yesterday's issues.
As I strongly support the local efforts of community development financial groups, the objective must be for continued opportunities for growth and improvement in a positive CDFI Fund program. The Fund can help the financial entities which can and are doing the job. The Fund can learn from the past couple of years. We can work together on policies that will not commit the errors of the past.
These unique and committed CDFI Fund intermediaries are part and parcel of helping our communities and neighborhoods help themselves. They can indeed be the foundation for the building blocks of economic opportunity and employment. The CDFI Fund programs must be the instigators of change and the partners in business, housing and community initiatives.
The Bank Enterprise Act Program, as well, is deserving of the same attention and review as the CDFI program, but has been basically left out of that intense scrutiny for a variety of reasons.
Madam Chairwoman, I look forward to our hearing this afternoon and moving this reauthorization forward. I know we can work together on this subcommittee, this Congress, and maintain and improve the successful programs that leverage small resources into big results for communities across this Nation. I welcome the witnesses, especially Under Secretary Hawke and CDFI Director Ellen Lazar.
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Chairwoman ROUKEMA. Mrs. Kelly is here. However, I believe she was not here when I announced that Mr. Bachus would be making an opening statement. With her approval, Mr. Bachus, the Chairman of the subcommittee, will be recognized next.
It was Mr. Bachus's subcommittee, in a general report and then in a letter to Chairman Leach and myself, that has outlined the interpretation of the results of his study and has made certain recommendations. We are waiting, Mr. Bachus, to hear your questions and comments with our illustrious panelists today. Chairman Bachus.
Mr. BACHUS. Thank you. I will, quite frankly, admit that I don't know what to say. The problems have been well publicized. I think that I have outlined what we found in a letter to the Chairman. I have prepared an opening statement which I will submit for the record, but really, more importantly, let me say this.
I traveled on an Amtrak train yesterday or the day before yesterday from Boston to Washington, and from the window of that train you could see a lot of communities in need of development that good, solid community development fund institutions could help. What Mr. Vento said about partnerships between businesses, the community, what South Shore has done in Chicago, I think this was a very noble idea. In fact, I voted for it.
I think there is a tremendous need in a lot of our impoverished communities, whatever we want to call them, I am not sure what you call them these days, but you know, when you see them you know that they are in need of reinvestment and of seed money and of restoration. You can see cities that have been successful at doing that and others that haven't.
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So first of all I would say that this is not a goal we ought to abandon. Anybody that looks out a train window in North Philadelphia knows that there is a tremendous need for this. I think the only question is, how do we do it and how do we do it most effectively.
I am just going to say this and then I will take maybe a minute or two more to say that we found nothing in the BEA program, Bank Enterprise Award program, that was amiss. I mean, it seemed to function very well. It is a third of the allocated fund.
I might suggest that you look at some reallocation and expand that program maybe, whether you take $50 million, $60 million, whatever the figure is instead of a third, that right now you put two-thirds in that program. I am not giving a magic figure. I don't know what.
But you know that program provides seed money for institutions that have already done good things and have come before you and said, this is what we have done. You don't have to guess at what they are going to do in the future. They have already proved themselves by what they have done. By giving them this, you give them a measure of recognition. There ought to be hundreds of those institutions that deserve some measure of support.
As far as the CDFI, it is a very new industry. There are few organizations. So there was an attempt to get that money to those organizations, but there really were not enough of them apparently that were qualifying.
One thing that I might stress there is that you might look at taking just the new CDFIs as opposed to those that have been around for a while and are on their feet, and that you direct more money to them. Again, I have laid all this out in my suggestions and you can read that.
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I think that there was nothing in our review that said we should not be involved in community development, in encouraging these institutions, like South Shore, from doing good work, which they have done. There was nothing in that. I don't want to say anything today to slam them again. It would be piling on at this late point.
I would just say that I think in a nonpartisan way this subcommittee ought to take a look at the most effective way to let the Federal Government be a partner in helping revitalize those communities, because if we do not, we are in trouble. If some of those communities continue to go the way they are going, it is going to drag this country down.
The Secretary of the Treasury took a courageous stand. There are new people at the Fund. I think they are well qualified. I think this subcommittee and this Congress needs to try to work with the Administration in designing a better way. I think what President Clinton saw out there when he campaigned was a need that still is there as much as it was at that time, and I think we just got off to a bad start, maybe because this was a new program, and it does not mean we don't try again and keep trying until we get it right.
Chairwoman ROUKEMA. I thank you, Mr. Chairman.
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Ms. KILPATRICK. Thank you, Madam Chairwoman. I appreciate Mr. Bachus's comments in that it is a new agency and does need time to grow. It is in the third round. As it goes on, it will get better each year. I am sure of that.
The need that they meet is what I want to speak on just briefly, to rebuild distressed areas and to allow funding. I think it is very much needed in America today and certainly in my district. So, Mr. Bachus, I was happy to hear your comments and look forward to working with you as we strengthen the CDFIs.
Thank you very much.
Chairwoman ROUKEMA. Mrs. Kelly.
All right. I think we are ready for our panelists. First on the panel is Treasury Under Secretary for Domestic Finance John Hawke. We are very pleased to have you here today. I know that you rearranged your schedule today in order to accommodate this hearing, and we are very appreciative.
We also are happy to have Ellen Lazar, who has a big challenge before her in her new position, but she comes to this challenge with excellent credentials, having served with the Department of Housing and Urban Development and the National Coalition for Housing and the Enterprise Foundation. Surely you learned something about urban areas in that capacity. We do appreciate your being here and bringing us your experience.
Page 11 PREV PAGE TOP OF DOC Ms. Lazar is joined at the table by Maurice Jones, Deputy Director for Policy and Programs for the CDFI Fund. We will hear from him with his own inside experience on the subject.
With that, Secretary Hawke, we will turn to you.
STATEMENT OF HON. JOHN D. HAWKE JR., UNDER SECRETARY FOR DOMESTIC FINANCE, DEPARTMENT OF THE TREASURY
Mr. HAWKE. Thank you, Madam Chairwoman, Ranking Member Vento, Members of the subcommittee, Chairman Bachus. It is a pleasure to speak with you today about the Community Development Financial Institutions Fund, and I want to thank you, Madam Chairwoman, and Congressman Vento, for introducing our proposed reauthorization legislation.
I also would like to thank Chairman Bachus of the Oversight subcommittee for the very thoughtful statement that he has just made. There is nobody in the Congress today who knows more about this program than Mr. Bachus. I think in light of that, the encouraging words that he has just given us come with particular force, and we appreciate that.
The CDFI Fund is a critical component of our strategy to promote private sector-led growth in economically distressed areas, and I am here today to ask for your help in replenishing the Fund and in working with us to continue to improve the Fund's operations so that we can maximize its benefits to America's communities.
Page 12 PREV PAGE TOP OF DOC CDFIs are specialized financial institutions that serve economically distressed communities and underserved populations. 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.
The role of the CDFI Fund is to further strengthen these institutions and to help new ones to grow. The Fund provides equity, loans, grants and technical assistance to CDFIs so that they can attract more investors and depositors, and make more 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. I say this because any award under the CDFI program must be matched dollar-for-dollar with private sector capital. The Fund thus not only catalyzes private sector assistance, but generates a strong base on which CDFIs can leverage their resources.
The CDFI Fund has two main programs: the core CDFI program, which assists CDFIs; and the Bank Enterprise Award program, which funds financial institutions that demonstrably increase their lending and other financial services in distressed communities. The two programs are complementary and mutually reinforcing. By working through local institutions, both programs respond to communities' individual 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 nearly $80 million to 81 CDFIs around the country. The leveraging of the Federal investment is strong. The CDFI Fund investment, as I said, must be matched at least one-to-one with non-Federal dollars. Though actual leverage numbers vary from institution to institution, let me give you one example of how leverage works, taking a community development credit union as an example.
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The Fund's investment and the matching funds 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 about 6.65-to-1. In other words, each dollar of capital supports $6.65 of loans by the credit union. Because each Federal dollar must be matched by a 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. The Fund is still in the process of developing a systematic approach to quantifying impact, but anecdotal evidence of the Fund's impact is available.
I can testify from some personal observation about the impact. I recently visited Self Help of North Carolina, which operates a credit union and a venture capital fund. The CDFI Fund's February 1997 $3-million investment in Self Help has already enabled Self Help to effectuate $24 million in home mortgages and commercial lending transactions.
I saw firsthand how a young man who had been running a marginal fresh fish business in Durham, North Carolina was able to get a $1,000 micro-loan from Self Help to buy a fish fryer and thereby offer a fast food menu to his customers. This fellow had been selling fresh fish off the back of a truck with his father and they decided to open a store. They found out they couldn't sell much fresh fish without attracting customers in, and with the aid of this $1,000 loan they got into the fast food business.
Page 14 PREV PAGE TOP OF DOC His business began to grow and now he employs two full-time and two part-time workers. He has expanded by buying another fryer and a stove, and now he wants to borrow $15,000 more from Self Help to buy a refrigerated truck that will enable him to pick up his own fish.
This is only one example, and a small one, of how much difference even a very small loan can make for a small business entrepreneur with the creativity and drive to be financially successful. That is one of the things that CDFIs can do very well.
When I was in Durham I also had the opportunity to visit a distressed neighborhood 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.
With funding from Self Help and other sources, the neighborhood is now beginning to turn around, and I could see it block by block as I walked down the length of three blocks. The first block was not in rehabilitation at all. The second block was kind of in transition. The third block showed signs of very creative rehabilitation. That is where I spoke to this minister who told me how even that small part of the community had been turned around with rehabilitation funds from Self Help. That assistance made the neighborhood safer. It has encouraged homeowners to become more involved in their community, and it is just another small example of what can be done.
Under the Bank Enterprise Awards program, more banks and thrifts than ever before are reaching out to their communities and investing in CDFIs. This year the Fund received 104 applications, a 40 percent increase over last year. The Fund's $30 million in BEA investments have already leveraged $273 million in bank investments and support. 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.
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Though the CDFI Fund has accomplished much in a short time, as with any new organization, there have been some growing pains and some missteps. In my judgment, we have dealt with these problems effectively, and I am confident they are behind us, but let me make just a few points about the past.
First, we have had the benefit of extensive congressional oversight of the Fund's activities for more than a year. Chairman Bachus's report on the CDFI Fund is a highly professional and thorough report, and we believe it has been extremely useful and productive in helping the department focus its attention on where corrections are needed, and it has been helpful to the Fund in improving their program operations.
Second, the Fund has significantly strengthened itself over the last year. It has strong internal controls, and we will continue to improve procedures as this program grows and matures.
The Fund has instituted a series of changes since the first round of awards in 1996, including a numeric scoring system, reviewer training, detailed application review, and awards policies and procedures, documentation of awards files, clear conflict-of-interest policies and other procedures. We have an exhibit over here on your right that lists the major management improvements that have been made in the Fund. Attached to my testimony is a side-by-side chart showing exactly where CDFI stands in its efforts to cure other deficiencies.
