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U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 12:10 p.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives Bachus, Weldon, LaFalce, Frank, Bentsen, Kilpatrick, Lee, Goode, and J. Maloney of Connecticut.

    Chairman LEACH. The hearing will come to order. The committee convenes today to hear testimony on microenterprise lending and H.R. 4179, the proposed ''Program for Investments in Microentrepreneurs Act of 1998,'' known as the PRIME Act, which was introduced in the House by Congressman Rush and in the Senate by Senators Kennedy and Domenici.

    America is an entrepreneurial society, and it is in this entrepreneurial spirit that the concept of microlending has been embraced by many as an avenue for opportunity for low-income Americans who otherwise would have difficulty obtaining credit. Welfare reform legislation passed by this Congress in the last session seeks to move disadvantaged Americans from dependency and poverty to independence and prosperity. This redirection in policy underscores the appropriateness of microenterprise activities.

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    In a free market economy, it is critical that the entrepreneurial spirit be nourished and that access to capital, which is an essential ingredient to entrepreneurial activity, be provided to all parts of society. If entrepreneurial dreams are denied any part of America, society as a whole is short changed.

    A microenterprise is generally defined as a sole proprietorship that has fewer than five employees, has not had access to credit from commercial banks, and requires a loan in an amount under $15,000. While the concept of small business in this country certainly is not new, the notion that individuals who are receiving Government assistance, or who are at the poverty line, should be afforded access to small amounts of credit to build a business that facilitates self-sufficiency has few precedents.

    Programs that are designed to assist microentrepreneurs through training, counseling and lending are evolving rapidly. The 1996 Directory of Microenterprise Programs lists 328 microenterprise assistance programs throughout 46 States and the District of Columbia, approximately three-quarters of which were established within the last 12 years. These programs work with low-income populations to develop the necessary skills for managing and running a business.

    According to the Aspen Institute's Self-Employment Learning Project, which studied the effectiveness of microenterprise assistance, such programs have served over 200,000 individuals, loaned over $44 million, and assisted over 54,000 businesses in disadvantaged communities. The Self-Employment Learning Project's research revealed positive results with respect to growth, profitability and survival rates of microenterprises. Details of this research will be presented by a witness on our third panel.
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    The practice of microlending has received more attention abroad than in this country. A survey of 13 microlenders in Latin America was conducted by the Private Sector Initiatives Corporation. The survey showed that some microlenders received returns far in excess of traditional commercial lenders, with an average return in equity of 26 percent.

    The recent Financial Times article states that, ''Though Latin America has moved furthest toward the commercialization of microfinance, it is also commonplace in other developing countries, and the World Bank estimates more than $7 billion of microcredit is outstanding.'' Elsewhere, the widely recognized Grameen Bank in Bangladesh has received international attention for lending $2.15 billion to more than two million people.

    I would ask unanimous consent to expand the statement somewhat.

    Without objection, so ordered.

    And I would like at this point to turn to Mr. LaFalce.

    [The prepared statement of Hon. James A. Leach can be found on page 42 in the appendix.]

    Mr. LAFALCE. Thank you very much, Mr. Chairman. Throughout my entire tenure in Congress I have strongly supported microlending, and I am always pleased to have any opportunity to discuss ways in which we can work with American entrepreneurs to help them successfully build their small businesses and create jobs in our communities.
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    As the past Chairman and Ranking Member of the Small Business Committee, I was very proud to be a part of the effort which made permanent and expanded the Small Business Administration's Microloan Program. This program now provides very small businesses—and we are talking mom and pop businesses for the most part, on average businesses with five employees or less—with a credit resource simply not provided by traditional lenders.

    To date, the SBA has made 182 loans, totaling more than $68.9 million, with no loss to the Federal Government. I applaud the work of the SBA in successfully implementing this vital microlending program. But the SBA's Microloan Program is only one such program. Other microlending programs are offered through the Department of Health and Human Services, HUD, the Department of Labor, Department of Commerce, and the Department of Agriculture.

    In an attempt to better coordinate the work of these valuable programs, an interagency task force was established to review the work of the programs and to consider whether additional microlending legislation is needed at this time. I really look forward to hearing more about the findings and the work of this interagency task force this afternoon, because it is extremely important that we have far greater resources for microlending, but not necessarily reinvent the wheel every time within every agency that might conceivably be involved in microlending.

    If we are to get the maximum benefit to our communities and for our communities and for our small budding entrepreneurs, we must ensure these programs, wherever they exist, are very well coordinated and operate efficiently. So the delivery mechanism for these programs is extremely important. The type of management expertise that is required and follow-up that is required is extremely important, in my mind, rather than just the initial making of the loan. I will be very anxious to hear about that.
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    One particular legislative proposal which I am interested to hear more about today is the Program for Investment in Microentrepreneurs, or as it has become known, the PRIME Act. PRIME is intended to target low-income entrepreneurs, or those traditionally denied access to capital.

    I applaud the efforts of all my colleagues in the House, and most especially former Banking Committee Member Congressman Bobby Rush, as well as Congresswoman Diana DeGette, who will be testifying before us today, as well as our Senate colleagues, Senators Kennedy and Domenici, for encouraging the further development of microlending for American entrepreneurs through this proposed program. I welcome their testimony. I look forward to working with them to ensure that worthy entrepreneurs do receive the right training and support to turn their ideas into business realities and thereby increase economic development and job growth in our communities.

    Let me just add one thing. A long time ago I read a book, many of you probably read it too: ''Small Is Beautiful,'' and I firmly believed that at that time; although I also thought that big could be beautiful, too. But as bigness has become the way of life within the United States, and bigness has become the way of life in the world, the truth of the statement that ''small is beautiful'' becomes greater and greater and greater and more and more meaningful. And we need to devote more of our time and attention in ensuring that small is and can become more beautiful, because bigness is happening in and of itself without Government assistance. Government should really be on the side, first and foremost, of the small entrepreneurs of America.

    I look forward to working with you in that endeavor and am delighted that the leader in the Senate in this effort, Senator Ted Kennedy, has now joined us.
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    Mr. FRANK. Mr. Chairman, if I could just make a brief statement.

    Chairman LEACH. You are recognized for such.

    Mr. FRANK. Thank you. I was delighted to see my Senator come in to the accompaniment of the announcement that ''small is beautiful.'' I know he has a very heavy agenda. And I want to apologize, I am a cosponsor of the PRIME bill and very strong supporter, but a couple of other things have come up that take a little bit of my attention these days, so I will not be able to stay here for the full time. But I did want to express my appreciation to those who have taken a leadership role in this, my two congressional colleagues and Senator Kennedy. They have done so much in this regard and I wanted to express my agreement with those sentiments.

    One of the things I want to stress that is very important, we met last week talking about the international economy. We have a very serious equity problem that goes beyond moral considerations now. That is, we have come through a period in the last decade or so when the movement of capital around the world has been highly touted and has accomplished some great things in terms of overall productive efficiencies. But equity has been left behind both in our own country and elsewhere, and there are those for whom equity on its own terms does not have a lot of claims. They do not worry much about inequality. They say, ''Well, in the long run it will work out.''

    It has now become clear as we look at America's position vis-a-vis a number of the international economic issues, that we ignore equity, not just at our moral peril, but at peril to our ability to go forward. People are simply not going to support the kind of international economic cooperation agreements that they are urged to support if they have a sense that they are being left out. If this becomes trickle-down economics writ large, you are going to lose the political consensus you need to move forward in a globalized situation.
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    And that is the particular context. This is an important bill in itself. It is important to help people with microcredit, people who are trying to break through. But it is also important because it is one of the steps we can take to let people know we understand that there has to be equity; that the prosperity that we hope to gain through the globalization of the economy and the worldwide movement of capital, that those gains have got to be shared; and there has to be some concern about people that, as the gentleman from New York just said, bigness will take care of itself, and to a great extent it will, but we also then have to make sure that we do things such as this, not just for their own merits, but if we are to have the political support we need to go forward.

    So I am especially grateful to the three leaders of this movement who are here, and I look forward to hearing from them. I apologize because I will now have to leave to go read some more stupid stuff.

    Chairman LEACH. Well, thank you, Mr. Frank.

    Let me say the committee welcomes Senator Kennedy, who is the cosponsor of S. 2190, which is the Senate version of H.R. 4179, which is Congressman Rush's bill. The committee also welcomes Ms. DeGette from Colorado, who has distinguished herself so much in an early House career.

    Let me say that, Congressman Rush, we are delighted that you brought this bill to the committee's attention.

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    But let us begin with Senator Kennedy, who brings such distinction to the Congress and who I am confident will go down as one of the several Senators of the century. Senator Kennedy.


    Senator KENNEDY. Mr. Chairman, thank you very much, and thank you for your greeting and warm words and those of my colleague and friend, Congressman Frank, and Congressman LaFalce. And I also want to extend appreciation to my two colleagues here. They will get into the details of the legislation. I have just left the floor, where we have two back-to-back votes, but I wanted to come over here both to submit my statement and to add my strong support for this legislation, and also in behalf of Senator Domenici.

    We have had a very strong working kind of partnership with Senator Domenici, who has been a strong advocate for this program. There have been enormous initiatives out in his own State of New Mexico, as there have been enormously successful programs in our State of Massachusetts. This is one of the very—I know there are many other different parts of the country that take a sense of pride in the work that is being done, but this is something that we take an enormous sense of pride in in our State and in the rest of the country.

    Congressman Frank talked about the international situation. I think we have learned so much in terms of this whole microcredit from what has been happening in other parts of the world. I have had the chance to see this in Bangladesh, in India, and in other parts of the world. So many of the lessons we learn from there have application here, in terms of communities all across this country, and they have taken hold in my State, throughout New England.
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    This is a movement of entrepreneurship, of initiation, of imagination, of creativity at the grass-roots level that is really sweeping the Nation. It is a movement that really has been underneath the radar. It has enormous impact in terms of communities and it does recognize what I think all of us understand, and that is the real genius of individuals around our country, in giving them the opportunity not only in giving them a chance at getting to the capital, which is obviously enormously important, but as this legislation indicates, the kind of training and the kind of information that is so necessary to take the idea and move it from the idea into the commercial world.

    We have outlined it, it is listed on those documents, and I know my colleagues will go into detail of the legislation.

    Mr. Chairman, this I think is one of those pieces of legislation that can make a very important difference in the lives of the many people who come in contact with it. And it will give those that are resourceful and creative and are willing to work hard that kind of assistance that can take an idea and really make it a reality. I think that is one of the great assets and values that we have in terms of our society that is too often conditioned. This, I think, offers us a real chance to make a breakthrough.

    I think, finally, this has strong bipartisan support in the Senate. We want to work very closely with our colleagues here in the House to get this passed. We think administratively we have established and taken the best process and means of CDFI that we have been able to work out, but I am very hopeful that we will be able to pass this legislation.

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    And I would just say, finally, as Senator Domenici says, as the Chairman of the Budget Committee, he thinks on this one we just might be able to find the resources to fund it, which is something which we obviously want to be able to be effective in not only getting the authorization, but actually to implement it.

