Community Development Financial Institutions (CDFI) Fund

CRS Report for Congress
Received through the CRS Web
Community Development Financial
Institutions (CDFI) Fund
Pauline H. Smale
Economic Analyst
Government and Finance Division
The Community Development Financial Institutions Fund was established in August
1994 by P.L. 103-325. The purpose of the Fund is to provide credit and investment
capital to distressed urban and rural areas by investing in and supporting community
based organizations. The Fund’s programs also encourage banks and thrifts to expand
their activities in distressed communities. The programs provide technical and training
assistance. In addition, the Fund will administer the New Markets Tax Credit program
created by P.L. 106-554. The Fund is managed by the Secretary of the Treasury. From1
FY1996 through FY2001, Congress appropriated $483 million to the CDFI Fund. The
Bush Administration proposed a significant cut in funding for FY2002. The
Administration’s request was for $68 million, a decrease of 42% from the $118 million
appropriated in FY2001. Supporters of the Fund stated the proposed large cut in
funding would adversely affect the operations of the Fund’s programs. P.L. 107-73
provides $80 million for FY2002, a decrease of $38 million from FY2001. This report
will be updated as warranted.
In 1993, President Clinton proposed using development banking institutions to
facilitate community economic development as part of a broad effort to bring greater
capital and investment into America’s economically distressed areas. Legislation was
introduced in the 103rd Congress to establish a fund to facilitate the operations of financial
entities, with the primary goal of revitalization of low income communities. These entities
came to be collectively referred to as community development financial institutions
(CDFIs). CDFIs include community development banks, credit unions, housing/facilities

1 Funding is provided through the annual VA-HUD-Independent Agencies appropriations. A
description of the process and progress of that bill is provided by CRS Report RL31004,
Appropriations for FY2002: VA, HUD, and Independent Agencies, by Dennis W. Snook and E.
Richard Bourdon.
Congressional Research Service ˜ The Library of Congress

loan funds, microenterprise loan funds, and venture capital funds. As of May, 2001 the
CDFI Fund had certified 421 organizations as CDFIs.2
There was general agreement between Congress and the Clinton Administration on
the need for rebuilding poverty-stricken and transitional neighborhoods. An additional
goal was to bring economic opportunity to individuals living in markets considered to be
underserved by the financial services industry. Providing access to credit and investment
capital is a primary step towards creating and retaining jobs, revitalizing neighborhoods,
developing affordable housing, and supporting small businesses.
Two laws, P.L. 103-325 and P.L. 104-19, established the CDFI Fund and provided
for its management. P.L. 103-325, enacted in August, 1994, created the CDFI Fund as
a wholly owned government corporation. The intent of the legislation was to facilitate the
flow of lending and investment capital into distressed communities and to individuals who
had been unable to take full advantage of financial services offerings. Funding for the
Fund’s programs has been provided through the annual VA-HUD-Independent Agencies
P.L. 104-19, enacted in July, 1995, placed the Fund within the Department of the
Treasury and the Secretary of the Treasury was given the authority to manage the Fund.
In addition, P.L. 104-19 allocated one-third of the appropriation for the CDFI Fund to the
Bank Enterprise Act (BEA) program. This program was authorized in 1991 but was never
funded. The law redesigned the original BEA program to function as a companion to the
CDFI Fund programs. The name was changed to the Bank Enterprise Award program.
The purpose of this program is to encourage and expand lending, investment, and service
activities by traditional banks and thrifts in distressed communities. A major goal is to
form partnerships between banks and thrifts and CDFIs.
The Community Renewal Tax Relief Act of 2000 (part of P.L.106-554, enacted in
December, 2000) created the New Markets Tax Credit (NMTC) program which will be
administered by the Fund. The intent of this program is to encourage investments in
businesses located in low-income communities. Incentives to investors will be provided
in the form of a tax credit over seven years. The Fund is developing guidelines and
application materials. The first credits are expected to be allocated in 2002.
Fund Programs and Their Impact
The Fund’s stated mission is “to promote access to capital and local economic growth
by directly investing in and supporting community development financial institutions
(CDFIs) and expanding financial service organizations’ lending, investment and services
within underserved markets.”3 The CDFI Fund has established five major programs
through which it provides monetary and nonmonetary assistance to distressed
communities. They are the CDFI program, the BEA program, the Training program, the
Native American program, and the NMTC program. As a means of measuring the