The Fund was recently given an unqualified financial audit for its activities since its inception. That audit also confirmed the findings of the Fund management that there were material weaknesses that had existed in the past, and the Fund has corrected or is in the process of correcting each of those weaknesses.
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Third, the CDFI Fund's award decisions have been based on the merits, after a rigorous review of track record, financial strength, management team skills and experience, the quality of the business plan, the ability to raise non-Federal matching funds, and the potential for making a difference in their communities.
I appreciate, Mr. Bachus, the constructive criticism in the report about the documentation failures with respect to some of the decisionmaking. That is something we take very seriously, and I believe that is being, has been corrected.
From the beginning, I have emphasized to Fund management that the Fund must make its decisions independently and on the merits, because the easiest way for this Fund to lose credibility is for the impression to be created that its decisions are affected by outside influences that do not go to the merits of particular applications. I am confident that that is, in fact, the way the Fund's decisions have been made.
Finally, we are moving this program forward with the new leadership of Ellen Lazar and her new team, which I believe bring to the job dedication and many years of experience in community development, the discipline and the energy needed to strengthen the CDFI Fund in the years ahead.
In sum, we have a strong management team in place with the necessary skills and experience to ensure that the program meets high standards of accountability and performance. The Fund has strict awards procedures and sound infrastructure in place. I believe that the Fund is well positioned to serve low income communities across the country and to achieve the kinds of results and transformation that Mr. Bachus described as being so necessary.
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Thank you very much.
Chairwoman ROUKEMA. Ms. Lazar, it is my judgment that perhaps we should wait for your testimony so that it can be heard in whole without being rushed. I think perhaps we will go for a vote and then return. Apparently we will be having two votes, so it will be a 20-minute recess. Thank you.
Chairwoman ROUKEMA. We apologize, we had no idea how long this was going to take. It was a long 20 minutes, wasn't it? I am sorry about that.
Let me see, where were we? Ellen Lazar was just recognized, and I am very glad that we didn't interrupt you in the middle of your testimony. Now we are settled in for a while and we can listen with rapt attention.
STATEMENT OF ELLEN W. LAZAR, DIRECTOR, COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS FUND, ACCOMPANIED BY PAUL GENTILLE, DEPUTY DIRECTOR FOR MANAGEMENT/CHIEF FINANCIAL OFFICER, AND MAURICE JONES, DEPUTY DIRECTOR FOR POLICY AND PROGRAMS
Ms. LAZAR. Thank you, Madam Congresswoman, Ranking Member Vento, Chairman Bachus and distinguished Members of the subcommittee, it is a pleasure to be before you today representing the Community Development Financial Institutions Fund. Madam Chairwoman, in the interest of time I will summarize my statement and ask that my written testimony be entered in the record in its entirety.
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Chairwoman ROUKEMA. With unanimous consent, it will be included.
Ms. LAZAR. Thank you. Before I begin my testimony, I would like to introduce senior members of the Fund who are with me: Paul Gentille, Deputy Director for Management/Chief Financial Officer, and Maurice Jones, our Deputy Director for Policy and Programs.
I would like to begin by thanking the subcommittee for your interest in the Fund and our proposed legislation for reauthorization of the Fund. The proposed legislation extends the life of the Fund, provides for technical corrections reflecting the Fund's status within the Treasury Department, and makes a limited number of changes to allow us to better administer our programs. You can help make a difference in the lives of people that are often left out of the mainstream by helping us reauthorize this legislation.
I would also like to thank the GAO, the Treasury IG, KPMG Peat Marwick, and Chairman Bachus' subcommittee for their guidance and recommendations through their recent reviews of the Fund.
The department's and my top priorities will continue to be strengthening the Fund's management internal systems and procedures. I wish to assure you we 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.
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Chairwoman ROUKEMA. Please continue.
Ms. LAZAR. To date we have already made significant strides toward achieving these objectives. This afternoon I am very pleased to report to you that in our first financial statement audit covering fiscal years 1995, 1996 and 1997, we received a clean opinion from KPMG Peat Marwick. As we expected, the audit also confirmed the material weaknesses we had previously identified.
We will eliminate the material weaknesses during fiscal year 1998 and strengthen and build the management structure and staff. Furthermore, we will reduce our reliance on outside contractors and enhance our in-house capacity.
During the Fund's 1996 and 1997 rounds, the Fund awarded a total of $77.6 million through the CDFI program to over 81 CDFIs serving urban, rural, and Native American communities. The CDFI program also stimulates private investment by requiring that all financial assistance be matched on at least a 1-to-1 basis from sources other than the Federal Government.
These organizations finance affordable housing projects, small businesses, microenterprises and community facilities. A central part of the Fund's mission is to facilitate the development of a national network of financial institutions that are dedicated to community development.
The Fund has provided significant support to startup CDFIs. To date, 18 percent of the CDFI program awardees have been startup organizations that have been in existence for two years or less. In 1997, the Fund made more than $7 million in awards to three intermediary organizations to support the development of nascent CDFIs. Furthermore, the Fund has certified 233 organizations as CDFIs and has a current pipeline of 48 organizations seeking to become CDFIs.
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The Fund evaluates all organizations using the criteria established in our regulations: track record, financial strength and current operations, capacity, skills and experience of the management team, quality of the business plan, and potential community development impact. In the case of startup organizations with no or minimal track record, the Fund places greater emphasis on the capacity, skills and experience of the management team, and its business plan.
The Bank Enterprise Award 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 in 1997, the Fund made 92 awards totaling $308 million under the BEA program. We are delighted that many of our awardees reinvest their awards in CDFIs and community development activities.
The Fund promotes performance by requiring all CDFIs selected to receive assistance in the CDFI program to enter into an agreement to meet performance goals. These goals are tailored to each CDFI based on its comprehensive business plan, consistent with our authorizing legislation. In the BEA program, the Fund encourages performance by requiring awardees to fully complete their projected activities before their awards will be disbursed.
The Fund also encourages performance within the CDFI Fund by promoting best practices. The Fund's Presidential Awards for Excellence in Microenterprise Development is a nonmonetary program that recognizes and seeks to bring attention to organizations that have demonstrated excellence in promoting microentrepreneurship.
Page 21 PREV PAGE TOP OF DOC 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 our Fund will be launching an impact analysis project that will provide valuable information on how the Fund's investments have worked.
In fiscal year 1998, the Fund was appropriated $80 million. The Fund is using these monies for the CDFI program, BEA, and new training and technical assistance efforts. Our new technical assistance program is designed to increase the capability of smaller, newer organizations to serve their communities and increase their sustainability and viability over time. Our new training program will develop and deliver training to the field, training that will help organizations provide more capital to their communities.
At this time the Fund has $109 million in unobligated monies. The bulk of these funds have been reserved for our current award rounds, and we expect to obligate $92 million by the end of this fiscal year, which would leave us $17 million in funds to carry over in fiscal year 1999 to begin award rounds for that fiscal year.
The Fund's vision is to create an America in which all people have fair and equal access to capital and financial services. Our objectives over the next four years include increasing investments in CDFIs, increasing their capacity and expertise, promoting the microenterprise industry and microentrepreneurship, and expanding financial service organizations' lending investments in underserved communities. I believe we can do this through our current programs.
Madam Chairwoman, Members of the subcommittee, thank you for giving me this opportunity to provide an overview of the Fund's mission and its accomplishments and plans for the future. As a new entity, we are now beginning to see the first glimmer of what the Fund can accomplish by assisting communities to realize their potential. I also look forward to working with you over the course of this year's reauthorization process. Thank you.
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Chairwoman ROUKEMA. Thank you.
Does Mr. Jones have a statement to make?
Mr. JONES. No, ma'am, I don't.
Chairwoman ROUKEMA. All right. I think we are going back into session now. We went into a short recess. We will ignore the bells for a while. Staff will keep us informed as to what the lights mean.
But I would ask, I guess I have a couple of questions for Mr. Hawke as well as Ms. Lazar, and they are of a more general nature. Then maybe we can get into, with Mr. Bachus' help, some of the procedural safeguards that Mr. Bachus' committee had, as had been forwarded to all of us.
But, Mr. Hawke and Ms. Lazar, there have been specific references to increased private sector leverage, and so forth. I would like you to be a little bit more particular on that. What I want to know is, and I didn't hear it, are some of these management improvements that you have talked about including any private sector expansion in terms of using it as leverage for the program? Should any of them be put into statute?
It seems to me that it might be useful to prescribe some of these, but I haven't had the experience that you have had, but it might be useful to prescribe them in statute quite beyond just the minimum procedural safeguards. Yes?
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Yes, Secretary Hawke.
Mr. HAWKE. Are you referring to the use of outside contractors when you talk about private sector?
Chairwoman ROUKEMA. Well, I would be. However, I was referencing your general assertion that there should be, dollar-for-dollar, more private funds used as leverage. And then I guess there was a statement, at least I wrote it down as such and underlined it and starred it, as to increased private sector leverage.
Is this something, some kind of a formula or a general formula that should be put into the statute?
Mr. HAWKE. The statute presently requires that any assistance provided by the Fund, whether it is a loan, a grant, or other forms of assistance, be matched dollar-for-dollar with a comparable form of private sector contributions. So that if the Fund makes a $500 dollar loan to a CDFI, the CDFI must first demonstrate that it has got $500 of loans from a private source, or if it is an equity investment that the Fund is going to make, the CDFI must show a comparable equity investment from a private source.
Chairwoman ROUKEMA. So you are thinking that that is adequate and that is as far as we could go in the statute?
Mr. HAWKE. Well, you could always increase that requirement, but we don't see a need to do that. We are dealing with financial institutions here that are really intermediaries, and the point that I was making was that if we make a $500 contribution to the equity of or to the capital of a community development credit union, for example, given the leverage that already exists in credit unions, they will take that and use that capital base for essentially bringing in additional funds.
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And also, since that contribution of ours has to be matched dollar-for-dollar with equity from another source, it in effect doubles the equity base that can be leveraged. So we think that is working very well.
Chairwoman ROUKEMA. All right. Well, there were a number, and I haven't written each of them down, and we will go over in your detail your testimony where a number of management improvements have been outlined, and I thank particularly Ms. Lazar, who has been discussing that. How much of that should be in statute, in order to avoid the kind of criticism that there has been in terms of manipulation, apparent manipulation of the system under the previous practices?
Do you have any recommendations? I was going to leave it to Mr. Bachus. I know his report has a number of specific recommendations. I don't know how many of them should be considered statutory or not, or do you feel it would be too constrictive of your operations?
Mr. HAWKE. I think we need to address them on a situation by situation basis. For example, the report comments on conflict of interest policy.
Chairwoman ROUKEMA. Yes, and the objective scoring systems and so forth.
Mr. HAWKE. The objective scoring system iswe have moved in that direction, and I think we may have a little difference of view on the right component of objectivity and subjectivity in this process. And if I can, Madam Chairwoman, let me just take a moment and talk about that.
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Chairwoman ROUKEMA. Please. I would appreciate that, because that is I think the way we can be most helpful as we go through this reauthorization.