    I have a whole statement and some very excellent examples in my statement that I think would be of interest to those Members of the committee that take an interest in this legislation, and I thank you very much for the chance to come on by and add my strong and wholehearted support and to put into the record the very strong statement of Senator Domenici, who has been our leader as well in this effort in the Senate.

    Chairman LEACH. Without objection, the full statement of Senator Kennedy will be placed in the record and the statement of Senator Domenici.

    [The prepared statement of Sen. Peter V. Domenici can be found on page 58 in the appendix.]

    [The prepared statement of Hon. Edward M. Kennedy can be found on page 55 in the appendix.]

    Senator KENNEDY. I thank the Chair.

    Chairman LEACH. We certainly appreciate your coming by, and we recognize the time constraints you have. But before you leave, Mr. LaFalce would like to make one comment.
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    Mr. LAFALCE. I just want to make a personal statement, Senator. As a father, I just know that the most important thing that I could ever do in life is try to raise a good son, and nothing gives me greater joy when people say that about my son. And I just want you to know that you have raised a great son who has made a great mark in the Congress already and will make a much greater mark in the years ahead in the United States Congress and you should be filled with pride over your son.

    Senator KENNEDY. Well, I thank you. Those are very kind words. We were fortunate to have both my nephew and my son in the Congress. I am in the Senate. And now when someone says, ''Who does that darned Kennedy think he is?'' there is at least one chance out of three that it is not me. Now, next year, it will be two. I thank the good Congressman.

    Chairman LEACH. Thank you, Senator.

    Congressman Rush, we thank you for your thoughtfulness and we appreciate you coming here today. Please proceed.


    Mr. RUSH. Thank you, Mr. Chairman, for this opportunity. It is certainly a pleasure and an honor to be here again at the House Banking Committee. As you mentioned earlier, I served on this committee my first term in the Congress and I relish those moments. I think about those moments quite often as I participate in the deliberation of this committee. I want to thank you personally, Mr. Chairman, and also the Ranking Member, Congressman LaFalce, for your attentiveness to this particular piece of legislation, my legislation, H.R. 4179, the Program for Investments in Microentrepreneurs Act of 1998, known as the PRIME Act.
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    Through the welfare reform legislation that this body passed in 1996, we have been encouraging people to leave the welfare rolls. While we have indeed been successful in reducing the welfare rolls, we have also seen a rise in domestic hunger.

    At the same time that the welfare rolls have been dropping, the food pantry rolls have been rising. Surveys from both the U.S. Conference of Mayors and the Second Harvest Food Bank Network have shown a dramatic increase in the number of people visiting emergency food outlets to meet their nutritional needs. In fact, the number of low-skilled jobs available does not match the number of low-skilled workers who are seeking these jobs.

    In my State of Illinois, an Urban League study has pointed out that there are over 85,000 low-skill jobs and over 355,000 job seekers. And as the similarly conflicting realities of dropping welfare rolls and rising food pantry rolls suggest, the jobs that people are able to get still do not meet the costs that people must meet in order to sustain themselves. A recent Columbia University study showed that 65 percent of poor young people live in homes where at least one parent or relative works full time or part time. This just should not be the case.

    As a Nation, we have a responsibility to help and encourage those at the bottom of the economic scale to find work that permits them to be self-sufficient. In that spirit, I have introduced a bill that allows us to help poor Americans help themselves. I have introduced the PRIME Act, H.R. 4179.

    The PRIME Act provides $105 million over four years in training and technical assistance in support of microenterprise in the United States.
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    For those of you unfamiliar with the microenterprise businesses, they are tiny businesses generally consisting of one to five persons. Microcredit is a provision of small loans to these entrepreneurs to launch or enhance business initiatives. Some of you may be familiar with the idea of microcredit as it was launched in the developing world by Dr. Muhammad Yunus, the founder of the Grameen Bank in Bangladesh. The Grameen Bank now serves two million clients, 94 percent of whom are women, and helps them become self-sufficient through self-employment.

    In Bangladesh and other developing nations, the greatest need is access to loan capital to help people start their own businesses. But here in the U.S., the needs of microenterprise development are different. In the developing world, the greatest need is for loan capital. In our more complex economy, there are other needs that a microenterprise organization should meet.

    One of the greatest needs in the U.S. is for training and technical assistance. Why? Because microentrepreneurs face different issues here in the U.S. Here a person may have to develop a business plan, deal with credit problems and credit repair, learn how to file complex tax forms, deal with other Federal regulations and develop general business skills, among other things, before they are able to launch a successful business. The training they receive will not only help them access funds, but also use those funds successfully.

    Unfortunately, delivery of training and technical assistance is the most expensive part of running a domestic microenterprise organization. This is where the PRIME Act fills a need. The bill provides $105 million over four years for training and technical assistance for microentrepreneurs. There is a requirement in the bill that one-half of the funds go to support microentrepreneurs living at 150 percent or less of the poverty level. The administrator of the program will ensure that no more than 10 percent of the funds will go to any one organization and that the funds awarded will be distributed to an array of different organizations. In addition, for every $2 of Federal money spent, a match by local, State, or private entities will be required. This allows for a collaborative effort of all interested parties, entities and communities.
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    It is my hope that my bill will convert people who presently receive public benefits into taxpayers and employers. Empowerment can only be achieved by these individuals by encouraging sustainable businesses and rewarding the entrepreneurial spirit.

    Again, Mr. Chairman, and Ranking Member LaFalce, I want to thank you for the opportunity to appear before this committee today and I ask that a letter of support, signed by 20 national economic development organizations, be included in the record.

    [The prepared statement of Hon. Bobby L. Rush can be found on page 64 in the appendix.]

    Chairman LEACH. Without objection, so ordered, and thank you, Mr. Rush, for such a thoughtful statement.

    Ms. DeGette.


    Ms. DEGETTE. Thank you very much, Mr. Chairman, and thank you also, Ranking Member LaFalce, and the rest of the Members of the Banking Committee. I most especially want to thank Congressman Rush for introducing this important piece of legislation and for his strong commitment to microcredit and microlending programs.

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    I am also a strong supporter of microcredit and I am pleased to be invited here today to talk about the importance of microcredit and the role that Congress can play in supporting the burgeoning microcredit movement in this country. I believe that the PRIME Act is good legislation that will provide the kind of assistance that non-profit microcredit development organizations need in order to better assist microentrepreneurs.

    I understand, Mr. Chairman, that you have three panels of witnesses testifying today, so I will do my best to move things along, and I would like to summarize my testimony and present the full copy of my testimony for the hearing record.

    Chairman LEACH. Without objection.

    Ms. DEGETTE. Thank you. Mr. Chairman.

    With welfare reform, microcredit is an essential component of our economic strength, as you have heard from both of the other witnesses here today. Oftentimes people just trying to make a living, trying to feed their children, need only a sewing machine or a computer or, as you will hear from me in a moment, simply cleaning supplies to make the difference between going hungry and having a decent quality of life. Microcredit creates jobs, generates income, and provides economic self-sufficiency, particularly for disadvantaged populations.

    I think the way I can best help this discussion today is to talk for a moment about the microcredit movement in my own district, talk about what successes we have had and what gaps I think need to be filled. And I will also try briefly to address the question Mr. LaFalce asked in his opening statement about how you develop a microcredit lending organization that actually has some success.
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    One thing I have heard over and over again from the microcredit development organizations in Denver is that what new microentrepreneurs need most is training and technical assistance. It is vital to the success of the microcredit movement in this country that the intermediary organizations have the right tools to provide the support needed for long-term sustainability and success. H.R. 4179 will allow this by providing grants to the organizations assisting microentrepreneurs for educational and technical training.

    One of the reasons this bill is such an important first step is because it will provide grants to local organizations who are in touch with the needs of their own communities. In Denver, there is a very diverse group of microcredit development organizations. Each one of these organizations is designed specifically to help a targeted population. Let me give you a couple of examples.

    One organization, Mi Casa, does outreach to low-income women, former welfare recipients, and has seen tremendous success in job creation and sustained employment among disadvantaged women. Another organization, Belay Enterprises, arose out of an urban ministry in Denver. After many years of community development and outreach to youth, the organizers found that many of the social problems they were addressing were due in large part to economic instability. The response was to establish a sister organization to help people go into business for themselves because they realized that this is what would have the biggest impact on the population they were serving.

    Denver is also home to the microcredit organizations using the peer lending group model where borrowers join together in a small, tightly structured business support group, sort of like a microcredit book group, where people get together to work together for credit. No collateral or credit is required as long as each member agrees to the terms established by the group and ensures repayment of the loans.
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    These are very different organizations serving diverse populations, but they all have something in common. Each organization has been successful in raising money for loans, but has had an equally difficult time finding funding to provide technical support that microentrepreneurs need.

    You heard my colleagues talk about the technical needs that businesses have, filling out tax forms, finding the way to pay sales tax. Educational and technical assistance is one of the most important components of microcredit. If a new small business does not know how to access the right markets or keep the books balanced, then all the microloans in the world won't do them any good and they are doomed to failure from the moment they start.

    The organizations I have mentioned are just a few that currently operate in Denver and illustrate how effectively microcredit can be used to meet the needs of different communities. I would like to share just for a moment what microcredit has done to one entrepreneur, because I believe this experience illustrates what microcredit is all about.

    Linda Smith was on welfare and living in a women's shelter a couple of years ago when she first applied to enroll in a local microcredit program. To make a long story short, within a couple of months of training, and with a lot of technical support, she started the small business she had always dreamed about. She now runs a successful cleaning business in the Denver metro area. Linda could have just stayed on welfare, because even with her ambition, she had so many obstacles to overcome. But because of assistance from a microcredit group and because she was given this opportunity, she is now a successful entrepreneur.

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    Just to give one more example of an organization that actually provides microcredit, Colorado Capital Initiatives is a microcredit development organization that works with microentrepreneurs. While CCI has only been in existence for a couple of years, it has already helped 60 small businesses across the State, mostly in rural areas, because microcredit is not only an urban issue. The average income of the individuals that they are assisting is $19,300 for a family of three or more, and the average loan is $9,700. The key to CCI's success is extensive training and extensive follow-up, and they generally have a three-year relationship with those they help. So far, Mr. Chairman, CCI has a 99 percent loan repayment rate.

    The success both of the lending organizations and the success in people's lives cannot be underestimated, and I therefore urge Chairman Leach, Ranking Member LaFalce, and the entire committee to use their leadership to make sure we advance microcredit legislation on our agenda.

    Thank you again for holding this important hearing.

    [The prepared statement of Hon. Diana DeGette can be found on page 52 in the appendix.]

    Chairman LEACH. Well, thank you, Ms. DeGette. And let me just note, and I have no questions for the two of you, but the only difference I have with you, and particularly with Senator Kennedy, is, as you will learn later in the hearing, that the finest microenterprise lending program is in the State of Iowa. But thank you for your thoughtfulness.

    Ms. DEGETTE. Mr. Chairman, do they have 100 percent loan repayment rate?
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    Chairman LEACH. They have a population base that is 100 percent perfect.

    Thank you all. Appreciate it very, very much.

    Mr. LaFalce.

    Mr. LAFALCE. Thank you all very much.

    Chairman LEACH. If I can ask for the second panel to come to the table. Our first panelist is Mr. Michael Barr, who is the Deputy Assistant Secretary for Community Development Policy at the Department of the Treasury. He is accompanied by Ellen Lazar, Director of Community Development Financial Institutions Fund, and accompanying Director Lazar is Maurice Jones, who is Deputy Director of Policy and Programs for the CDFI Fund. The next panelist, then, will be Mr. John Gray, who is the Associate Deputy Administrator for Capital Access of the Small Business Administration. Mr. Gray coordinates the Small Business Administration's microlending programs.

    We will begin with Mr. Barr. Please proceed.


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    Mr. BARR. Thank you very much. Chairman Leach, and Ranking Member LaFalce, distinguished Members of the committee, it is a pleasure to speak with you today about the PRIME Act which authorizes the Treasury Department's Community Development Financial Institutions Fund to provide valuable support to microentrepreneurs and microenterprise organizations. I am pleased to be joined today by Ellen Lazar, Director of the CDFI Fund; her colleague, Maurice Jones; and our friend and colleague at the SBA, Mr. John Gray.

    Mr. Chairman, with your permission, I would like my written statement entered into the record and I will summarize my key points today.

    Chairman LEACH. Without objection, all the statements of all the panelists will be placed in the record. And if anyone wishes to summarize at any point, they are welcome to do so.

    Mr. BARR. Before discussing the PRIME Act, I want to give you some background on the CDFI Fund itself. The CDFI Fund helps to promote private sector growth in economically distressed areas and to help bring low-income Americans into the economic mainstream. CDFIs are specialized financial institutions that meet the needs of underserved communities. They include credit unions, microenterprise funds, development banks, and equity or loan funds that share this common mission: providing financial services to those who are typically overlooked by traditional financial providers.

    For many years, institutions such as these have defied conventional wisdom by making loans to people that could not get financing elsewhere, and these borrowers have repaid with interest. CDFIs are often pioneers in their local community, making financially sound loans based on local market and customer knowledge. In so doing, CDFIs demonstrate to traditional lenders that these are viable markets and they help, thereby, to expand the reach of the private sector marketplace.
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    Thus far in its core program, the CDFI fund has awarded nearly $80 million to 81 CDFIs around the country. The Fund expects to award over $40 million more by the end of this month. The leveraging of the Fund's investment is strong, requiring at least a one-to-one match with non-Federal dollars, and the CDFIs, in turn, further leverage these Federal dollars by raising deposits or partnering with other lenders on any given loan.

    Under the Bank Enterprise Awards Program, the Fund received 104 applications this year, a 40 percent increase over last year. Thus far, the Fund has provided $30 million in BEA awards to banks who have provided more than $273 million in investments for low-income communities.

    Though the CDFI Fund has accomplished much in a short time, as with any organization, the Fund has had some growing pains. In my judgment, the Fund has dealt with those problems thoroughly and effectively and they are behind us. With important insight and advice gained from the Subcommittee on Government Oversight of this committee, the Fund significantly strengthened itself over the last year. We are moving the program forward with the leadership of Ellen Lazar and her team who bring to the job many years of experience in community development.

    Mr. Chairman, the Fund has a strong management team in place, with strict awards procedures and a sound infrastructure, which the Fund will continue to improve over time. In our judgment, the Fund is well positioned to serve low-income communities across the country. As you know, the Subcommittee on Financial Institutions and Consumer Credit has now reported out the CDFI Fund's reauthorization bill, for which we are grateful to Chairwoman Roukema and her colleagues, and we look forward to working with the full committee to enact this legislation.
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    Let me now turn to ways in which the Fund currently supports microenterprise. First, as I mentioned, under its core CDFI program, the Fund provides grants, loans and technical assistance to strengthen the capacity of CDFIs, including microenterprise organizations, whose primary mission is to provide financial assistance to low-income communities.

    Second, the Fund plays a leadership role in the microenterprise field through the Presidential Awards for Excellence in Microenterprise Development. These non-monetary awards highlight best practices in the field. Let me tell you about one award winner, Cascadia Revolving Loan Fund in Seattle, Washington. Cascadia has made over $7 million in loans, with losses under 1 percent annually, and 90 percent of the businesses it has funded are still in existence. Cascadia is also now financially self-sustaining and a permanent resource in its community.

    Third, the CDFI Fund, by Executive Memorandum, has been charged with the coordination of microenterprise programs across the Federal Government, as Mr. LaFalce mentioned in his opening remarks. The Fund has begun that effort of coordination, which we believe will bring increased benefits for microentrepreneurs in the years ahead.

    Let me now turn briefly to the PRIME Act. In our judgment, the PRIME Act fills a critical gap in funding for training for low-income microentrepreneurs and microenterprise organizations. The PRIME Act would give authority to the Fund to build the capacity of microenterprise development organizations that primarily focus on providing training and technical assistance to microentrepreneurs. We believe that the PRIME Act leverages the Fund's strengths in building the capacity of local development institutions to serve their communities. We would also like to work with the committee and with the SBA to be sure that microenterprise organizations funded by SBA can take full advantage of this program.
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    As you know, while capital is critical for any small business to grow, it is not enough. Often the difference between success and failure for any business is the availability of sound business advice, and such assistance is hard to find. As Senator Domenici said on introducing this bill in the Senate, ''Starting one's own business is a part of the American dream. And as every entrepreneur knows, it takes extraordinary dedication, creativity, and connections. There are sometimes overwhelming obstacles for would-be small business owners. But we believe a well-placed Federal investment could go far in terms of encouraging more people to make the American dream a reality.''

    Mr. Chairman, the Fund's vision makes sense and the Fund's investments are beginning to make a difference. I look forward to working with all of you to enact the Fund's authorization so that the CDFI can help more local communities rebuild their neighborhoods, create jobs, and restore hope. CDFI is a solid investment in the long-term economic well-being, not only of those communities, but of all of us. Thank you.

    [The prepared statement of Michael S. Barr can be found on page 72 in the appendix.]

    Chairman LEACH. Ms. Lazar.


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    Ms. LAZAR. Thank you. Chairman Leach, Congressman LaFalce, distinguished Members of the committee, it is a pleasure to be before you today and represent the Community Development Financial Institutions Fund. I am happy to be here today with my colleague Michael Barr; Maurice Jones, our Deputy Director for Programs and Policy, and our colleague John Gray at the SBA. I am Ellen Lazar. I have been the Director of the Fund since January of this year.

    I would like to begin by thanking the committee for your interest in the Fund and the proposed legislation, H.R. 4179, the PRIME Act. The CDFI Fund was created to address critical community and economic revitalization needs of urban, rural and Native American communities. Our mission is to promote access to capital and local economic growth by investing in and supporting community development financial institutions and expanding banks and thrifts' lending, investment, and services within underserved markets.

    Today's distressed communities are faced with many challenges: moving families from welfare to work, providing basic financial literacy skills, and training unskilled workers for jobs or to become self-employed. The funding we provide, through a variety of programs, is making a difference in the lives of people that are often left out of the economic mainstream in this country.

    The Fund's programs are built on several key principles: Stimulation of private markets being critical for rebuilding economically distressed areas; building the capacity of community-based institutions is essential for providing localities with the resources and tools necessary to serve underserved individuals; and an initiative that promotes private sector strategies to achieve public policy goals must be based on performance and maximizing impact.
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    Currently, the Fund operates four programs that collectively further these principles: the Community Development Financial Institutions Program; the Bank Enterprise Award Program; the Technical Assistance Program; and the Presidential Awards for Excellence in Microenterprise Development. These programs are run through a competitive process.

    The Fund builds the financial capacity of CDFIs by providing financial assistance in the form of equity investments, grants, loans or deposits to enhance their capital base—or the financial muscle—of the organizations to make loans, investments, provide technical assistance or otherwise address unmet community development needs. The Fund also provides grants for technical assistance to help the organizations develop the skills they need to further their development objectives. Over the past two years, we have provided close to $2 million in funding to approximately 25 organizations for technical assistance.

    In addition to CDFIs, traditional financial institutions play a key role in community development lending and investing. The Bank Enterprise Award Program stimulates private sector markets by providing incentives for banks and thrifts to increase their investments in CDFIs and to increase their community development lending, investment and service activities within distressed communities.

    This year the Fund launched a new initiative to build the organizational capacity of CDFIs. This initiative is a technical assistance program that will provide grant monies to CDFIs, particularly young and relatively small organizations, for capacity building activities.

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    A second capacity building initiative, to be launched in early fiscal year 1999, is a new training program that will enhance skill development among CDFIs and other members of the financial services industry that engage in community development finance.

    The Fund also encourages excellence in performance within the microenterprise industry by identifying and promoting best practices. The Fund's Presidential Awards for Excellence in Microenterprise Development is a non-monetary program that recognizes and seeks to bring attention to organizations that have demonstrated excellence in promoting microentrepreneurship. By recognizing outstanding microenterprise organizations, the Presidential awards seek to promote sound practices and bring wider public attention to the important role and successes of microenterprise development, especially in enhancing economic opportunities among women, low-income people, and minorities. The first awards were made in January of 1997 and we expect to make the 1998 awards later this year.

    The proposed PRIME Act program would be compatible with the Funds's mission and current programs. The Fund's current programs focus on providing financial and technical assistance to community-based organizations that pursue their community development objectives primarily through making loans and investments in distressed communities. The PRIME Act proposes to provide technical assistance to a broader range of microenterprise organizations than would otherwise be reached under existing programs.

    The proposed legislation establishes a competitive grant program based on the Fund's authorizing statute. The Act's key focus, technical assistance and training for microenterprise development organizations and low-income entrepreneurs, is consistent with the Fund's community development mission. The Act's emphasis on research and development to further best practices in microenterprise training and technical assistance and their outcomes or impacts accords with the Fund's efforts thus far under the Presidential Awards for Excellence in Microenterprise Development.
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    The PRIME Act requires that all assistance be matched with funds from sources other than the Federal Government. This matching funds requirement is also a key component of the Fund's CDFI Program. The leveraging of private sector investments with Federal dollars has greatly enhanced the capability of the organizations that we invest in.

    We also take seriously the commitment to ensure that the Federal agencies better coordinate amongst themselves. The Interagency Work Group on Microenterprise Development was formally launched in July of 1998. The CDFI Fund is co-chairing this endeavor with the Small Business Administration. The first meeting included 40 people representing 12 agencies. It is our intention to provide the public better access to information about these Federal programs. Along with other objectives, we hope to establish a common definition of microenterprise amongst the Federal agencies and other regulatory and educational programs. Most importantly, we will work to ensure that our programs do not duplicate or undermine each others' efforts.