Mr. HAWKE. When I first got involved in this program, and having no experience in grants programs at all, one of the things that we considered early on was what kind of evaluation system should we have for applications. And there was a proposal that staff had made for a numeric, objective scoring system.
I felt at that time, and I still feel to some extent, that given the wide variety of types of organizations that the Fund is helping to support, it would be difficult to make all awards on the basis of a completely numeric, objective scoring system, and that what was important here was to really learn something about these organizations with kind of a due diligence approach that involved a much more hands-on sort of inquiry about the organizations.
Now, I don't think we are really very far apart on what is really at stake here, and the issue isn't in my judgment so much the difference between an objective system and a subjective system. I think what Mr. Bachus' report very properly points out is that the important thing is whether there is transparency in decisionmaking. Can somebody come in and look at the decisions that the Fund has made, whether it is on the basis of an objective system or a subjective system, and make comparisons and evaluate the quality of the decisionmaking?
I think you can do that with the kind of mix of objective and subjective procedures that we have, provided that there is adequate documentation and fair and thorough documentation in the files of those considerations that led to the decisionmaking, and I think that is where we fell down. In the first round, we did not have the kind of documentation that would enable an oversight subcommittee to come in and do the kinds of things that Mr. Bachus and his subcommittee properly wanted to do.
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Chairwoman ROUKEMA. Well, my time is up, but Ms. Lazar, have you been able to institute, do you feel confident about instituting those new procedures with the kind of transparency needed so we won't be running into the same kinds of problems that we had previously?
Ms. LAZAR. Yes, I do. I think as we progress toward a more objective scoring system and a review system that is fairly expansive in terms of the teams that we put together to evaluate the applications and the type of due diligence we do, and we now have an awards administrator in place who is helping us firm up policies and procedures that are really helping us to better structure the process itself. I feel comfortable that this third round particularly will be very transparent, and people will be able to come into our files and understand what went on.
Chairwoman ROUKEMA. Well, all right. Will you, in addition to your written testimony, if there is anything further you want for the record, please submit it to me with specificity as to the administrative changes you are instituting with respect to this subject.
Ms. LAZAR. Sure, I would be glad to.
Chairwoman ROUKEMA. Thank you.
Page 27 PREV PAGE TOP OF DOC Mr. VENTO. Madam Chairwoman, it is late in the day, we have got a lot of questions, and I am going to try to be brief. Obviously we have time to get those on the record and we can answer them just briefly now.
One of the comments that has come up is, in one of the reports, is that we have sort of saturated the market with community development fund grants and withI don't know about the BEA program. But can you just briefly comment about that, Jerry, that there aren't a lotor Ellen?
Mr. JONES. Let me defer to Ellen.
Ms. LAZAR. Let me say I don't agree with that statement. We just got in our applications for this round. We have gotten in 248 applications. I trust that many of them will be strong, good, competitive applications. Up until now the Fund has only been able to provide awards to approximately 18 percent of the applicants to the program over the past two rounds. The requests for assistance have approximated $500 million, and the Fund has been able to provide only $80 million in funding.
The Fund is in the process of providing $5 million in technical assistance grants to CDFIs, as well as designing a $15 million training program for the industry. These capacity building initiatives are expected to result in a more qualified applicant pool in the future. In our judgment, CDFIs will continue to play an increasingly important role in helping to build strong communities.
Mr. VENTO. One of the other issues that has come to mind to me in terms of the past for this, and I really want to look forward more thanat least look at the presentbut one of the past issues has been, I wanted to get this, my own feeling was there was a small group of expertise with regards to community development, financial institutions, and the fact is that those that have been officers, officials, those that were relied upon. In fact, we say we are going to contract with these various groups to do technical assistance and training and mentoring and so forth.
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But it was almost inevitable that there would be some conflicts in the sense that there was a small group, a small pool of people that had the expertise. Does anyone want to comment about that or just agree with me orbut I just want it out in the record. I wanted to get that out, because it isn't as thoughand I think there were some mistakes made. As I said, these notes were amplified to the point that we lost the music, you know, the melody.
Mr. JONES. I think that is an accurate statement, Mr. Vento, and the problem is compounded by sort of the seasonal nature of the process. The Fund goes out for a round of awards and applications come in and that creates a need for, over a very short period of time, for the assessment of, evaluation of applications.
It is not possible, not efficient for the Fund to keep a full-time staff on to deal with those episodic needs. So the Fund has gone out to hire, on a temporary basis, people who would come in and help evaluate the applications, and as you say, that almost inevitably leads to taking on people on a temporary basis that have some involvement in the industry.
We have made a strong effort. I think we now have very solid conflict rules that make sure that people who are engaged in that context are not passing on their own applications or those of competitors.
Mr. VENTO. Well, there are some, like NSF, and others, National Institutes of Health, all of them have peer review models where the peers actually do review. It isn't as though they may not be getting awards in those particular rounds, but there are all sorts of suggestions. So I don't know if anyone has a pure model of it. If you get into those, and you are talking a lot more dollars than you have here, so I don't knowbut there are some models out there to help.
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The advisory group, one of the questions I had, giving it a more formal role in terms of oversight or power. Up to this point I think it has sort of been, someone pointed out advisory groups do tend to happen. They end up being sort of cheerleaders in terms of it.
The other question I wanted to get to beforeand there have all sorts of differences. I am sure GAO would want more oversight within Treasury, and the oversight more powerful. Are we at that particular point where we need it here? This isn't another RTC or anything. What about the permanent authorization?
What my question is, of course we don't really know about performance in most of these instances. GAO can't comment on it. Not enough has been in place, we don't have enough feedback. Nobody is really talking about it, and as I am saying, we don't really know what this composition is going to sound like or look like. But how much time is that going to take?
You asked me and my Ranking Chairwoman, to introduce this bill that gives permanent authorization. I don't think we are going to get permanent authorization. We are lucky if we are going to get any authorization this year, based on the time, unless something special happens.
How much time do we need in terms of authorization to get this beyond sort of the political debate? I guess I am saying beyond 2000 we need authorization, but how much time do we need to get an accurate feedback and a pretty good picture of whether or not this Fund is doing what it is intended to do?
Page 30 PREV PAGE TOP OF DOC The time? They are all looking at Mr. Jones and one another. This wasn't on my list of questions I was supposed to ask them, Madam Chairwoman.
Mr. JONES. Let me take a crack at that. I think, first of all, there is no precise answer to that, but I think that at a minimum we probably need five years, and I will tell you why. Congress in the legislation requested that we request all of our awardees under the CDFI to propose, at a minimum, five-year business plans, so we base our decisions on what these institutions are proposing to accomplish over at least the next five years.
We just started funding these institutions. Our first funds to these CDFIs went out in February of last year. So I think at a minimum, if we really want to see a big picture on the impact in communities across the countries that our investments make, we are taking at least five years to get some feedback.
Mr. VENTO. I think there obviously is an interest to doing some other adjustments in terms of the legislation, in terms of trying to reiterate some of the issues where there is agreement in it, to have some comfort. I was very much appreciative of the statement that Mr. Bachus made, as an oversight chair that had worked on this issue, and that he was willing to continue to support it but I think within certain parameters, and we can talk about some of those. I am sure he will as he asks his questions.
I would yield, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you.
Page 31 PREV PAGE TOP OF DOC Mr. Bachus.
Mr. BACHUS. Thank you Madam Chairwoman.
Secretary Hawke, we just received the bound copy of our report, so that is the reason that you just were handed one. Of course, you have had a copy of it for some time.
One of the things we requested was, there was a $2 million award to Southern Development, and Southern Development indicated that they wanted to extend or expand into eastern Arkansas. It later turned out that Mr. Brandon became the CEO of Southern Development, and now Southern Development is taking $2 million, and they wouldn't have had $2 million and be buying his bank, making a bank acquisition of his bank.
My question is, how does that fit in under the mission statement? I mean, are we going to be buying banks? I am looking forward, I am not looking back. I have criticized that.
Mr. HAWKE. Let me say as, again, a principle, one way of building infrastructure in the CDFI community is through the establishment or acquisition of a bank. But let me ask Mr. Jones to address that in more detail, particularly the sequence of events that
Mr. BACHUS. You know, I am not sure that I would agree that what we need to be doing is using these funds to buy banks. That is within the mission statement. But I guess my question is, will we be doing this again?
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Mr. JONES. Let me clear up something about the facts of our investment there. We did provide a $2 million investment to Southern; $1 million, though, of the $2 million went to the Arkansas Enterprise Group, which is an affiliate, not-for-profit affiliate of them that actually engages in affordable housing development.
The other $1 million we did provide for them to actually acquire a bank, is what they ended up doing with it. Southern has been in existence now for perhaps 15 years. Southern from its very inception wanted to go into the Arkansas Delta region to do community development banking in rural areas in the delta, but it had never been done before.
So what they did was, for eight years they tested the strategy that they wanted to use in rural communities in central Arkansas, in Arkadelphia. It was their decision and their belief that they could not actually get into the Arkansas Delta region without actually acquiring a bank, and so we did actually provide dollars to them so that they could actually expand and provide community development services in the Arkansas Delta region, to the poor in that area.
Now, as far as Mr. Brandon goes, Mr. Brandon was not Southern's CEO.
Mr. BACHUS. Other than the fact that he was hired as CEO and then Southern Development, they bought his bank that he had left. But, I mean, I am not asking you to explain about Mr. Brandon. I am sure he is a good banker. In fact, I understand he was past president of the American Banking Association.
Page 33 PREV PAGE TOP OF DOC Mr. JONES. Yes, sir.
Mr. BACHUS. I guess I would come at this in a different way. I have read the mission statement. The mission statement is to expand the number of lenders operating in a distressed area. How does buying an existing bank increase the number? I mean, that is a bank that is already existing in that area and hopefully, making loans. Do you understand what I am saying?
Mr. JONES. Yes, sir.
Mr. BACHUS. You are basically changing ownership of the bank.
Mr. JONES. Here is what was happening with the bank that they actually purchased. The bank that they actually purchased was actually at a decision moment in its life. It believed that it was going to actually have to merge with some other bank or somehow pull back from their community because it was not going to be profitable basically. And what the actual acquisition allowed was for First DeltaFirst National Bank, actually allowed First National to continue to operate in this very poor region and to continue to provide access to capital to folks in that area.
What Southern actually has found is that actually one bank in the Arkansas Delta is not enough, that they actually need two, three maybe, and so they are actually now expanding to actually increase the number of banks there. But Southern believed that they could not provide access to credit to people in the delta region unless they were actually present there, that they could not adequately do it from central Arkansas.
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Mr. BACHUS. But, it just seems to me that there would be people and institutions, that could develop community development financial institutions in that area, people in that area of Arkansas that you could give seed money to and start. Because, basically you have a bank that was lending in a distressed area, and I would just suppose that Mr. Brandon, as he became the CEO, was probably committed to making loans to the disadvantaged. You paid out a million dollars but what you got is, you got that bank.
Secretary HAWKE. Mr. Bachus, I understand.
Mr. BACHUS. I am saying, two years from now when we review this, are we going to find that we bought a few more banks, which I don't think is part of this.