    The PRIME Act would create a program within the Federal Government that is specifically dedicated to building a network of non-profit community-based institutions that can provide training and technical assistance to low-income entrepreneurs. Its focus on non-profit community-based organizations serving low-income entrepreneurs is consistent with the goals of the Fund: building community-based organizations to serve low-income people and communities.

    Thank you for this opportunity to tell you about the CDFI Fund's programs and our thoughts about the PRIME Act. I would be very pleased to respond to any questions.

    [The prepared statement of Ellen W. Lazar can be found on page 76 in the appendix.]
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    Chairman LEACH. Thank you, Ms. Lazar.
    Mr. Jones.

    Mr. JONES. I do not have a statement, Mr. Chairman.

    Chairman LEACH. Thank you.

    Mr. Gray.


    Mr. GRAY. Good afternoon and thank you. I am very honored to appear before you, Chairman Leach. And I am especially pleased to appear before Congressman LaFalce, who chaired the Small Business Committee at the time the SBA Microloan Program became law. The current Ranking Member of the committee, Representative Velázquez, has also been a strong supporter of the microlending program.

    I am particularly pleased to participate in this discussion because of my longstanding interest in microenterprise development. Before I assumed my position at the SBA as a private sector banker, I was involved with a number of projects to foster community and microenterprise development, particularly in South Central Los Angeles. I want to state at the outset of the hearing my strong support for the objectives of CDFI and for the wonderful strides it has made under Ellen Lazar's leadership.
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    Since its inception, the Microloan Program has provided unique support to start and grow microenterprises. SBA's Microloan Program is much more than a lending program. It links its provision of funding for microloans with the technical support funding that is so critical to the ultimate success of individual microenterprises. SBA's Microloan Program also provides separate funding for technical assistance, both to enable microenterprisers to obtain loans from private sector sources and for capacity building in numerous microenterprise development organizations around the country.

    Consistent with the program's authorizing legislation, SBA targets Microloan Program assistance to low-income individuals, those in areas of economic downturn, and to women, minorities, and others in need of small amounts of capital to own and operate a small business.

    SBA's Microloan Program has three components. Under the first, SBA provides loans to organizations called ''intermediaries'' that in turn make loans to microenterprises up to $25,000. What makes this loan program unique is that SBA is also authorized to provide grant funding to the intermediaries, which allow them to provide technical assistance and support to their borrowers. For fiscal year 1999, SBA is authorized to provide up to $100 million in loans to intermediaries and up to $40 million in technical assistance grants.

    Under the second component, SBA is authorized to provide separate grant funding to additional ''non-lending technical assistance providers.'' To date, more than 13,000 microbusinesses have received technical assistance under this component, and these businesses have received private sector funding estimated at more than $30 million.
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    Through the third component, SBA provides grants to experts in the microenterprise field. These grants enable them to train other microenterprise organizations to increase their skills in assisting microbusinesses. For example, SBA recently funded the research and development of capacity building training modules for organizations to provide services to two special markets: Vietnamese and Hispanic communities.

    SBA's Microloan Program is valuable for a number of reasons. First, it is community based. It requires local investment of dollars, expertise, and training, and it allows lenders to conduct business within the local lending climate. It also encourages borrowers to strengthen their financial positions through local institutions.

    Second, the Microloan Program focuses on access to credit backed by technical assistance. I would like to share with you an example of the program's success.

    While working as full-time firefighters, a brother and sister partnership established a business that marks underground utilities in Wisconsin. They worked on different shifts so that one could run the business while the other went to work. They shared a car and invested a major portion of their earnings into the business, which recently reached a point of growth that required a small capital injection. They only borrowed $14,000, but as a result, new equipment was purchased and two full-time jobs were created, doubling the size of the company. As a result of this growth, this minority-owned microbusiness landed a two-year contract with a large firm, strengthening that firm's commitment to invest in local minority-owned businesses.

    At present, SBA's Microloan Program includes 119 intermediaries providing full or partial coverage in 46 States, the District of Columbia, and Puerto Rico. It also includes 19 non-lending technical assistance providers spread across the United States. SBA is authorized to expand the program to a total of 200 intermediaries, and we are working hard to expand our geographical coverage.
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    Microborrowers are a diverse group of individuals with the common goals of self-sufficiency, improved lives for their families, and the opportunity to make positive contributions to their communities. About 36 percent of SBA's microborrowers live in rural areas and nearly one-half of the microloans have been to businesses owned by women. Minority business owners have also received more than 40 percent of these loans.

    The single most unique feature of SBA's Microloan Program is its ability to link technical assistance with lending. Ultimately, the availability of technical assistance is critical to the individual microborrower's potential for success. It also helps entrepreneurs obtain critical funding from private sector sources.

    Administrator Alvarez has committed SBA to provide business capital and services to ''new markets,'' which include inner-city and rural small businesses, and those owned by women and minorities. The Microloan Program is at the very beginning of SBA's critical continuum of programs which provide small businesses with access to capital, both debt and equity, to start, grow and expand.

    Thank you for taking the time to learn more about SBA's Microloan Program, and we are all looking forward to the continued growth in the future. Thank you.

    [The prepared statement of John Gray can be found on page 80 in the appendix.]

    Chairman LEACH. Thank you very much, Mr. Gray.
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    I might just begin with you with one broad question related to the SBA's Microloan Program, and that is—obviously, there can be a cost to it—but do you believe that the Government, as a whole, may be at a break-even or savings point with regard to saving costs on the welfare side of the equation?

    Mr. GRAY. Absolutely. I do not have the actual statistics of the welfare-to-work numbers that have been affected by the microlending. We have numerous anecdotal evidence, and I will be glad to get back to you with that exact number. We do measure that.

    Additionally, we measure the ability of self-sustainability in that field, and I could also get back to you with a number on that.

    Chairman LEACH. I would appreciate that. That would be good. And we will put that in the record, so if you could get back to me with that, that would be fine.

    [The information referred to can be found on page 87 in the appendix.]

    Turning to the Treasury, one of the aspects of all of this is that the Treasury is not the natural place in the Federal Government for programs. We think of the Treasury as more macro- than microeconomic. But you do have the CDFI Fund, which is, in a sense, a breach of this.

    It is my sense that one of the attractive features of moving forth is, once one's premise is that you have a CDFI Fund, is that your spectrum of potential institutions to support widens. Many of these institutions in microenterprise lending, at least that I have seen, are frankly stronger, in my view, than some of the CDFI programs that you have supported. But I don't want to draw that as a strong conclusion. I would just say that is a possible observation.
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    Would you care to comment on that? And, more importantly, that you, by moving into microenterprise lending, expand the scope of the type of program that can be supported through CDFI. Does that make sense?

    Mr. BARR. I will try to answer the question at a general level and ask Ellen Lazar to talk a little bit about some of the particulars of the CDFI program.

    It is our view that the PRIME Act would permit the Fund to engage with a broader range of organizations, and many of those organizations currently lack access to program funding or sufficient program funding to provide the kind of technical assistance that I think we have all agreed is essential to effective lending, particularly for low-income entrepreneurs.

    We also believe that we would be able to leverage additional relationships that the CDFI Fund and the Treasury Department and its bureaus have with financial institutions generally to foster microenterprise development. So we see this as part not just of an important additional thing that the CDFI Fund could do, but an important way of leveraging other Treasury resources.

    Ms. LAZAR. Let me add, Congressman, that the CDFI Fund has continually funded microenterprise organizations that are CDFIs. Part of the definition of a CDFI is an organization that does lending or provides equity investing. To that end, we funded in our rounds in 1996 and 1997, over $8 million in grants and loans to microenterprise organizations. This year we will be funding an additional number of microenterprise organizations. We are making our awards right now.
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    The organizations that we would be reaching through the PRIME Act would be organizations that are really training-led rather than credit-led, whose activities are more based on their training and development work than on their lending work. We would be reaching down to, I think, a more grass-roots, lower community development-based, or group of organizations that we had not reached before; organizations that don't necessarily do lending.

    Chairman LEACH. Well, thank you for that distinction. I appreciate it very much.

    Mr. Jones, did you want to add to that?

    Mr. JONES. No, sir, I think that Ms. Lazar actually really focused on the issue. Currently, there are a lot of very strong microenterprise organizations that we cannot reach because their predominant business is not financing. Their predominant business is technical assistance and training. What the PRIME Act would allow us to do would be to reach those organizations.

    Chairman LEACH. Thank you very much.

    Mr. LaFalce.

    Mr. LAFALCE. Let us start out with the premise that I believe—always have believed in—the importance of small business and microcredit, microlending in particular. The question is what is the most appropriate role for the Federal Government in stimulating this activity?
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    As Chairman of the Small Business Committee, I focused on the Small Business Administration and its microlending programs, and I was there at the creation, working with Senator Dale Bumpers. On this committee I focused historically on microlending through the international financial institutions, and I believe we have achieved significant success, at least in the past several years.

    Now, I want to be very, very helpful wherever and whenever I can be. The CDFI program was an initiative of this Administration, and I want to be supportive. If I had my druthers, I would have put it, clearly, within HUD as opposed to Treasury. Because when I think of Treasury, I think of an institution involved with the raising of money, enforcement at our borders, work with the International Monetary Fund, and so forth. I don't think of them in these little neighborhoods in the City of Chicago or someplace else. I don't know that they are structured that way.

    CDFI has been criticized by some. Representative Bachus has had a number of hearings and has been somewhat critical, but he can speak for himself. I think that is a fair characterization. On the other hand, HUD has received some criticism too for its management of its programs from Members of this committee.

    So I want to be helpful; but the question is how do we best accomplish that within the present setting and with the current fiscal resources? I believe the SBA is authorized at least twice what has been appropriated for microlending; is that correct?

    Mr. GRAY. That is correct.
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    Mr. LAFALCE. OK. What activity is CDFI or HUD doing right now with respect to microlending that SBA is not doing or cannot do, Mr. Gray?

    Mr. GRAY. The SBA programs are really focused on the lending side of microenterprise, (even on non-lending technical assistance), providing technical assistance in support of financing. We have a modest component for training.

    The support of institutions——

    Mr. LAFALCE. Who performs the training then? Do you contract this out? Do you award grants to institutions?

    Mr. GRAY. We award grants and, through that process, it is contracted out.

    Mr. LAFALCE. So the question then is not what your capacity is, it is your fiscal resources. So you could enter into a contract with a group, as you have done historically, both to make loans and to provide training or one or the other; is that correct?

    Mr. GRAY. That is correct.

    Mr. LAFALCE. Tell me about this Interagency Task Force on Microlending with respect exclusively to domestic microlending as opposed to international. Who are the participants, the agencies, and who chairs this effort?
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    Who would like to address that?

    Ms. LAZAR. I can certainly address it. Actually, we cochair it. John and I cochair the Interagency Task Force. We came together in July. About twelve different organizations were at the table.

    Mr. LAFALCE. July of 1998?

    Ms. LAZAR. July of 1998. Recently.

    Mr. LAFALCE. Very.

    Ms. LAZAR. We brought together the Department of Agriculture, HUD, HHS, the Department of the Interior, the bank regulatory agencies, including the OTS, the OCC.