Mr. HAWKE. I understand exactly the point you are making. Let me come at it a little bit differently. The objective is to have an infrastructure of CDFIs that are capable of meeting the needs of their communities. Now, that $2 million might have been used as an equity injection in a brand-new
Mr. BACHUS. A million, a million or something.
Mr. HAWKE. A million with a matching million. It might have been used as an equity injection in a startup institution. I think there is really very little difference between injecting into a startup institution and buying an existing institution that has a capital structure and that can be used as a CDFI, that can be used for the same purposes. You get a leg up in the process if you are taking off from an existing institution rather than taking the same money and investing it into a brand-new startup institution where you have all the problems of getting the thing up and running. So I think the point you are making is well taken, that we shouldn't be using
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Mr. BACHUS. When this bank was acquired by Southern Development, then it actually had loans to all sortsI mean it was lending to corporate clients, I suppose.
Mr. JONES. It was not a community development bank, which I think is really the distinction here. What we got that we did not have, after this acquisition was consummated, was a community development bank located in the delta region whose primary region
Mr. BACHUS. You hoped to turn it into that.
Mr. JONES. That is what Southern is. So once it actually becomes a part of Southern, it is actually a community development financial institution. It was not prior to the acquisition. So what we believed we were getting was a CDFI in the delta region, which was in dire need of one.
Mr. BACHUS. OK.
Mr. JONES. And so we believethat is why we promoted or invested in that strategy.
Mr. VENTO. If the gentleman would yield to me.
Mr. BACHUS. Yes.
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Mr. VENTO. I don't want to, just briefly, get into your way. It is a question here of whether you are supplanting already capital investment that was for this purpose or if you are supplementing. That to me would make all the difference. But, I mean, I didn't want toI may be restating whatbut, I mean, if it is a supplement that is actually demonstrated to actually perform, and these dollars aren't actually somebody else's and taking your money out, or if you are not bailing out a bank, in essence.
But you had mentioned something of it being in transition. I know that the gentleman's time is expired. If you wanted to respond to that, I don't know, I guess there is some other written documentation that you may want to submit with regards to this as well.
Mr. BACHUS. I am just looking forward. You know, can we expect to see more of these acquisitions?
Mr. VENTO. I don't know if the gentlemanI don't knowthe issue is that almost everything that we are doing here in terms of the CDFI Fund or the BEA is in factI mean, this is sort ofwith BEA we give the money after the fact, they said, based on what they actually performed. But the CDFI Fund, we are putting the money in ahead with the expectation in five years that the business plan will result in this type of academic development.
So I don't know thatI think that iswe are taking the existing market structure entities that are in place and reinforcing it. Rather than giving this money to the State of Arkansas, the State of Minnesota, or communities within, you are actually giving it to the institutions that are already in the community or about. Of course, there is an argument about whether you ought to be doing more startup, which I read in the report.
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Mr. BACHUS. The mission is to increase the number of lenders. If we are going out buying existing banks, it at least appears we are not doing that.
Mr. VENTO. Unless it is a holding bank. They are going to actually provide it.
Mr. BACHUS. That is something that ought to be discussed.
Secretary HAWKE. I think that is absolutely right, Mr. Bachus. I think in the situation of this case, you have an existing CDFI that wanted to expand, in effect, to be able to serve a new market. They had a choice of ways of doing that. They could have gone into the market and invested in the creation of a new entity in that market, or bought an existing bank that could be converted into a CDFI and serve the same purpose.
I don't think the idea is for the CDFI Fund to go out, be funding the acquisition of banks all over the country. I think that is really the point that you are making, and I think it is well taken.
Mr. BACHUS. Fine, thank you.
Chairwoman ROUKEMA. Thank you.
Page 38 PREV PAGE TOP OF DOC Ms. KILPATRICK. Thank you, Madam Chairwoman.
And along the lines of Congressman Bachus, the proof of the pudding would be that the new CDFI bank in the delta would actually make loans and investments and those kinds of things, and I am hoping if you have to come back next year and the year after, we will see that that new bank is in fact investing and helping out in those economically distressed communities.
I want to turn the attention to the appropriation itself. I notice in the first year you have $50 million, $45 million, $50 million, $80 million, and asking for $125 million this year, Ms. Lazar. I think I wrote that you say there are $190 million in unobligated funds at this time.
And I am assuming that would be a partand correct me if I am wrongI am asking, the 1997 appropriation or all of them combinedand we have this amount, I understand the process, and it is lengthy and Congress has required various things. It takes a long time to get from the application to the money.
So am I to understand that the $190 million that is right now unobligated is a result of all of those appropriations, and that you on top of that are requesting twice the amount of money that you have had in the past in your annual appropriation?
Ms. LAZAR. Let me correct you, if I may.
Ms. KILPATRICK. Please.
Page 39 PREV PAGE TOP OF DOC Ms. LAZAR. The current unobligated amount is $109 million.
Ms. KILPATRICK. $109 million?
Ms. LAZAR. $109,479,000. Those are previous years' appropriations. At the beginning of this fiscal year, we had $115 million in funding, which was previous years' appropriations plus this year's $80 million in funding. At the end of this year we expect to have $17 million to carry over into fiscal year 1999. We have reserved $92,100,000 for our programs for this year. We expect to make our awards in September, so we expect that that money will be used up by then and that we will go into fiscal year 1999 with $17 million to fund our awards.
Ms. KILPATRICK. OK. And then the $17 million that will go into the 1999 fiscal year which starts October 1, the current request for $125 million, is there demand in an application for that money at this time, or do you anticipate that there will be?
Ms. LAZAR. We anticipate that there will be. We have looked at our numbers. We have looked at our performance goals for fiscal year 1999 and fiscal year 2000. We expect an increase in use, small but incremental use in our funding, but we will also be using money for our technical assistance program and our training program.
Ms. KILPATRICK. And the technical assistance program is the service program that you provide other financial institutions who want to become
Ms. LAZAR. Yes. We are basicallyit is a new program this year, we just had a notice of funds of availability out on the street for $5 million to provide money for technical assistance to young startup organizations who need certain consulting or training help to help them develop their organizations.
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Ms. KILPATRICK. I can't see the poster there. That is OK, you don't have to turn it. I would like a copy, I mean, it has got to be somewhere else where I can get a hard copy of that.
Ms. LAZAR. We will be glad to get that.
Ms. KILPATRICK. Can staff or somebody tell me what Michigan has on this?
Ms. LAZAR. I think I can tell you quickly. Hold on one second.
Ms. KILPATRICK. Please.
Ms. LAZAR. In Michigan we have made an award to Neighborhoods, Inc. of Battle Creek. We haven't made any Bank Enterprise Awards in Michigan, but we have four certified CDFIs in Michigan.
Ms. KILPATRICK. Right. And that was my point. I am familiar, in working with them, one of them is in my area in the empowerment zone and I am not so sure that they have done anything yet. I think they are starting up and are on the road to success, but I would hope with your assistance and others that they do have movement there.
I do want to commend you for the administrative changes you made in terms of implementing some of the concerns that Mr. Bachus' report speaks to. Our Chairperson was asking, did you think many of those need to be in statutory authority or did you think administratively you can do it?
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I tend to think administratively much of that can be worked out, and hope in your present positionand congratulations on thatthat you would work diligently so we don't have to have statutory language, but that administratively we can see the Fund working efficiently as we move to the new millennium.
Ms. LAZAR. Thank you.
Ms. KILPATRICK. Thank you.
Mr. VENTO. Madam Chairwoman, I would ask consent that all Members have the opportunity to put opening statements in the record, without objection.
Chairwoman ROUKEMA. Yes, of course, unanimous consent is granted.
Mrs. KELLY. Thank you, Madam Chairwoman. I only want congratulate you for holding these hearings. I think we have brought out a number of answers to many of the questions, just your testimony and prior questions. I have no questions at this time, but I do hope you will hold the record of the hearing open so that if there are questions that come out of later testimony, we can add those in.
Chairwoman ROUKEMA. Yes, that is an excellent suggestion. And I will recommend by unanimous consent that the record be held open, and I know that these panelists will be open for written responses to further questions.
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Mrs. KELLY. Thank you very much.
Chairwoman ROUKEMA. Thank you.
Mr. SHERMAN. I am new to this subcommittee, and so I need to get some basic background about your organization. You are seeking now $125 million, and I assume that will be grants to those financial institutions and other lenders who are willing to make loans that are in poorer areas; is that generally correct? This is chiefly for grants, not for loans?
Mr. HAWKE. Well, they can go for grants or for loans and other forms of assistance. But the principal component of what has been done so far has been grants, I believe.
Mr. SHERMAN. Now, if you have made loans in prior years, I assume those loans are paid back to you. Do those loan repayments go to the Treasury, or do they go to your funds so that you can loan or grant those funds in the future?
Mr. JONES. They go to the Treasury, unfortunately.
Mr. SHERMAN. To the Treasury.
Page 43 PREV PAGE TOP OF DOC Mr. JONES. We can't
Mr. SHERMAN. So you have a bias, then, in favor of making grants rather than loans, because many financial institutions will say, look, sure, we will lend $50 million in an impacted area, and we will do it if you either loan us $25 million or give us $5 million. And as far as you are concerned, it is money out the door for your entity, looking only at your own entity, whether it is a $25 million loan or a $5 million grant; is that correct?
Mr. HAWKE. There are very important reasons for having grants rather than loans, Mr. Sherman. When you make a grant, it becomes part of the capital of the financial institution that is the recipient, and that then has to be matched dollar-for-dollar by a private contribution. So initially it leverages one-for-one with a private contribution that also must become part of the capital base. That capital base can then be leveraged on by the institution to borrow money from third parties.
Mr. SHERMAN. Of course, if you bought stock in a bank you would achieve the same thing, and you would own the stock, you wouldn't be making a contribution to the
Mr. HAWKE. That is essentially what this is; it is like buying stock.
Mr. SHERMAN. No, these are grants, you don't buy stock in a small bank.
Page 44 PREV PAGE TOP OF DOC What portion of the $125 million would you anticipate would go to nonprofit organizations and what percentage would go to private sector for-profit organizations, based on the experiences you have had over the last couple of years?
Mr. JONES. Well, under the CDFI programtwo big programs we are talking about hereunder the CDFI program, if history is any measure of what will happen in the future, perhaps two-thirds of the awards will be grants and perhaps two-thirds of the recipients will be also not-for-profits.
Mr. SHERMAN. So about two-thirds goes to nonprofit financial institutions. They may, in turn, get much of their capital from banks and more traditional for-profit organizations. And then one-third would go to for-profit organizations?
Mr. JONES. That is correct.
Mr. SHERMAN. These for-profit organizations, do they themselves have to be headquartered in disadvantaged areas, or do they simply have to undertake to make loans in the disadvantaged areas?
Mr. JONES. It is the same requirements imposed on for-profits as not-for-profits. They have to have a primary mission of promoting community development. They have to serve a targeted area which is distressed. They have to be predominantly financing entities. They cannot be government entities. They have to be accountable to the distressed areas that they are serving, and they have to provide development services to their borrowers.