    Mr. LAFALCE. Is there a document that lists all the microlending programs for domestic purposes of the Federal Government?

    Ms. LAZAR. We have some materials that the CDFI Fund had compiled a couple of years ago, and we have some materials that had been compiled by the Association for Enterprise Opportunity. The AEO will be testifying later this morning. What we intend to do with this interagency work group is really develop—one of our tasks is to really develop a full compendium of all the work that is being done throughout the Federal Government in the microenterprise field or that touches on that.
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    Mr. LAFALCE. All right. Let us suppose that I am a farmer in the village of Medina in Orleans County. Orleans County has a population of 40-some thousand. Do I go to HUD, do I go to CDFI, do I go to the SBA, do I go to the Department of Agriculture, or do I go to HHS, or do I say, to cover it, I better go to each and every one of them?

    Mr. BARR. I think in your local community there is going to be an institution, or a set of institutions, that is responsive to local needs, and that institution——

    Mr. LAFALCE. What type of institution are we talking about? Are we talking about the Medina Savings and Loan, a credit union? Are we talking about the Rural Development Opportunities group that already has a contract to perform services such as this with respect to the delivery of microlending, both financial and management?

    I have forgotten who their contract is with. Is it HUD? It is not SBA, is it?

    Mr. GRAY. [Shakes his head in the negative.]

    Mr. LAFALCE. Then it is HUD. Good. They might get a contract from CDFI shortly.

    Mr. BARR. Right. My point, Congressman LaFalce, is that there is an institution, or a set of institutions, on the ground in the local community that will bring together whatever resources it can to provide services to its community. And sometimes that resource will be the CDFI Fund, depending on its structure, and sometimes that resource will be the SBA. Business institutions put it together on the ground.
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    Mr. LAFALCE. All right. Let us say I am an employee for the SBA, and I am working out of the Buffalo office or the Rochester office; Orleans is in between. Do I want to bother with this $10,000 microloan? I have bigger fish to fry, don't I?

    Should I look to the SBA employees or is it only contractors with the SBA that really would be interested in microloans, Mr. Gray?

    Mr. GRAY. As you know, the program is delivered through the establishment of small locally-based, community-based microintermediaries. Our district offices have done a wonderful job referring applicants to those microintermediaries, and that is the role we play.

    Mr. LAFALCE. So it doesn't matter, then, who we give the money to—which governmental agency. The question is who is the intermediary. We can give it to just about any one of you, any program, so long as you choose a good intermediary, because it is really up to the intermediary, really, to do the work; is that right?

    Mr. GRAY. That is correct, as a matter of fact.

    Mr. BARR. That is right.

    Mr. GRAY. A great majority of our microintermediaries are also CDFIs.

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    Mr. LAFALCE. So, any way we can skin the cat, let us skin it; is that what you are saying?

    Ms. LAZAR. Yes.

    Mr. LAFALCE. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, John.

    Mr. Bachus.

    Mr. BACHUS. Thank you, Mr. Chairman, I appreciate your having this hearing. I think, as Mr. LaFalce said, the primary question is how do we accomplish it, not that there isn't a need.

    Mr. Gray, I have read your testimony. I was looking at page 6 and trying to figure out whether you supported the PRIME Act or not. Do you support it?

    Mr. GRAY. Yes. The world of microenterprise needs every available resource it can possibly get, and we believe that the support of the PRIME Act is appropriate. We are working very closely with CDFI, OMB, NEC, to make sure that the institutions that participate both with SBA and with CDFI benefit by this program.

    Mr. BACHUS. Can it accomplish anything that the SBA Microloan Program doesn't already accomplish?
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    Mr. GRAY. The focus of the PRIME Act is on the training side versus the lending side of the microenterprise community. And I believe that that focus in and of itself is enormously helpful and can be funded in a very specific way.

    Mr. BACHUS. But you have training programs also, do you not?

    Mr. GRAY. We have been limited in the development of the training programs due to a limitation in the amount of funds that we receive.

    Mr. BACHUS. But if the funds were put in SBA, you could do the same thing?

    Mr. GRAY. I believe that we could. I think that the picture here is bigger than just SBA and that the microenterprise community is enormously diverse and in great need and that we have to work together with all of our institutions.

    Mr. BACHUS. We often talk up here about duplication and combining programs, and this almost seems as if we are going in the opposite direction. Does that bother you or can you see how I could have that impression?

    Mr. GRAY. I certainly can understand how you have that impression, and we have had lengthy discussions about the public purpose of both the programs. I believe that at this point the Administration is comfortable supporting both programs and looking at how the PRIME Act can certainly be integrated into the SBA's programs.
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    Mr. BACHUS. Mr. Barr, you know I have had some concerns about the management practices over at CDFI, and I think Ms. Lazar is on the right track, so I am optimistic that things are better. But I am concerned at this time about adding a new responsibility to the CDFI before it really gets its initial responsibilities nailed down. Do you have any comment on that?

    Mr. BARR. Yes, sir. We are very cognizant of that concern and share it and, in our judgment, the top priority for the Fund in the coming year is going to be focusing on making sure that the strong management practices that Director Lazar has been able to put into place are really given a chance to take hold; that your recommendations and the recommendations of others are taken into account in the structuring of the program.

    That being said, we believe that were the Congress to decide to move forward with this program in the next fiscal year, the Fund would be prepared to implement such a program effectively.

    Mr. BACHUS. Do you have that capacity?

    Mr. BARR. We believe that the Fund will be in a position to be assured of that by the next fiscal year. We don't think that the program, if it were to have been done this past fiscal year, would have been an appropriate new task for the Fund to take on.

    Mr. BACHUS. I noticed in June there were $115 million worth of unobligated funds at the CDFI. At the end of the fiscal year, how much of those funds do you expect to obligate?
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    Ms. LAZAR. I would be happy to answer that, Congressman. We are right now making awards. The letters are going out today and tomorrow to our awardees. We expect to give out over $70 million in awards. This year we had a total two-year obligation authority of $115 million. At the end of this fiscal year, September 30th, we expect to be left with $32 million.

    Mr. BACHUS. So about $85 or $83 million?

    Ms. LAZAR. We have spent the money that we projected on our CDFI core program; our intermediary program, our BEA program, and our new technical assistance program.

    Mr. BACHUS. But you still have $32 million unobligated?

    Ms. LAZAR. Yes, that is right. That is what we will have at the end of the year.

    Mr. BARR. Just to clarify, sir, those are funds, as you know, that are carried over into the next fiscal year.

    Mr. BACHUS. I realize you gave an estimate several months ago that you would obligate about $95 million, and you have obligated $83 million, so that is not too far off.

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    Ms. LAZAR. Yes.

    Mr. BACHUS. You had planned to spend about $20 million on training programs. Mr. Gray mentioned training programs. To me, it almost seems like what you are doing is you are training people, you are creating an industry. Because there is not one there, you have to train them to ask for it. How much have you spent on these training programs this year?

    Ms. LAZAR. This year we had put out a notice of funds availability for $5 million for our technical assistance program, which we launched this year. Out of that $5 million we will be making awards for about $3 million.

    The $15 million that we had anticipated spending for our full training program is going to fall into next year. We expect that we will have a program which will obligate funds in the first part of fiscal year 1999.

    Mr. BACHUS. We have this unobligated money. To me, it seems as if you are going to expand the programs in the Department, but I am not sure that the Fund is ready for more responsibility. I am not sure that SBA would not be a better place for it.

    I will say this, in the letter of transmittal on the review of the management practices, I expressed some of these same concerns. But I wanted to express them again.

    Ms. LAZAR. OK.

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    Mr. BACHUS. But I appreciate your openness in answering those questions. Thank you.

    Chairman LEACH. Thank you very much, Mr. Bachus, and I would like to thank the panel for their testimony and, more importantly, for their work in this particular area. Thank you very much.

    Our third panel, if they could come forward, is composed of Mr. Jason Friedman, who is Vice President of the Institute for Social and Economic Development, a non-profit microenterprise development research and evaluation organization based in Iowa City, Iowa; our second witness is Mr. Eugene Severens, who is Executive Director of the Nebraska Microenterprise Partnership Fund, which is a non-profit financial intermediary that serves community-based microenterprise programs operating in Nebraska; our third witness is Peggy Clark, who is the Executive Director of the Economic Opportunities Program at the Aspen Institute. The Institute is a non-profit education research organization which has administered an evaluation of microenterprises through a five-year study called the Self-Employment Learning Project. And our last witness is Mr. Michael Maroney, who is Chairman of the Association for Enterprise Opportunity, which principally provides technical assistance and training to microenterprises.

    Chairman LEACH. We will begin, in a very competitive sense, with a fellow Iowan, Jason Friedman.


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    Mr. FRIEDMAN. Thank you, Mr. Chairman. It is a pleasure to be here. I am the Vice President of ISED. We are one of the largest and oldest microenterprise organizations. We cover the entire State of Iowa.

    H.R. 4179, or the Program for Investments in Microentrepreneurs Act, represents nothing less than a watershed event in the history of the microenterprise movement in the United States. And on behalf of the thousands of Iowans, low-income Iowans that we have served, my goal here today is to attempt to explain why.

    ISED is a leader in using microenterprise development as an anti-poverty strategy. We began serving welfare recipients in 1988, and then expanded our markets to serve low-income populations and economically distressed urban and rural communities. As of the end of 1997, ISED has started or expanded over 1,000 businesses within Iowa. We have served 4,300 clients, 76 percent of whom are low-income, and we have assisted clients in accessing nearly $5.8 million in financing.

    Of the businesses started, expanded, or strengthened with ISED assistance, 86 percent have been owned by low-income individuals, and 42 percent of those individuals were on public assistance at the time of enrollment in our program. Significantly, our clients have a remarkable business survival rate of 63 percent.

    The PRIME Act is of tremendous importance to the microenterprise industry as it validates what ISED and hundreds of other microenterprise organizations have learned is necessary and critical in helping low-income people create their own jobs, enter the mainstream economy, provide for their families and contribute to society.
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    First, we have learned that the microenterprise development is a human capital building strategy as much as it is a credit and finance strategy. The entrepreneurial and job skills provided by our programs are amongst the most critical skills demanded by employers today. Anecdotally, we know that many of our folks who go through our training program but do not start businesses report to us that they get a better job because of the skills that they have learned, the business training skills that they have learned with ISED. PRIME responds to this by supporting the development and strengthening of training programs.

    Second, we have learned that business capital is only one ingredient for business success and, in many cases, not the most important one. Over 50 percent of ISED businesses that have started have not required capital to start their businesses. A client starting a cleaning business, a furniture restoration business, or a landscaping business may not need capital to start their business. For those that do, however, the SBA Microloan Program has been an important source of credit and technical assistance to low-income entrepreneurs who are unable to access capital from conventional lenders.

    However, while the SBA program is extremely important, it cannot help ISED and many other training-led organizations provide the training and technical assistance that are needed because many of our clients do not get a loan when they start. This is the central dilemma we are facing in the industry today. Support for microenterprise at the Federal level primarily focuses on credit, with limited funds available strictly for the training and technical assistance needs of low-income and disadvantaged entrepreneurs. PRIME directly addresses this imbalance between credit and training, and we are most grateful. And, frankly, we envision Treasury and SBA to be natural allies and partners on behalf of low-income individuals across the country.
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    Third, we recognize that the forces shaping our economy today from a technological, social, and demographic standpoint pose new challenges to the microenterprise industry. Our challenge is to help our clients understand how to capture new markets, incorporate technology, and accelerate their profitability and growth. At the same time, existing funding streams for these activities are not in existence. The PRIME Act responds to this by building the capacity of organizations to address and meet these challenges.

    For example, capacity building funds will help newer organizations develop an infrastructure geared to serving low-income clients and develop state-of-the-art training programs. For mature organizations, like ISED, these funds will help us refine and expand our training programs, serve new immigrant and refugee populations, and develop new programs and strategies to help our businesses respond faster and more effectively to market forces.

    In conclusion, PRIME is absolutely critical to the stabilization and evolution of the microenterprise industry in the United States. Combined with the SBA program and other Federal supports it will create a unified and coherent infrastructure to stimulate the creation of thousands of microenterprises owned by low-income individuals, and we appreciate your support. Thank you.

    [The prepared statement of Jason Friedman can be found on page 110 in the appendix.]

    Chairman LEACH. Well, thank you very much, Jason.

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    Mr. Severens.


    Mr. SEVERENS. Thank you, Mr. Chairman, for inviting the Nebraska Microenterprise Partnership Fund to provide testimony before the House Banking Committee on the PRIME Act. My name is Eugene Severens, and I am the Director of the Nebraska Microenterprise Partnership Fund, a not-for-profit financial intermediary which serves community-based microenterprise programs operating in the State of Nebraska. I will be summarizing my testimony here and would ask that the entire document be entered in the record, as you indicated earlier.

    My first point I would like to make relates to the role of microenterprise and Nebraska's economy. I provided some statistics from the Bureau of Labor Statistics for the State of Nebraska, which finds that microbusiness comprised 91 percent of the businesses in Nebraska, provides 25 percent of the jobs, and generates 20 percent of the net income. I wanted the committee to be aware of that data simply to show that microbusinesses are not some insignificant marginal part of the economy, but at the core of Nebraska's economy.

    In my second section I want to describe a little bit about the Nebraska Microenterprise Partnership Fund. Microenterprise, as we all know, is a new and evolving field. As part of the growth in microenterprise programs, there has been a gradual restructuring of microenterprise delivery systems. This has taken different forms in different States, and the Microenterprise Partnership Fund represents one version of that restructuring.
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    We use the word ''intermediary'' a little differently than the word is used in the context of SBA. For us, the partnership fund is a statewide financial intermediary that provides support for local microenterprise programs. In a nutshell, we raise funds from new sources and regrant or loan those funds on a performance basis to microenterprise programs which, in turn, provide training or microloans to local microbusinesses.

    As an intermediary, in the way I am using that word, we do not serve microbusinesses directly; rather, we serve the non-profit and community-based microenterprise programs, which in turn serve the end-user microbusinesses. And I have provided, and am going to skip over, a section that provides some rationales for why we, in Nebraska at least, think that this approach is a constructive one.

    I would like to move to the section on the importance of training and technical assistance. As an intermediary which currently provides operating or lending capital support for 16 non-profit microenterprise programs, urban and rural across the State, I would like to make two points that I feel bear on the PRIME Act.

    Point one: While much has been made about microlending and, indeed, access to capital is extremely important to microbusinesses, the need for entrepreneurial training and technical assistance is greater. The PRIME Act's focus on entrepreneurial training reflects this reality.

    For example, in 1998, the 16 programs served by the partnership fund are projected to make 161 microloans. During that same period, they are projected to provide training and technical services to 1,117 microbusiness owners. In other words, for every one microloan borrower, there are 7 trainees in the pipeline.
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    I think the concept of a pipeline is important to recall. Microloans don't just come out of thin air. They are circumstances that need to be nurtured, and training is part of the background that has to be there.

    I will skip the next example and move on to point two. While the microenterprise development strategy is roughly eight years old in Nebraska, there are still many unserved populations. For example, in the Partnership Fund's most recent funding round this past April, four new microenterprise programs applied for assistance. These programs ranged from one program serving a Mexican-American farm worker population in the far western part of the State, to an urban program serving the City of Lincoln.

    I mention this simply to make the point that the kind of capacity building provided for in the PRIME Act is very important in the microenterprise field.

    My fourth section deals with the relationship of the PRIME Act with other Federal programs. In my experience, I think the proposed PRIME Act is fairly unique among Federal microenterprise programs for at least three reasons, although I would like to add a fourth.

    First, the PRIME Act provides funding for entrepreneurial training. Microlending is not necessarily presumed. I think this fact may make the PRIME Act unique among Federal programs. And as I have discussed above, this is an important reality of the microenterprise field.

    Second, the PRIME Act is, as far as I know, the only Federal legislation that mentions the role of microenterprise financial intermediaries. And, again, I am using the word ''intermediary'' as I defined it earlier, intermediaries such as the Nebraska Microenterprise Partnership Fund, whose role is to support local microenterprise programs.
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    While it is not clear how Nebraska's programs might collectively respond to any PRIME Act opportunities, the recognition of intermediary roles such as ours provides a flexibility that allows microenterprise programs to respond as integrated systems working together, rather than as stand-alone programs serving smaller fragmented customer bases.

    Third, and from a somewhat personal perspective, I would like to make note of the fact the PRIME Act would be delegated to the U.S. Treasury Department's Community Development Financial Institutions Fund. Speaking as the director of a program that has both been certified by and received financial assistance from the CDFI Fund, I would support this delegation.

    The CDFI Fund's process of careful capacity assessment and the adoption of mutually crafted, but very demanding performance benchmarks has been, for our organization, on balance, an extremely constructive process. While the PRIME Act, of course, would be a different program with different legislative criteria, and it does not include a certification process, I am guessing that the rigors we experienced in our CDFI Fund application would resonate in a new program.

    Now, the fourth point I would like to add, that is not in my written testimony, is the fact that the PRIME Act may be the only piece of Federal microenterprise legislation that explicitly acknowledges a place for State government in the process of developing a delivery system. That is in section 175.

    Which really brings me to my last point, Mr. Chairman, and last observation. What is not well known among Federal policymakers is the fact that State policymakers are getting increasingly involved in microenterprise development. This is an important new ingredient. In June 1997, the Nebraska legislature passed the Nebraska Microenterprise Development Act, or LB 327, which takes as its goal the creation of a permanent statewide infrastructure of microenterprise programs that can provide access both to training and microcredit to all of the State's micro and startup businesses. The legislature appropriated $500,000 for this effort.
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    Without going into the details of that legislation and how it could dovetail with the PRIME Act, I would simply like to make the point that the Federal Government has important new partners at the State level that need to be acknowledged and incorporated into their legislative schemes. In this regard—and I have attached to my testimony, Mr. Chairman, a letter written by the Director of the Nebraska Department of Economic Development—DED is the agency responsible for implementing this State legislation, and she has written a letter in support of H.R. 4179.

    So thank you for this opportunity to provide testimony and I would be happy to answer any questions.

    [The prepared statement of Eugene Severens can be found on page 112 in the appendix.]

    Chairman LEACH. Well, thank you very much, Mr. Severens.

    Ms. Clark.


    Ms. CLARK. Good afternoon. Thank you very much for allowing us to come here and talk to you today. My name is Peggy Clark, I am Executive Director of the Economic Opportunities Program at the Aspen Institute, which is a non-profit research and education organization.
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    For the past seven years, we have been involved in an evaluation of the microenterprise field in the U.S., and it is called the Self-Employment Learning Project, SELP. Last year we were awarded a Presidential award for our contributions to the debate about what are the strengths and weaknesses in the field. In SELP we have been tracking seven of the oldest and largest microenterprise programs, or intermediaries—programs that provide direct services to microentrepreneurs—annually since 1991. And we have been looking at the costs, the performance and the outcomes to the entrepreneurs of this kind of assistance.

    As part of this research, we have focused primarily on poor entrepreneurs, and what were their needs and what were the results in terms of their lives over time, which is an issue that is central to the PRIME Act. This is where I would like to make my comments today, and I will make three major points.

    First of all, we have seen very strong outcomes among poor microentrepreneurs, which has led us to say that it is an effective poverty reduction strategy.

    Second, poor entrepreneurs, in particular, need training and technical assistance in a number of areas, and it is essential that we explicitly target them in this legislation to ensure they do get these resources.

    And, third, that there is a critical need for additional Federal funding to support expanded programming for the poor, and the particular training and technical assistance in the PRIME Act is a perfect way to do that.

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    I would like to talk first, briefly, about some of the outcomes from our study, which I would be happy to answer some more questions on. You also have additional materials in your packets.

    We tracked 405 entrepreneurs. As I said, we annually talked to them about their lives and their businesses. It was a random sample. We found some very interesting things at the end of the five-year period. The vast majority, 78 percent, increased their household incomes. The average change in household income was about $10,000. Generally, households went from around $13,000 a year to $24,000 a year. That might not sound like a lot of money, but, in fact, they were doubling their household incomes. So if you think of that in your own life, in a five-year period, that is quite a remarkable increase.

    Even more importantly, more than half, 55 percent, of the entrepreneurs actually made the hurdle over the poverty line. They got out of poverty in that five-year period. This compares very, very favorably with other programs that are targeted to the extremely disadvantaged in our Nation. For most of those who made it over the poverty line, it was more than a 200 percent increase in their household incomes.

    There were other important economic development impacts we really did not expect to see. We did not expect to see a lot of job creation, for example, among the self-employed, but we found by the last year of the study 43 percent of the businesses had added additional employees. The average wage was over $7 an hour.

    Annual sales of microenterprises are small, although they are significant. On average, they were $50,000, and they grew over the five-year period, although relatively slowly. Survival rates were 78 percent after three years, which is, in fact, higher than most small business rates. And after five years they were at 57 percent, which does compare with Commerce Department statistics for minority-owned businesses.
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    It is important to recognize that this was one of the first studies of microenterprise in this country. Not a lot is known about microenterprise. We are always asked how big is the microenterprise sector; how many entrepreneurs are there? It is a hard question to answer, but we have looked at a number of sources, Census sources, Commerce Department sources, and we are prepared to say now that we estimate that there are at least two million low-income microentrepreneurs in this country.

    We have been doing a directory of microenterprise programs since 1992. As you might be able to see, each year it grows about twice in size. These are the programs in every State that are providing loans and technical assistance to entrepreneurs. For the last we did, the 1996 directory, showed that 200,000 microentrepreneurs had been reached. If you look at this in relation to the two million figure, we believe that there is significant unmet demand for services to this population.

    This population is largely minority. In many cases, it is women, in many cases people that live in disadvantaged communities, both rural and urban, and they do not either feel comfortable or able to realize services from traditional banks or even from traditional SBA resources. Often they feel much more comfortable going to local or community-based organizations such the ones we have been talking about today.