Page 45 PREV PAGE TOP OF DOC Mr. SHERMAN. So Bank of America can't set up a little business lending office in a poor part of California, because their primary mission of the bank as a whole, even if theycould they create a subsidiary that would have
Mr. JONES. No, sir, they couldn't. When you look at the primary mission test, it applies to both the applicant and its affiliates. So Bank of America or a subsidiary thereof could never be a CDFI. Now Bank of America could get money from us under our BEA program, and I am sure they have.
Mr. SHERMAN. BEA stands for?
Mr. JONES. Bank Enterprise Award program.
Mr. VENTO. If the gentleman will yield, we will have to go on a vote, but I would just say there is a whole business plan for five years that each of these grant recipients and loan recipients have to make out; is that correct?
Mr. JONES. Not only is there a business plan, when you ask do we care about our monies, absolutely. In fact, we care about them so much that we impose performance goals on every institution that gets money from us, and if they don't perform, we put these performance goals in a legally binding contract so that we can actually declare them to be in default and, believe it or not, get back that grant money.
Mr. SHERMAN. I am sure you are very dedicated to the goals of the organization, not out there trying to waste taxpayers money. It is just if you have a choice between making a loan or a grant, I am not at all surprised that the vast majority of your financial transactions are grants, but they are grants designed to create the desired effect.
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Mr. VENTO. I think it is also important to point out that there is a matching requirement for the grant, and I don't know how there is a matching requirement for loans. It is substantially different. And that means there isn't just public dollars, there are private dollars that are also put in place. So this is an additional safeguard.
Mr. JONES. If I can just add just a short note on that. We don't actually have an incentive to make any particular type of investment. What we do is, if an institution can provide matching monies in the form of a grant, that is what we give them. It just so happens that most of our institutions fortunately have been able to actually get grant monies. But where their match money is equity, we are happy to make equity. We are happy to make the shares.
Mr. HAWKE. I don't want to lose the point either, but you get leverage out of a grant that you don't get out of a loan.
Mr. SHERMAN. That is the point I am making. If you have a dollar you can grant, you will get very substantial pledges from the institution you make that grant to. If you merely make a loan of the same amount to that organization, they will do less. You would expect them to do less. Given the fact that when you make a loan, you never see the money back, I would suspect that you would get the most effect for the goals that your organization is trying to achieve by making grants and by demanding that the organizations that receive these grantsI do know we have to go.
Chairwoman ROUKEMA. A new aspect of the subject that you might want to put more in writing. We are going to have to go or we are going to miss this vote.
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I thought we were going to be able to dismiss you. I am afraid not. We do another question for Chairman Bachus, and I don't think we have enough time before this vote to ask.
Mr. BACHUS. I just want to ask you a question. I just want to point out to you, on page 85 of this bound report it talks about something which is the 8(a) set-aside programs for basically the minority set-aside entity or the Native American entity. In one case was basically used as a pass-through, which I think is abuse of the goals of 8(a).
And we are looking forward, but I hope in the future we don't abuse this 8(a) program, because it brings criticism to the 8(a) program and to affirmative action, and particularly people that support affirmative action ought to be very sensitive to this.
Secretary HAWKE. We are not going to use the 8(a) program for procurements going forward, Mr. Bachus.
Chairwoman ROUKEMA. Excuse me. Should we release these prisoners?
Mr. BACHUS. Yes. He answered what I want.
Chairwoman ROUKEMA. We have five minutes, but I invite you to submit in writing any further comments on Mr. Sherman or Chairman Bachus' questions.
Page 48 PREV PAGE TOP OF DOC Mr. HAWKE. We would be happy to respond in writing to any questions that you have or come up and brief you, Mr. Sherman, on any issues if you care to have that done.
Mr. SHERMAN. I appreciate that.
Chairwoman ROUKEMA. We stand in recess.
Chairwoman ROUKEMA. We will call this hearing to order. They say time flies when you are having fun. I don't know how it got to be 20 after 5 p.m., but it is. Mr. Vento is enroute here and he sent word that we should begin. He will be here momentarily.
I do also have the request, which we are all in agreement with, that Mr. Clifford Rosenthal, who is here I believe for technically a third panel, but we would be very pleased, Mr. Rosenthal, if you would come up and join us at the table here and be part of the second panel. That will, I believe, be a more efficient way of handling this today, given the time and given the fact that there will be more votes this afternoon.
The panel members I have, there are more people there than I have names for. Let me introduce, mention those thatI am sorry. We have both Mr. Calahan and Mr. Dennis Schindel. I do see both those names.
First, Mr. Calahan is the Deputy Inspector General for the Department of the Treasury's Office of the Inspector General, just the objective kind of person we need here today. And Mr. Dennis Schindel is Assistant Inspector General for the Audit Department.
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We also have Judy England-Joseph, who serves as Director of Housing and Community Development Issues, Resources, Community and Economic Development of the General Accounting Office. Is that a full title for you?
Ms. ENGLAND-JOSEPH. No, but housing and community development works.
Chairwoman ROUKEMA. But you deal with those other issues?
Ms. ENGLAND-JOSEPH. Absolutely.
Chairwoman ROUKEMA. All right. And also Patricia Donahue, also of GAO. We appreciate it. We are very eager to hear from the GAO.
Our additional witness, Karyn Molnar, is a partner with KPMG Peat Marwick, and it is my understanding that Ms. Molnar has extensive experience in public accounting and that very important experience with respect to CDFI Fund issues, as you have already heard them alluded to.
Then our final witness is Clifford Rosenthal, a founding member of the Community Development Financial Institutions Coalition, a coalition of more than 350 CDFIs across the country. I believe you serve as an executive director of one of them. The National Federation of Community Development Credit Unions. All right. Thank you.
Page 50 PREV PAGE TOP OF DOC Without further ado, we will start testimony by the panel with our first witness, Mr. Calahan.
Mr. CALAHAN. Thank you.
Chairwoman ROUKEMA. Do each of you have testimony or is it one testimony?
Mr. CALAHAN. Just one.
Chairwoman ROUKEMA. Thank you.
STATEMENT OF RICHARD B. CALAHAN, DEPUTY INSPECTOR GENERAL, DEPARTMENT OF THE TREASURY, OFFICE OF INSPECTOR GENERAL, ACCOMPANIED BY DENNIS SCHINDEL, ASSISTANT INSPECTOR GENERAL FOR AUDIT
Mr. CALAHAN. Madam Chairwoman, Members of the subcommittee, we appreciate the opportunity to discuss with you today our products on the CDFI, and at this point I would like to request that our long statement be submitted in its entirety for the record.
Chairwoman ROUKEMA. Without exception and for all the panel members, all the testimony will be included in full in the official record of the hearing. Continue, please.
Mr. CALAHAN. At the time the Fund was transferred to the Treasury Department in July of 1995, the Office of Inspector General was asked by departmental officials to provide some advice to CDFI. We provided advice on program procedures in the form of two technical assistance reports produced by our Office of Evaluations.
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The first report provided information to CDFI on procedures for accepting applications for assistance and awarding assistance. We pointed out the benefits of establishing a numeric scoring system and the need to maintain extensive documentation, especially if a numeric scoring system was not used.
The second technical assistance report provided information to CDFI on award monitoring. In this report we pointed out the importance of establishing performance requirements, payment schedules, reporting requirements and award close-out procedures.
We subsequently became aware that unresolved issues continued to be raised in the department regarding the provision of accounting and other support services to CDFI. As a result of these issues and others involving special initiatives in the department, the OIG began a series of four case studies to determine how such initiatives could benefit from lessons learned. CDFI was one of these case studies.
Our review of the implementation of CDFI found several deficiencies. We found that no written implementation plans and no analysis of the implementation effort identifying issues, the mission and objectives, the funding sources, and so forth, was completed when CDFI was first transferred to Treasury. Early-on there was significant confusion regarding the organizational placement of CDFI within the department.
Our suggestions from this study focused on designing and implementing detailed planning processes for high priority projects and special endeavors, and increasing oversight from the senior management group. The department generally agreed with our findings and suggestions.
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In April 1997, after receiving complaints about the application review and award process, staff members of the General Oversight and Investigations Subcommittee of the House Committee on Banking and Financial Services initiated a review of CDFI's first round of awards. They discovered a lack of documentation. They also discovered undated memoranda in four application files.
When the Secretary was subsequently asked to provide an explanation for the undated memoranda, his office requested that we conduct an investigation into this matter. Our investigation, completed in August 1997, confirmed that the memoranda in question had been prepared the night before the congressional staff's visit.
After the investigation was completed, we initiated a previously planned audit of CDFI. The scope of our audit was limited to application review and application selection processes only. Our review found that the BEA program was well documented and followed procedures specified in the interim regulations which were published in the Federal Register.
However, this was not the case with the CDFI program. Our review confirmed that the procedures for the fiscal year 1996 CDFI application and review and award process were not well documented. There was also a significant lack of documentation to support conclusions and decisions made in this first round of awards. The process used to award CDFI Funds in fiscal year 1996 was changed from what was published in the Federal Register but these changes were not adequately documented.
The following year, fiscal year 1997, under new management, the CDFI created procedures governing the application review process. Our review of selected fiscal year 1997 CDFI applications and of controls established for handling them revealed that the new procedures instituted for the second round were followed, resulting in extensive documentation of every step of the review and decision process.
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The standard review forms contained the same five evaluation categories as in fiscal year 1996, but a rating system had been established and was followed in all cases. Each file contained a list of applicant contacts, an interview guide and a list of suggested supplemental information to request. The evaluation forms had numeric ratings and were signed by reviewers. The forms had recommendations and were approved by the director.
Additionally, we found that the fiscal year 1997 BEA program application and selection process was well documented, and sample application files reviewed were consistently organized and used standard forms.
Therefore, our work indicates that after the problems that developed in fiscal year 1996, there has been substantial energy expended to remedy deficiencies. While additional improvements may enhance the award process, the basic structure of an objective CDFI award process seems to have been established. The Fund has hired an experienced Federal grants manager and an experienced Federal CFO who should be able to provide the expertise for strengthening awards and controls.
We will soon issue a draft report on the CDFI application review process that discusses this matter.
In closing, we believe CDFI has weathered a difficult start, but is now taking steps to follow accepted Federal processes for assistance programs and is open to suggestions for methods to strengthen its operations.
Page 54 PREV PAGE TOP OF DOC This concludes my prepared statement.
Chairwoman ROUKEMA. Thank you.
Ms. England-Joseph, please, the GAO.
STATEMENT OF JUDY A. ENGLAND-JOSEPH, DIRECTOR OF HOUSING AND COMMUNITY DEVELOPMENT ISSUES, RESOURCES, COMMUNITY AND ECONOMIC DEVELOPMENT, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY PATRICIA DONAHUE
Ms. ENGLAND-JOSEPH. Madam Chairwoman and Members of the subcommittee, we are pleased to be here today to discuss the work we have ongoing at the Community Development Financial Institutions Fund, an organization that we too feel has a mission that is critically important to distressed communities. Our review focuses on the first years of the CDFI and Bank Enterprise Award, or BEA, programs. Because participants in the first round of the CDFI program are just beginning to report their preliminary results, our work focuses on the Fund's progress in developing performance measures for awardees and systems to monitor and evaluate their progress.