    My second point is, as others have said today, and I will make this brief, that microenterprises really do need training and technical assistance, and often the gap is not about credit. We do have credit in this country. Many people use credit cards, especially when the interest rates are low, to finance businesses. What they often cannot get is access to basic business training and also connections to the mainstream market.
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    For example, a woman who makes beautiful handmade clothes in inner-city Chicago competes not only with other local clothesmakers but Walmart. So we are a very complex competitive economy, and microentrepreneurs need to survive in that economy.

    Interesting point about our directory, to give you a sense of how many people are coming to these programs for training and technical assistance instead of credit. Of the 50,000 entrepreneurs that were reached in one year by programs, a full 40,000 of them were receiving training and technical assistance, and only 10,000 came seeking credit. It tells you that knowledge is what is needed, and also connections. Really, connections to markets are quite important for this population.

    The almost final point I am about to make is targeting the poor. We strongly endorse the fact that this legislation now has a target to reach 150 percent of poverty. One of the reasons why we have advocated for the benchmark to be 150 percent of poverty is that other guidelines, for example, HUD median-income guidelines, are based on local earnings. So that if in fact, especially in urban areas, there are large numbers of higher-income individuals, it tends to slide the median income level up, and so more moderate-income people are counted in as low income.

    We believe this legislation will encourage programs to try even harder to reach those that are the neediest.

    Last, I really appreciate the comments of SBA colleagues and CBFI colleagues who say that the microenterprise field needs all the help it can get. There is very, very little Federal funding even though we have some important legislation in place now.
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    But we do feel that there is nothing in place that really provides training and technical assistance, in particular to low income entrepreneurs, and that PRIME would make a very significant difference in the lives of hundreds of thousands of entrepreneurs across the country.

    Thank you.

    [The prepared statement of Peggy Clark can be found on page 117 in the appendix.]

    Chairman LEACH. Well, thank you very much.

    As the most neutral of the observers of this process, Mr. Maroney.


    Mr. MARONEY. On behalf of the Association for Enterprise Opportunity, I would like to thank you, Chairman Leach, for convening this hearing on microenterprise development and the Program for Investments in Microentrepreneurs Act.

    I am Michael Maroney, Chairman of the Board of the Association for Enterprise Opportunity and also President of New Community Development Corporation, a practitioner organization, in Omaha, Nebraska.
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    While today I will officially be speaking as AEO's Board Chairman, I am also a microenterprise development practitioner, as I said. My organization, NCDC, has been providing housing and community development activities to residents in Omaha since 1992. We got into microenterprise development in 1994. And since then, principally we provide training and technical assistance to our entrepreneurs.

    In the four years that we have been doing microenterprise development, we have made 26 loans for over $120,000 to graduates. Two hundred forty people have graduated from our program. Eighty-three of those graduates have actually gone into self-employment. In addition, these graduates have created 36 additional jobs and retained 43 jobs as a result of the training they received through our program.

    I would also like to say at this point that we are one of those programs in the State of Nebraska who has been a recipient of the Nebraska Microenterprise Partnership Fund Intermediary. And we are not an intermediary. We are a practitioner organization, and we looked at organizations like our enterprise, our Nebraska partnership program to receive funding and assistance.

    The Association for Enterprise Opportunity is a 501(c)(3) organization committed to microenterprise development. AEO defines microenterprise to be a sole proprietorship, partnership, or family business that has fewer than five employees. It does not generally have access to the commercial banking sector and requires a loan of $25,000 or less to start or expand its business.

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    For clarification, I will be speaking about microenterprise development. Our industry is often incorrectly referred to as microcredit. We view credit as one of the barriers to microenterprise development. The microenterprise development industry has emerged in this country to address the full range of needs of the microentrepreneur: training and technical assistance, access to credit, access to markets, and economic literacy and asset development.

    Since AEO was founded in 1991, it has grown from an organization of 100 pioneering programs to a network of over 500 members representing community development programs, social service providers, support organizations and funders. While AEO has expanded and diversified, its mission to provide members with a forum, information, and a voice to promote enterprise opportunity for people and communities limited access to economic resources has remained constant.

    AEO's growth has paralleled the expansion of the microenterprise development industry. Seven years ago, microenterprise development was considered the province of several dozen struggling programs. Today it is estimated that over 700 programs are in operation across the country with more being added each day.

    One of the most striking features of the U.S. microenterprise industry is its diversity. A wide range of institutions are involved in microenterprise development programming, including stand-alone microenterprise development organizations, community development organizations, loan funds, community action agencies, community development banks or credit unions, as well as Federal, State, and local government agencies.

    While most microenterprise development organizations target their programs to low income individuals, the goals and outcomes of individual microenterprise organizations vary. Some programs stress job creation, business and community development while others focus more on poverty alleviation, human capital development, and asset development for the poor.
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    Organizations tailor their programs to meet the specific needs of different target populations. For instance, programs that target persistently poor individuals on public assistance will have a heavier focus on training and support services than a program with existing women business owners that lack access to credit.

    There are four elements of a comprehensive microenterprise program: training and technical assistance, credit or access to credit, access to markets, economic literacy, and asset development.

    While programs incorporate these elements into their program design in different ways, there are three principal program models that dominate microenterprise in this country. Training led programs provide substantive training and technical assistance to clients before offering or referring clients to credit providers. My organization is an example of that.

    Credit-led programs provide individual loans to clients usually on a one-on-one basis and provide training or refer clients to training providers. An example is ACCION in New York.

    Peer networking programs provide credit and/or technical assistance to clients through peer group networking in which clients come together to make group underwriting decisions, create safeguards against default, and provide mutual support and technical assistance. An example would be Working Capital in Boston.

    The diversity of the microenterprise development industry presents a challenge when it comes to public policy because microenterprise development does not fit neatly into the jurisdiction of any single Federal agency or congressional committee.
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    AEO members have been actually involved in policy work, both at the State and Federal levels, since the organization was founded seven years ago. AEO has always been a member driven organization and our members, most of whom operate microenterprise development programs in poor communities, see the direct connection between their work as practitioners and the role they can play educating policymakers and the public at large.

    In 1991, when the discussions about the SBA Pilot started, there was a great deal of skepticism among Members of Congress and the SBA that non-profit organizations could successfully make small loans to low income individuals to start or expand a business. Would the loans get paid back? Could a loan of less than $25,000 really have an impact? Do community based non-profits have the capacity to administer loan funds and provide business training and technical assistance to small entrepreneurs?

    Well, seven years later, we can answer these questions and point to the success of the program. As we heard earlier, the SBA, there are currently over 110 non-profit intermediaries participating in the SBA Program. Collectively, they have made more than 7,000 loans to microentrepreneurs totaling approximately $68 million. The average loan to a business is roughly $10,000, and the SBA has not incurred a single loss in the six years they have administered the program.

    AEO supports the PRIME Act because it specifically addresses needs that our members have consistently identified as priorities for the industry: technical assistance funding for low income entrepreneurs and support for capacity building activities targeted to microenterprise development programs.
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    The idea of creating a fund to support the technical assistance needs of low income entrepreneurs emerged from the work of AEO's Policy Committee in partnership with a number of microenterprise development and support organizations, including RESULTS, the Corporation for Enterprise Development, the Aspen Institute, FINCA USA, Working Capital, and members of the CDFI Coalition.

    This working group identified three areas where additional investment was needed to ensure that low income entrepreneurs could access the types of services they needed: training and technical assistance for low-income entrepreneurs; capacity building for microenterprise development organizations; research and dissemination of information on industry best practices.

    The PRIME Act creates a new program at the Community Development Financial Institutions Fund dedicated to building a network of non-profit community-based institutions that can effectively provide training and technical assistance to low income entrepreneurs.

    I would like to focus briefly on two key components of PRIME: technical assistance and capacity building.

    The majority of PRIME funds would be targeted to non-profit microenterprise development programs to provide intensive technical assistance and training to low income entrepreneurs.

    Most existing funding for microenterprise programs, especially at the Federal level, is credit related. In fact, the industry is often incorrectly referred to as ''microcredit'' despite the fact that credit is only one of the barriers faced by low income or emerging entrepreneurs, as I mentioned earlier.
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    The more disadvantaged the population being targeted by a microenterprise development program, the more training and technical assistance are essential. Steady funding for technical assistance and training are amongst the most expensive elements of a microenterprise program, and organizations consistently identify funding for technical assistance and training as the primary funding need in the industry. However, no Federal program currently provides funding to support the training and technical assistance needs of microenterprise development organizations that target the very low income entrepreneurs.

    All of the funding authorized by PRIME would be targeted to low-income individuals and economically distressed areas as defined by the CDFI Fund, and at least half the PRIME funds must be used to benefit very low income individuals, those at or below 150 percent of poverty.

    This targeting criteria would ensure that the hardest to reach entrepreneurs would be served by the program. The targeting also distinguishes PRIME from other federally-funded technical assistance funds that are not strictly targeted to low income individuals and therefore rarely reach this population.

    Let me be clear that AEO is a strong supporter of existing business assistance programs, including the SBA's Women's Business Centers and the Small Business Development Centers. While these programs do provide technical assistance to entrepreneurs and small businesses, they tend to serve more established businesses rather than the very low income individuals that microenterprise development programs would be required to serve under PRIME.

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    At least 15 percent of the PRIME funds could be used to provide training and capacity building services to microenterprise development organizations and programs.

    AEO has seen a dramatic increase in demand for training and support activities as the industry expands. Some of the mature organizations, those that have been in operation for five years or more, are in need of training and support as they try to move to the next phase of programming or try to more effectively serve their low income target population.

    These mature microenterprise development organizations are now looking for ways to help their business clients graduate from survival mode to growth mode, and we have heard some of that earlier. In addition, some of those microenterprise development organizations are looking at ways they can assist their entrepreneurs access markets.

    Organizations are looking for ways that they can provide more sophisticated training in marketing and sales concepts to the entrepreneurs they serve. They are looking for creative ways to support the development and distribution of joint catalogs, facilitate Internet access or promote participation in trade shows and business and trade missions. The efforts of these mature microenterprise development organizations to expand their services would be supported by PRIME.

    The training needs for new and emerging microenterprise development organizations are quite different. Many of these new programs are being started by organizations who have not traditionally been involved in community economic development; for example, housing and social service organizations. What these groups are finding is that the microenterprise development strategy is one that can be imported into the current mix of services they offer their clients.
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    Organizations like the National Urban League are now encouraging their 115 affiliates to become more involved in microenterprise development. Organizations focusing on other targeted populations are also beginning to add this programming. For example, the World Institute on Disability, with whom AEO recently collaborated on a meeting on the topic of self-employment for people with disabilities, works with numerous organizations who are looking to add microenterprise development programming and who could benefit from capacity building initiatives like PRIME. PRIME can also help leverage other funding for these organizations, particularly when partnerships are formed between public and vocational rehabilitation programs and private organizations like banks and disability organizations.