In contrast, because participants in the first round of the BEA program have largely completed the activities for which they were rewarded, our work discusses the impact of the program on banks' investments in CDFIs and distressed communities.
Finally, we reviewed the Fund's progress in meeting the strategic planning requirements of the Government Performance and Results Act of 1993. My testimony is based on the experience of the 31 CDFIs and 38 banks that received 1996 awards. To obtain in-depth information about the two programs not available here in Washington, we visited six CDFIs and five participating banks.
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In summary, Madam Chairwoman, our analysis shows the following:
By January of this year, the Fund had entered into assistance agreements with 26 of the 31 CDFIs that received awards in 1996. These agreements include performance goals and measures that were based on the awardees' business plans and negotiated between the Fund and the awardees as the CDFI Act requires and is consistent with the program's objectives.
To evaluate the performance goals and measures the Fund negotiated with the CDFIs, we used the Results Act guidance in part because the CDFI Act provides no specific guidance for such evaluation and in part because the Results Act is commonly accepted as the Federal Government's standard for performance measurement.
We found that the performance measures generally assess activities, such as the number of loans a CDFI has made, rather than accomplishments, reflecting the results of a CDFI's activities, such as the number of new low-income homeowners. This emphasis was due in part to difficulties in isolating and assessing the results of community development initiatives. Such results may not be observable for many years and may be subject to factors outside the awardee's control.
As a result, CDFIs are reluctant to commit in writing to completing accomplishments. Nonetheless, it is what CDFIs accomplish, using the assistance they get from the Fund, that will help provide you and others in the Congress a full assessment of this program and enable a better understanding of what specifically works in distressed communities and what does not. Leveraging knowledge about what works, as well as leveraging dollars, in distressed communities is critically needed.
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We also found that although the performance measures in the assistance agreements are generally related to specific goals, they do not always address all key aspects of those goals; and most of the assistance agreements lack baseline data that would facilitate tracking progress over time.
More importantly, though, the Fund did not develop monitoring and evaluation procedures for the CDFI program during its early years, primarily because of staffing limitations. Recently, the Congress increased the Fund's staffing levels, and newly hired managers are now focusing on these important tasks.
In the BEA program, the Fund has disbursed about 80 percent of the 1996 award funds, but it is difficult to determine how much of the program's awards actually encourage the 38 banks to increase their investments in CDFIs and distressed communities. According to our case studies of five banks and interviews with Fund officials, the prospect of receiving a BEA award prompted some banks to increase their investments or consider some they would not have otherwise made. However, it had little or no effect on other banks. We found that in general other regulatory or economic incentives exerted a stronger influence on banks' investments than did the BEA award.
For example, banks told us that they invested in distressed communities because they needed to comply with the Community Reinvestment Act, wanted to expand or maintain market share, or were seeking to improve community relations in distressed areas. We also found that some banks do not collect all of the data on their activities needed to guarantee that increased investments that the BEA program rewards are not being offset by decreases in other investments in these same distressed areas.
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Finally, according to the Fund, most banks have said that they are reinvesting their award funds in loans or investments supporting community development.
In closing, I would not characterize our work as critical of the Fund and its programs. Our review has identified several opportunities for the Fund to improve the effectiveness of both the BEA and CDFI programs and of its strategic planning effort. In our view, the Fund has these opportunities in part because it is new and is experiencing the typical growing pains associated with setting up an agency, particularly one that has the relatively complex and long-term mission of promoting economic revitalization and community development in low-income communities.
Also staffing limitations have delayed the development of monitoring and evaluation systems. However, the Fund has decided recently to hire several senior staff, including a chief financial officer, and is reportedly close to hiring an evaluations director.
It is too soon to assess the impact of filling these positions. However, the new managers have initiated actions to improve the Fund's programs and its strategic plan. And in our final report to you and other congressional customers, we expect to make recommendations to further improve the operations of the CDFI Fund and its programs.
Madam Chairwoman, that concludes my statement. I would be happy to answer any questions you or Mr. Vento may have.
Chairwoman ROUKEMA. Ms. Molnar of Peat Marwick.
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STATEMENT OF KARYN L. MOLNAR, PARTNER, KPMG PEAT MARWICK LLP
Ms. MOLNAR. Thank you. Good afternoon, Madam Chairwoman, Members of the subcommittee. I am pleased to be here today on behalf of my firm, KPMG Peat Marwick LLP, to provide information regarding our audit of the Community Development Financial Institutions Fund. My name is Karyn Molnar. I am an audit partner with our firm and was responsible for the CDFI Fund audit.
We completed the first-ever audit of the financial statements of the CDFI Fund since its inception in 1995. We issued an unqualified or clean opinion on the CDFI Fund's financial operations for the fiscal years 1997, 1996 and 1995.
We also issued reports on the CDFI Fund's internal controls and on its compliance with laws and regulations. These reports identified two conditions which we considered material weaknesses in internal controls and two related instances of noncompliance with laws and regulations. A material weakness in internal controls is a condition in which the design of specific internal control components does not reduce to a relatively low level the risk that a misstatement that would be material to the financial statements could occur and not be detected by employees in the normal course of performing their duties.
It means the conditions are such that a material misstatement of the financial statements is possible, but it does not mean that a misstatement has occurred.
Page 59 PREV PAGE TOP OF DOC The first material weakness we identified was the lack of a formal process, as required by the Federal Managers Financial Integrity Act, to establish and evaluate on a continuing basis an effective system of internal controls. We believe this weakness arose primarily because critical management personnel, with specific responsibility and accountability for this function, were not in place during the CDFI Fund's initial operating period.
As the CDFI Fund's program activities began to increase, it became apparent that separate financially accountable management for the CDFI Fund was essential. A chief financial officer was appointed in November 1997, and since then, corrective actions have begun to be taken to strengthen internal controls and address financial management and awards administration and monitoring problems.
We recommended the highest priority be placed on filling the remaining essential management positions and on developing procedures to assess the effectiveness of internal controls. Our recommendations place particular emphasis on the need to develop policies and procedures for an awards administration and monitoring function.
CDFI Fund management agreed with our findings and recommendations and assured us that corrective actions were in the process of being taken. However, we have not reviewed the status of any such corrective actions since the completion of our audit procedures in February of this year.
The second material weakness we identified was an incorrect method of accounting for grants and awards. This resulted in a significant understatement of amounts due to awardees of the grant award programs. This error was corrected before the financial statements were issued.
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The reported instances of noncompliance with laws and regulations were interrelated with the first material weakness I discussed; that is, the CDFI Fund did not and, in fact, could not, with its limited staff, comply with the provisions of the Federal Managers Financial Integrity Act and, as a result, also did not comply with the Federal Financial Management Improvement Act related to maintenance of proper financial management systems.
These compliance deviations will be corrected as the CDFI Fund's management addresses our recommendations for improvements in internal controls.
In conclusion, it is essential that CDFI Fund management continue to pursue its initiatives to strengthen internal controls and establish policies and procedures to effectively manage its financial operations and monitor the performance of its awardees. Failure to do so could result in material misstatements of the CDFI Fund's financial statements.
Thank you for the opportunity to be here. I would be pleased to address any questions you may have.
Chairwoman ROUKEMA. Thank you.
Mr. Rosenthal of the Community Development Financial Institutions Coalition.
STATEMENT OF CLIFFORD ROSENTHAL, ON BEHALF OF THE COALITION OF COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS
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Mr. ROSENTHAL. Thank you very much, Chairwoman Roukema and Mr. Vento.
I won't prevail upon your time to read in full the testimony that has been prepared. I hope you will introduce that into the record.
Chairwoman ROUKEMA. Yes, that has been, by unanimous consent, applied to all testimony.
Mr. ROSENTHAL. Thank you very much.
I do represent the Coalition of Community Development Financial Institutions, a private sector entity which represents approximately 350 Community Development Financial Institutions, or CDFIs, around the country.
I would stress that, above all, these are private sector entities. They are institutions, and really the whole business of the CDFI Fund is to enhance the infrastructure and build institutions that can play an important role in community development, not only now but for years and decades to come. We think it is a tremendously valuable program, and we unequivocally and enthusiastically support and urge you to reauthorize the CDFI Fund.
I would like to address some of the questions that I understand are of particular interest to the subcommittee. One of them, I believe, is the issue of demand. As I mentioned there are approximately 350 CDFIs represented by our coalition. Less than a fifth of those institutions have received support up to this point, so we are really quite confident that there is a strong and ongoing demand for the program.
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Speaking for my own organization, the National Federation of Community Development Credit Unions, we have 170 member institutions around the country and scarcely 10 percent of those have yet benefited from the CDFI Fund. So we certainly believe that the demand justifies continuing reauthorization and appropriations.
The Bank Enterprise Award indeed has done some significant good for our field. It has encouraged the development of partnerships with CDFIs. It has encouraged increased investment in community development financial institutions and distressed communities. We do not think, however, that it is in any way a substitute for a strong, healthy, growing CDFI industry.
We do think that demand is going to continue to grow for CDFI Fund support in the future, not only simply on the basis of those who have applied up to this point, but because of some of the initiatives that the CDFI Fund has taken, including its training and technical assistance initiative. We feel very strongly that over time, that program is going to help develop the capacity of institutions which may not yet have qualified for fundingor may not have even applied, because we know there are many of those out there as well. So we think that initiatives like the training and technical assistance one undertaken by the Fund are going to help develop and grow the field.
Around the issue of startups, which I believe the subcommittee is concerned about, and certainly we are as well, we do think that this is an important part of the CDFI Fund mission, nuturing and helping the expansion of startup institutions. The technical assistance piece will clearly play an important role in the process.
Page 63 PREV PAGE TOP OF DOC Other strategies that the CDFI Fund has begun to implement will help as well, such as the intermediary round of funding which they introduced last year. That has helped organizations like ours spread the resources out much more broadly among many institutions that are quite small, and some of which are quite new as well.
In terms of suggestions for improvement or changes that we believe should be made to the CDFI Fund, going forward in a reauthorization, we do clearly believe that a permanent Fund would be very valuable to the field. As I think subcommittee Members have recognized, results of these kind of investments are not immediately apparent. It can't happen in six months, a year, or two years. So I believe I heard the timeframe of five years suggested. I think that would be an appropriate starting point to begin to document some of the long-term impacts.
We, as a coalition, would strongly like to recommend that the CDFI Fund, as a priority, create what we call an ''easy-access window'' as part of its core component. This window would be designed to increase the participation of smaller and emerging CDFIs by streamlining the application process and accordingly limiting the amount of capital that applicants could request, perhaps to a cap of $100,000 per applicant. In other words, streamline the process, but with the understanding that you could only apply for a limited amount of funds in this streamlined manner.
Furthermore, I guess what we would like to emphasize in closing is the terrific progress that we have seen in the CDFI Fund over the last couple of years. We understand the basis for some of the criticisms that were made, even though we would not necessarily agree with all of them. I would say that the progress in administration of the Fund, of staffing it up to its capacity, have been very palpable, very tangible to us.
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We see the improvements taking place, and we are quite confident that in the future those improvements are going to bear fruit. It has been in a process not only of administrative improvement, we think, but of improvement in developing and expanding and diversifying the strategies that the Fund is able to employto add training and technical assistance; to add the intermediary round; and we would hope to add the easy-access round. We think that those sorts of changes are going to make the Fund even more valuable in the future than it is now. We hope you will allow it to continue and expand.
Thank you very much. I will be glad to answer any questions.
Chairwoman ROUKEMA. Thank you. I will say forthrightly Mr. Rosenthal, I heard some of your testimony. Could you see I was also editing something else at the same time? I would pledge to you that I will go over your testimony carefully.
On the face of it, however, this idea of capping something does not necessarily meet with what I believe to be in the best interests of the development of the program, but I am going to be interested in exploring it. I don't know that anybody else has made that proposal, but I will try to keep an open mind.
I am much more concerned, as you have heard in my previous questioning, with whether or not we now are in a position, having examined with objective people like yourselves and the groups that you representwhether or not we have not only put in place administrative and responsible officials in the Department of the Treasury for handling this program and correcting past neglect, if not abuse and corruption, as some have identified it.
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But I want the benefit of your experience to tell me whether or not, and this is my interest, what, if anything, aside from proper administration, we should be putting in the statute to assure that these reforms are permanent and are truly being complied with, or not at someone else's discretion?
I don't know, maybe that is not possible. But you have heard my questions to Treasury and to Ms. Lazar earlier. But, Mr. Calahan or the GAO, Ms. England-Joseph, or Ms. Molnar, from your accounting background, havingfirst of all, let me go back and say, you will have a draft report soon. How soon? How soon? Will it be in ample time? You referenced a draft report. Will it be in ample time for us to study in depth before we go into reauthorization here, which we are thinking of in September.
Mr. CALAHAN. Our draft report will be out at the end of this month, end of June.
Chairwoman ROUKEMA. And GAO, you referenced a report.
Ms. ENGLAND-JOSEPH. Our report is in draft right now. The agency has it, as well as certain congressional customers.
Chairwoman ROUKEMA. We will have it in ample time?
Mr. CALAHAN. In terms of your question
Page 66 PREV PAGE TOP OF DOC Chairwoman ROUKEMA. And specifically, there are more areas, but specifically the one note that I wrote down, you are talking about the audits now being satisfactory. I am not sure. Are they random audits or should there be more statutory requirements as far as the audits, for example?
Mr. CALAHAN. In terms of statutory requirements, I think that in terms of the application review process, that it may not be necessary for the reason that the institution seems to be in an improvement mode. They are receptive to feedback from not just the IG's office, but I think GAO and the public accounting firm as well. And I think that mandating things in the Public Law might actually get in the way of making improvements.
If you allow them to do this administratively, it gives them the flexibility from one year to the next to learn from mistakes and to improve on their practices. I think, in terms of making changes to Public Law that mandating specific requirements could make it necessary for CDFI to come back to the Hill every year to make those kinds of improvements they will need to make as the program matures.
Chairwoman ROUKEMA. Are the investigations from your department totally discretionary? I mean, as the inspector general, you don't go in and do random audits necessarily only when charged by
Mr. CALAHAN. We have the authority to begin an audit or an investigation on our own authority.
Chairwoman ROUKEMA. You don't do it on a rotating basis necessarily?
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Mr. CALAHAN. Not necessarily, that is true.
Chairwoman ROUKEMA. I see. Ms. England-Joseph.
Ms. ENGLAND-JOSEPH. In reaction to your question about statutory suggestions, I think the CDFI legislation currently requires a number of things, and I think the frustration you and others have is that you had good legislation that maybe has not been implemented the way you intended.
It may be that, rather than additional legislative requirements, having regular oversight of the Fund and the Fund's activities might be appropriate. Certainly you are going to have annual audits, and you will be able to get the kind of information that you have heard this afternoon in terms of the kinds of material weaknesses that need to be addressed and dealt with or may continue to be a problem that need to be fixed.
I think that through the work of the IG, GAO and certainly the Fund itself to report to you on the status of a lot of these changes and improvements would be critical.
Chairwoman ROUKEMA. In that connection, correct me if I am wrong, Ms. Molnar; did you not reference that you found material weakness in the internal controls? Is there anything from your point of view that we should go beyond in terms of the statutory requirements?
Ms. MOLNAR. In respect to the identification of material weaknesses, there is already in the regulations the law that I referred to. The Federal Managers Financial Integrity Act does require them already to put in place a system to review internal controls and to have an effective system in place.
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Chairwoman ROUKEMA. How do we get at that noncompliance you referenced? You referenced noncompliance with existing laws and regulations. How do we get at that?
Mr. CALAHAN. The financial
Chairwoman ROUKEMA. Unless, after the fact, when there are clear indications of abuse.
I am sorry, Mr. Calahan.
Mr. CALAHAN. The financial statement audit occurs every year so that discipline of the financial statement audit will necessarily relate to an annual review of internal controls. So over a period of time there will be natural follow-up to the recommendations that have already been made in that area. And you should see, I think, a rather rapid improvement, probably, in that area if the Fund responds to those recommendations.
Chairwoman ROUKEMA. Yes. Further comment?
Ms. MOLNAR. The only thing I could add to that is that the CDFI Fund management has developed, we understand, a corrective action plan to address those material weaknesses. That is a part of an annual audit review before we start the next year's audit, just to add to what Mr. Calahan said.
Page 69 PREV PAGE TOP OF DOC Chairwoman ROUKEMA. I am sorry. Did you address yourself to the objective scoring system or not in your statement?
Ms. MOLNAR. No, I did not.
Chairwoman ROUKEMA. Any comment, Mr. Calahan?
Mr. CALAHAN. One additional point I could make is that the recommendations from the public accounting firm go into the department's control system on recommendations, just like recommendations from our office would, so that there is continuous feedback and control over those recommendations and so that there is a continuous responsive discipline regarding those matters.
Chairwoman ROUKEMA. If my colleague would just give me one more minute here, there isI believe in Mr. Bachus' Oversight Subcommittee recommendations, among thema reference to identify the most important selection factors and incorporate them in a scoring system that is fully disclosed to applicants. I don't know if that is a requirement of the law now or if it should be.
If we don't have time today, maybe that specific, if you could put in writing your reaction to that, because it was a specific recommendation of the Oversight Subcommittee. Would you be able to
Ms. ENGLAND-JOSEPH. In our work, we looked at the process after the awardees were selected, so I would not be in a position to really react to that.
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Chairwoman ROUKEMA. But certainly the Inspector General.
Mr. CALAHAN. We would be happy to provide you written comments on that.
Chairwoman ROUKEMA. Thank you. Appreciate it.
Chairwoman ROUKEMA. Mr. Vento.
Mr. VENTO. We could always have them consult with HUD with regard to how they give out categorical grants. Unfortunately, I don't know that there is any easy answer to it. I noted that Mr. Hawke, Under Secretary Hawke, pointed out that he hadwhile he was interested in some sort of numerical scoring, that he was willing to work with that, that there were a substantial number of subjective factors that probably, by design, need to be in place. I think that is one of the reasons we had the follow-up type of review with the unsuccessful applicants.
In any of these grants procedures, as I have come to know them over the years that I have worked with grant procedures, there is a feedback mechanism in terms of where the grant writer or applicant receives some instruction, even in the process on a minor basis to try and fulfill whatever the requirements are.
Of course here we are, in a sense, for Treasury and for this program, trying to construct something from the statute. I don't know if there are weaknesses in it, or we need to give more direction. I would think that we might want to be very careful in terms of that, but in any case, there was no evaluation of, by the inspector general of the grant-making process in terms of this assessment process; is that right?
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Could you make an assessment of that, of the grant application process? You didn't look atyou understood there was not a scoring system in place?
Mr. SCHINDEL. That is correct. We did look at, of course, both the first and second round, and we did note that the second round had a much more well-documented, objective structure to it. They did use a scoring system. There are probably opportunities to make it even more objective. And I think that we would agree that there is always going to be a certain amount of subjectivity even to introducing a numeric scoring system.
But they did attempt, in the second round, to introduce a scoring system and carry forward to both the initial application review stage and the subsequent review stage, which has three panel members reviewing the applications.
Mr. VENTO. Does anyone else have any comments on that?
Mr. CALAHAN. Could I just add to that? The fact that the second round process had documented procedures and that there was documentation in the files to show that those procedures were followed, it is difficult to exaggerate the significance of that compared with the first year. That is a tremendous improvement right there. It gets to the point that I think the under secretary was making earlier about transparency of decisionmaking, that for the first round it is difficult to conclude how decisions were made.
Page 72 PREV PAGE TOP OF DOC For the second round, you can conclude that, I think. And I think that is a really significant improvement.
Mr. VENTO. Ms. Molnar, the issue that the Department of Treasury has provided us with a chart with regard to your evaluations, the KPMG recommendations, and the material weaknesses. Have you had a chance to look at that chart?
Ms. MOLNAR. No, I have not.
Mr. VENTO. Well, I think that, for the record, it would be helpful if you could look at that and determine what your evaluation is of these particular assessments on this chart, as to whether or not these activitiesI know you have no way of going back and looking at the corrective action plan and evaluating it, but just in terms of reading this to determine whether or not you agree that this corrective action plan that has been suggested, or current status information, which would be new to you since you haven't had a chance to look at it, satisfies your concerns; or if there is any advice or any deficiencies that exist that you would point out.
It would be, I think, very valuable insofar as you have done the other work, to sort of have a fifth column on here as to whether or not they get a passing grade at this point.
Ms. MOLNAR. Our review, the beginning of our next audit for the fiscal year 1998, will encompass looking at their corrective action plan, which is what I believe you are referring to. That will guide how we will conduct our audit in 1998 as far as designing audit procedures.
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Mr. VENTO. We don't have time. Hopefully, we will be marking this up at some point, I hope before September.
I think that one ofthere are a lot of concerns here. For instance, did any of you look at theI don't know that this has happened yet, but how many, how much evaluation, if any, has there been of the business plans that have been submitted? Did the inspector general or the GAO or others look at those?
I see we are looking to Patricia Donahue as our person to respond to that.
Ms. DONAHUE. As part of our case studies of the six CDFIs that participated in the CDFI program, we did look at their business plans and compared the performance measures that the awardee had offered in their business plan against the negotiated performance goals and measures that were found in their closed assistance agreements. So that was the context within which we were looking at the business plans.
Mr. VENTO. And any reaction to these business plans? I mean, obviously we don't know how they performed after 16 months, but this is one of the problems we have with evaluating or reauthorizing a program that has a five-year business plan, but on a paper basis?
Ms. DONAHUE. Within the context, we were looking at their relative use of the different types of performance measures, and what we found was that in the business plans they tended to use the types of measures that describe how the awardee intended to affect the communities that they serve. They were using what we referred to as ''accomplishment measures.''