    There is a very strong peer-to-peer learning network in the microenterprise industry and we as practitioners utilize the expertise of our colleagues on a regular basis. What we lack are the resources to effectively share this wealth of knowledge with the many individuals and organizations that are not part of the informal network.

    There is currently no Federal program that invests in developing and strengthening the network of community based, non-profit microenterprise development organizations. I use the term ''investment'' because targeting funds to this type of capacity building activity will have a significant long-term pay off. PRIME funds will be invested in community based institutions most able to respond to the needs of the low income entrepreneurs.

    AEO would also like to see some of the PRIME capacity building funds used to expand the number of intermediaries participating in the SBA Microloan Program. While the SBA currently has at least one intermediary in each of 46 States, their goal is to expand the program to make it available in all areas of the country and expand the number of intermediaries to 200 by the year 2000. We think PRIME funds would help the SBA reach this goal.
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    AEO is confident in the CDFI Fund's ability to effectively administer a capacity building program targeted to microenterprise development organizations. As an institution the CDFI Fund has continually demonstrated their understanding of how community based organizations work and the support that such organizations need to thrive. In addition, the Fund's experience overseeing the Presidential Awards for Excellence in Microenterprise Development has given them a unique insight into the industry.

    In closing, I would like to talk a bit about where the industry is going.

    More than 1,000 people recently came together in Washington, DC to attend AEO's annual conference entitled ''Microenterprise Works When We All Work Together.'' During the conference, AEO launched the ''Big Bold Goal'' for the U.S. Microenterprise industry. The goal is to have one million low-income and disadvantaged people become self-sufficient through self-employment in the next decade.

    This is by all counts an ambitious goal, and yet we believe it is attainable if indeed we all work together. Collaboration and partnerships have been a centerpiece of the microenterprise industry from the start. With support from AEO's numerous public and private sector partners, this goal can be achieved. Partners include organizations like the National Urban League, the National Congress for Community Economic Development, Corporation for Enterprise Development, Bank One, NationsBank, and Federal agencies, including the Small Business Administration, the Department of Housing and Urban Development, the Department of the Treasury, and others. Together we can meet the Big Bold Goal.

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    The resources that PRIME would make available to the industry are crucial in helping us reach this goal. I ask the committee seriously consider authorizing the PRIME Act before the 105th Congress adjourns.

    Thank you again for the opportunity to testify today, and I am happy to answer any questions you might have. Thank you.

    [The prepared statement of Michael Maroney can be found on page 153 in the appendix.]

    Chairman LEACH. Thank you, Mr. Maroney.

    Let me begin by turning to our first two witnesses because, uniquely, they represent statewide programs in two rural States. We often think of poverty as intensely an urban problem. But in some ways, dealing in rural areas where client bases are much more distributed is uniquely difficult.

    Do you find microenterprise lending of the same consequence, less significance, or more significance in rural areas?

    Mr. Friedman.

    Mr. FRIEDMAN. I don't think there really is a difference per se between rural and urban. I think the real-issue folks—low income folks come to us believing that self-employment is their way to contribute to their families. And what they don't have, they have a good idea, and they have got the energy and commitment to put everything in it takes to make it work.
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    But what they don't really have, and capital is important, but putting capital aside, they don't know how to prove the feasibility of that idea. ''Will that really make me money? Will that make what I need to live on? Will that contribute to my family? How do I research that market? How do I put together a business plan? How do I put together a P&L?'' It is that basic. ''Roll up your sleeves, let's sit down and figure out if this is going to work, and we will train you.'' No microenterprise organization writes a business plan, but we teach people how to do it, and they do the research.

    When we get to capital, though, many of them are, we preach, ''Get this thing started without taking on necessarily a lot of debt that you may not be able to handle in the first early months of managing that business. So let's start it small and grow it.''

    When we need capital, we go to the banks. We go to our other public and private lending sources to make that work. And what we find in rural communities, the banks are very much committed to stimulating small business growth, especially in the—frankly in the depressed communities in the southern tier of Iowa, they are looking to us to bring them, to do all the training and technical assistance and bring them into the bank with all the front-end work done, and then they are more than happy to work with us on terms and financing to make it work.

    So in the rural areas the banks are very much a part of this. In the urban areas, frankly they are, too. But it is the front-end training and technical assistance that is going to encourage more bank lending and bank partnership.

    Chairman LEACH. Mr. Severens.
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    Mr. SEVERENS. One of the principles of the Nebraska Microenterprise Partnership Fund is—well, one of the recognitions that we begin from is that every non-profit organization knows its own constituency better than we do. And it is up to them to determine what types of training delivery systems and loan products make the most sense for their constituency.

    With that in mind, we are only interested in making sure that they adopt best practices, that they coordinate their programs with each other, and that they would agree to subscribe to some basic formulas that we provide them with. All of our funding is done on a performance basis. And so we expect that they reach certain numbers of trainees, make certain numbers of loans during the course of a particular grant period in which they would be associated with us.

    But having said that, I think—to be a bit more responsive to your question, I think that the delivery system in rural areas is going to, by necessity, be different than the delivery system in urban areas simply because of, in a State like Nebraska, the disbursed population base.

    And in Nebraska, microenterprise development really began in the rural areas. That is perhaps a little different than the experience in other States. In fact, of the 16 programs that I mentioned that are current grantees of ours that will be serving in 1998, 1,117, a single program, the Rural Enterprise Assistance Project of the Center for Rural Affairs in Walthill, Nebraska will be serving 439. And it operates in over 100 communities across Nebraska.

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    So that is an example of what Mike was calling a mature microenterprise delivery program that has its delivery system down very good.

    We have a lot of other startup programs, both in urban and rural areas, that are focusing on new constituencies that haven't been served. We try to get at your question by making sure when they come into our system that they coordinate their efforts with the more senior programs in the State, that they learn from one another, that they attend, not only AEO conferences, for example, but our own version of such things in Nebraska, so that in this more close-in field, we can really make sure that programs are learning as fast as they can from each other to better reach and provide access to microbusinesses and startup businesses across the State.

    Chairman LEACH. If I can ask Mr. Friedman, one of the unique features of your program is that you work very closely with conventional lending institutions. Do you find the cooperation very high? You seem to imply that, in rural areas, they are a little more cooperative than in urban. Is that a normal circumstance or not?

    Mr. FRIEDMAN. ISED, when John Ell started our program in 1988, went to the banks, and the banks said, ''We would prefer you not set up a microloan program. We would prefer to see your clients. If they in fact go through a comprehensive training program and you in fact certify that they can run and manage this business, we will entertain giving them a loan very strongly.''

    That has been our case. Over the $5.8 million in financing, a majority of that has come from banks who see us doing the front-end work to make it happen.
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    But the banking environment has changed. I mean, there are banks, especially in Iowa now where more of the bigger banks are moving in, like NationsBank, for example. They see microenterprise development and small business in this field as a line of business. I mean, they look at this as a way not only to make money, but to serve communities, and they are now investing, for example, in delivering our training program in communities that we haven't before.

    So it is—some of the banks that have a much bigger perspective on this that had worked in North Carolina and Washington and other States see this as a way to make an impact in communities.

    I think, frankly, that is going to impact a lot of the smaller banks because some of them have not—you know full well that in the 1980's, the agricultural crisis in Iowa wiped out a lot of small businesses, a lot of farmers. So there is a lot of reluctance to go back in again and say these are more risky deals and these are self-employed folks. We have the regulators to deal with, too.

    So what we have done since that time is to do a lot more outreach and training of lending officers to try to find creative ways to cover as much of the bank's risk as we can while still including them in the deal. From our perspective, we would like to develop a relationship between the client and the bank so that the next—when that loan is paid off, the next time they can go in on their own and they have a track record with that financial institution to take on a larger loan.

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    Chairman LEACH. Just because it is the jurisdiction of this committee, is there intertwining here of the CRA Act?

    Mr. FRIEDMAN. We don't like to necessarily use that word when we talk to banks. I think they are—the larger banks know that, and I think the banks have gotten smarter now, and they have said to us, ''Look, CRA is important to us, but understand that we are a for-profit institution, so we figure out creative ways that they can make money and still serve our clients.''

    I think to a certain extent, though, some of the smaller banks may need some more educational effort from the banking associations in Iowa and other groups about the relationship between the Community Investment Act and microenterprise development in their communities.

    Chairman LEACH. Well, a number of you have mentioned technical assistance, particularly—well, all of you. And I will tell you that the main experience I have had in this field, I once worked for the old Office of Economic Opportunity, and we funded credit unions among other things. And we found counterintuitively that it was less important to provide money than it was technical assistance; that if one had good people with technical assistance, one can make a bigger impact than if one simply dropped a bundle of cash on a doorstep, and that the technical assistance issue is really a profound one. Now, this bill envisions, I think, 75 percent going to technical assistance. Does that seem too high?

    Mr. FRIEDMAN. Well, we need dollars, as Peggy Clark has eloquently said, we do need dollars for research of best practices and understanding more about how programs work effectively and the tools that we can develop to strengthen programs. So I think it is important that we have the research dollars in there. I think that they are appropriate given the amount of funding that is proposed.
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    Peggy, would you agree with that?

    Ms. CLARK. I think it is really critical right now because it is an emerging industry. You know, it is about a decade old. We are doing some very important work both with AEO and Aspen and others around, best practices, and around performance measures, around performance standards. That is important work. It is very precise. ''How do you define a business? What are average costs?'' All of those things. So the industry can begin to say this is excellence. So we can say, ''Not only do we have this many programs, but we can say these are really strong performers.''

    So I think that kind of investment in, as Gene has spoke of in the delivery system itself, is quite important to moving the industry ahead, to be much more efficient and much more effective. So I think it is quite important.

    I think that, to date, private foundations have really supported the development of microenterprise which has been a good partnership, but more and more, as we see the emerging growth of the field, there is a strong role for Government supporting that.

    Chairman LEACH. Mr. Maroney, you are the only one wearing kind of a dual hat. What is your sense on the import of technical assistance?

    Mr. MARONEY. As one we are starting, and I still consider our program an emerging program, we have only been four years, we are still learning and growing, but also wearing the other hat as the Association of Enterprise Opportunity, I have been able to talk to a lot of programs around the country, that training, the technical assistance is by far the hardest piece to come by in terms of funding. There are more and more dollars available. Banks are becoming more receptive to providing some funds for that.
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    But without the proper training and ongoing technical assistance, the dollars could be wasted. The loan dollars could be wasted. We support very strongly that the training and technical assistance dollar amount or percentage amount is fair and needed, and we hope that it would be strongly considered by this committee and the Congress.

    Chairman LEACH. OK. Thank you. Is there anything else any of you would like to add that hasn't been said?

    If not, let me thank you very much. I am sorry this is a day that the voting doesn't start until the end and so the attendance has not been strong, but these kinds of hearing records are critical to setting a basis for moving legislation forward. And so your record will be very important. I appreciate all of your attendance. Thank you very much. The hearing is adjourned.

    [Whereupon, at 2:15 p.m., the hearing was adjourned.]

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