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In contrast, we found that the assistance agreements that the Fund negotiated tended to have measures that talked more about the activities of the awardee, such as the volume of loans that they were doing. So we felt as though the business plans had more accomplishment measures.
Mr. VENTO. I might say, in this context, I think I understand, and we are obviouslyI am trespassing on the time of everyone here. But the enthusiasm to go to GPRA, I don't know if that is what we need since we find few Federal agencies that have satisfied this.
I sat through a hearing in the Department of Interior and they were told they had too much detail, which was apparently one of the few exceptions.
Ms. ENGLAND-JOSEPH. I think, in answer to your question about the business plans in general, while we did not analyze every business plan, it was clear from the business plans that we reviewed showed that the communities or the CDFIs really understood their communities. There was information in these plans that showed that they had done research about the communities that they were serving or intending to serve, the target population and the extent of need in those areas; and how the need that they identified in those communities could be served by these CDFIs and the resources that would be available through grants or equity investments.
So I think, to the extent that you are asking how did these business plans seem to reflect the overall intent of the legislation and the desire of the program to focus money into distressed communities, we clearly saw that.
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Mr. VENTO. This is very helpful.
Just one more question for Mr. Rosenthal. There are a lot of questions I would like to ask this panel.
Mr. Rosenthal, as an advocate, do you have any guidance for us in terms of the split of the dollars that have occurred between the Community Development Financial Institutions programs and the BEA programs?
Mr. ROSENTHAL. Yes. Certainly, as a CDFI practitioner and advocate, I feel very strongly that the current balance, which I believe is targeted at two-thirds for CDFIs and one-third for Bank Enterprise Act, is a rather appropriate one. I would not like to see the balance swing necessarily more toward the BEA component of the program.
Mr. VENTO. Does this sort of have some symmetry with regard to the number of applications or where you anticipate growth will occur in the nextI noticed that in one of the rounds, the bank enhancement program part did not use all of the dollars. They tended to be, I guess, using more of them now.
But is there some symmetry here in terms of where the demand might be in terms of growth?
Mr. ROSENTHAL. That is my impression as well, that the disproportion of demand to supply was greater for the CDFI core program component. In other words, there have been many more applications for many more dollars that up to now have been unsatisfied for the CDFI core component compared to the BEA, which I don't believe, to my understanding, has fully utilized that proportion of money.
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Mr. VENTO. Well, if we had a large enough pot, I guess we could do more with BEA and still maintain arespond to what the demand is on the other side. I guess it would depend upon how much. If we got $125 million authorized this year, just make sure that there is a minimal or an adequate amount for CDFI so if people want to do more.
Mr. ROSENTHAL. It would be hard for us to quarrel with an increase in funding that would go to CDFIs. That would be perhaps the best of all possible worlds. But it certainly, if I had to choose, I would prefer the targeting to CDFIs themselves.
Mr. VENTO. We did not ask about the reauthorizing year. This is permanently reauthorized. Could we have back information? One of our problems is, even if we get the information back, we have to have time to evaluate and then pass the legislation. This is 16 months that the first grants went out. Assuming a five-year cycle and four years from now, we still would need time to do the hearings and find out.
I don't know if we can get by with less than five years. Does anyone here disagree with the fact that we would need to go through the five-year business plan cycle in order to get the type of feedback?
Ms. ENGLAND-JOSEPH. I would even suggest to you that saying that 16 months have gone by is probably a bit misleading, because as recently as the last few months these agreements were being signed. So in terms of the number of first-round applicants or awardees that have actually had much activity, even more than a quarter or two quarters worth of activity is very small. It is really not 16 months of activity for the entire program.
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Mr. VENTO. One other question that is really important. I hesitate, but this is an issue that there has been this suggestion of wrongdoing here, that some of the musical notes here have been so amplified as to destroy the song. My concern is that, with this, there is some suggestion of wrongdoing or corruption or crime.
Have any of these audits or any of the work done by the auditing made any evaluation of this particular wrongdoing? I understand that there were some excessive payments to consultants thatin my judgment, they sound high. Someone stayed at the Mayflower Hotel. I think Days Inn or Motel 8 would be more my recommendation.
Is there anything that we can say with regard to this in terms of decisions, any type of information, if you have information on this, because I mean, this is going to come up time and time again. I realize that there is some reconstruction of records to make it appear as though they were in place in the first round, which I don't intend to defend and I don't think anyone else here does, and I don't think you should. But has there been any finding of wrongdoing here that would rise to the issue or some place that we need to know about.
Mr. CALAHAN. The IG's office spent a lot of time looking at the fiscal year 1996 process. And while we stated earlier that there was a lack of documentation in general for that process and what occurred, we have to say that one of the findings that we have is that from the documentation that is available, we were not able to find that any award decisions were improperly made.
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Mr. VENTO. There were some suggestions of conflict of interest in terms of those persons, but there was no wrongdoing. You did not find any in any case?
Mr. CALAHAN. That is right.
Mr. VENTO. There were some political trespassers here, I will tell you that.
Chairwoman ROUKEMA. But you are not suggesting, are you, that all the objective scoring systems that have been designed to avoid influence peddlinglet us call it what it isI don't think there is anyI think it was clear that you could not absolve them of that responsibility there?
Mr. CALAHAN. Well, what I am saying is
Chairwoman ROUKEMA. The records were so inadequate, totally inadequate. So you are not suggesting that there wasn't influence peddling going on?
Mr. CALAHAN. I am saying that we did not find documentation to show that there was.
Chairwoman ROUKEMA. Should there not be some more precise requirements under the law for these kinds of, for compliance here with what the other legislation that has been referred to requires?
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Mr. CALAHAN. Sure. The application review process, and there were decisions in 1996 that were not well documented, and they obviously should be. The process should be documented. They should have documented procedures. They do now. There should be documentation to support that those procedures were followed and there is now.
Chairwoman ROUKEMA. You are saying the only way we can get at that is by having more rotational investigations, not precise, not in the statute?
Mr. CALAHAN. I don't know that there is more that could be done in terms of the fiscal year 1996 process to
Chairwoman ROUKEMA. I mean, in the future, as we reauthorize this legislation.
Mr. VENTO. If you would yield to me, I think one of the points hereand it was pointed out beforeis that you have a lack of a formal Federal Managers Financial Integrity Act process that is being followed and which has been recommended and that they are trying to. The question is, how do we enforce it?
Chairwoman ROUKEMA. That is the question.
Mr. VENTO. By saying that the Director or the Secretary of Treasury has to certify before any further award of grants in a given year, that in fact they have followed this procedure so it is sort of the internal thing that we can put into an authorizing measure.
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Chairwoman ROUKEMA. This is what I was trying to get at a little earlier.
Mr. VENTO. I meant, when you raised it, to point that out, but I think it gets at the point that that would put a higher level of duty on the secretary or the director.
Chairwoman ROUKEMA. Rather than just random
Mr. VENTO. Rather than an oversight issue, which is the internal type of devious mind that I have. But it could work.
Chairwoman ROUKEMA. You have been around here too long.
Mr. CALAHAN. An FMFIA process would include that kind of statement that there has to be an assurance letter as part of that process.
Mr. VENTO. We would put it before any further grant could be made at that particular point. In order to make grants that year, there has to be some sort of kicker in there to make certain that they go through, doing it. I think that is what is being asked for here.
That is, of course, maybe throwing you into the briar patch where you want to go, if you are theI see somebody is nodding that should be nodding.
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Ms. ENGLAND-JOSEPH. One of the things that the Fund has just handed me was their annual report for 1997 where they have to certify to exactly what you are talking about. So the requirements exist either through the legislation that you have responsibility for or a broader, cross-cutting legislation in the Financial Managers Integrity Act.
Chairwoman ROUKEMA. We will be able to figure it out.
Ms. ENGLAND-JOSEPH. It is accountability. It is how you determine accountability.
Chairwoman ROUKEMA. How you enforce it and determine accountability, how is it enforceable?
Mr. VENTO. What I am saying is, I think they have the certification requirement, but the question is, it does not necessarily stop if it is not done, or what it does in terms of future grant awards.
Ms. ENGLAND-JOSEPH. But if you had regular oversight of the program and at the end of 1995, after the first year's financial statement audits, you heard that they did not have a system in place to monitor, they did not have a number of things that you felt were fundamentally important, action should have probably been taken right then.
Unfortunately, what you are doing is realizing, three years later, that management problems existed. Fortunately, you have got a management team that appears to take a great deal of responsibility now, so perhaps, moving forward, there will be a lot of improvement.
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But you are right, it is very difficult to hold managers accountable.
Mr. VENTO. Especially authorizing committees have a hard time. Appropriators can do it, but it is a very blunt instrument. This is what remedially has to be done. You could add a lot of different qualifications. I thought maybe embracing this one phrase that the Chairwoman had pointed out in terms of this particular Federal Managers Integrity process would be a key component.
One other question, if I could, this question of saturation, in fact, that there had beenin fact, the suggestion that had been made that perhaps because there are fewer applicants, a limited number of applicants for CDFI Funds or for BEA Funds, we had sort of tapped the load here.
The suggestion is, of course, with training and activity. Has there been any work done by, I guess probablyCliff certainly would be able to respond to that, but I don't know if any of others that are working with the auditing functions, or the inspector general or others could comment on it, if they have made any evaluation.
Mr. Rosenthal, perhaps you could respond: saturation issue.
Mr. ROSENTHAL. To reiterate some of my earlier points, I think we are very, very far from a saturation point; there have been, so far, approximately seven applications for every one that is funded, which I think is a pretty reasonable ratio. I know that in my particular industry, community development credit unions, scarcely a tenth of the eligible institutions have been funded.
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I think what we have begun to do right now is the process of, through training and technical assistance, trying to enhance the capacity of potential applicants to the program. And I think, increasingly, starting this coming year, you will see qualified demand increase even further.
Ms. DONAHUE. I think we can add to that.
We conducted a nationwide survey of CDFIs, and we mailed out to approximately a thousand CDFIs and received a response rate of approximately 67 percent. So I think, continuing with what has been said already, I think our survey would indicate that there are substantial number of institutions still out there, and they have had a lot to say regarding performance measurement, which is the purpose of our survey.
We don't feel as though our survey covered all CDFIs. We are going off of lists those who had applied to the CDFI program, as well as national CDFI associations. So we are not saying that a thousand is all there are nationwide; there could well be
Mr. VENTO. So five years' authorization wouldn't exhaust it? We have enough clients to serve apparently. So I think it's been a very good hearing, Chairman.
Chairwoman ROUKEMA. Thank you, and I thank you all for your patience and for the contribution, and please do forward to us further thoughts that you have. Yes.
Page 84 PREV PAGE TOP OF DOC I would also hope that you will be in a position to accept questions from the panel here as we go back to staff and try to summarize and get a complete picture here, so that we will submit questions to you. But in the case of responses to some of the questions that we have had, if you want to add that, please forward it to us for the written record. Thank you.
[Whereupon, at 6:16 p.m., the hearing was adjourned.]