2 CDFI Fund Quarterly. Department of the Treasury. Spring 2001, p.5.
3 [http//]

performance of its programs, the Fund has conducted surveys of some of the past award
recipients in the Core Component of the CDFI program and in the BEA program. The
Fund has completed a preliminary evaluation of the impact and influence of these
Under the CDFI program the Fund provides financial and technical assistance to
selected applicants who are chosen through a competitive process. The CDFI program
has three components; the Core Component, the Intermediary Component, and the Small
and Emerging CDFI Assistance (SECA) Component. To be eligible, an entity must first
qualify as a CDFI. In general, a CDFI must have a primary mission of promoting
community development, be in the business of providing loans and investments, and serve
a defined investment area or targeted population. An applicant must be a non-government
entity; it can be either for-profit or non-profit. An organization is judged by its business
plan, financial viability, history of operations, experience of the management team, and
potential impact on the community. The Fund administers a CDFI certification program.
The Core Component is directed at building the financial capacity of CDFIs by
enhancing the capital base of individual organizations. The Intermediary Component
involves assistance to CDFIs that provide support to other CDFIs and to emerging CDFIs.
Applicants for funding under both Components request awards in the form of grants,
loans, equity investments, shares, or deposits. The applicant must obtain matching funds
equal to the amount of financial assistance. Matching funds must be from sources other
than the federal government. The Fund is generally prohibited from obligating more than
$5 million to any one organization in any three-year period. By May, 2001, the Fund had
made approximately 275 Core awards totaling over $267 million and seven Intermediary
awards totaling over $18 million.4
The Small and Emerging CDFI Assistance (SECA) Component was established in
November, 2000, it replaced the Technical Assistance (TA) Component introduced in
1998. The TA Component was created to build up the institutional capacity of new and
smaller CDFIs. TA grants were given for identified technical needs such as staff training,
consulting services, computer system upgrades, and software acquisition. The SECA
Component expands the operations to allow limited financial assistance to be combined
with the technical assistance for “small and emerging” CDFIs. In general, these CDFIs are
defined as institutions with total assets of less than $5 million and that have never received
a Core Component award. SECA awards are limited to $150,000. Unlike the technical
assistance, the SECA financial assistance must be matched with other non-federal funds.
The first SECA awards will be delivered in FY2001. A total of 225 TA Component
awards were made from 1998 to 2000. The awards totaled over $10 million.5
The BEA program provides monetary incentives to banks and thrifts to expand their
activities in distressed communities. BEA program awards are also distributed through a

4 U.S. House. Subcommittee on VA, HUD, and Independent Agencies. Hearing on FY2002
Appropriations. Statement of Jeffery Berg, Acting Director of the CDFI Fund. May 8, 2001.
5 Ibid.

competitive applications process. The awards are based on increases in “qualified
activities” engaged in by a bank or thrift during an assessment period. Program participants
receive funds after the successful completion of specified activities. Qualified activities
include investing in or otherwise supporting CDFIs and increasing loans, services, or
technical assistance to distressed communities. Federal regulations established procedures
for calculating award amounts based on the activities engaged in by the bank or thrift. By
May, 2001, the BEA program had made 433 awards totaling over $135 million.6
The Training program was initiated in 1999. This program directs funds to activities
involved with the development and delivery of training products to CDFIs and other
community-focused financial service organizations. Training can be provided through
classroom instruction and electronic formats. Currently, the Fund has contracts with four
training providers to develop and teach courses.
The Fund recognized the need to stimulate private investment on Native American
reservations and other lands held in trust by the United States. In the FY2001
appropriation Congress set aside $5 million for the Native American Training and
Technical Assistance Program. CDFIs, tribal organizations, and non-profit organizations
serving these communities are eligible for direct grants under this program.
The Fund is developing guidelines and application materials to establish and administer
the NMTC program. This program was developed to encourage investments in
businesses located in low-income communities. Incentives to investors will be provided
in the form of a tax credit over seven years. Investments will be channeled through
qualified community development entities (CDEs). A CDE must be a domestic corporation
or partnership that has the primary mission of serving, or providing investment capital for,
low-income communities or individuals. The Fund will certify CDEs; all CDFIs will
automatically qualify. The tax credits will be allocated to for-profit CDEs annually by the
Fund. The CDEs will in turn pass on the credits to investors (both institutional and
individual). The first credits are expected to be allocated in 2002.
The Fund has conducted award recipient surveys to measure and report on the
performance of organizations receiving assistance. The Fund has surveyed participants in
two programs, the Core Component of the CDFI program and the BEA program. The
preliminary findings of the most recent surveys were released in May, 2001.7
The FY1999 survey of Core Component participants included 106 recipients from the
1996 through 1998 funding rounds. Core Component awards for these CDFIs totaled
$122 million. The intent of the survey was to convey what was accomplished in the
communities served by these CDFIs with the help of the Fund’s financial assistance.

6 Ibid.
7 FY 1999 Annual Survey, Preliminary Findings: CDFI Program - Core Component. US
Department of the Treasury. May 8, 2001,4p. and FY 2000 Annual Survey, Preliminary Findings:
BEA Program. US Department of the Treasury. May 8, 2001, 4p.

During 1999, the 106 recipients reported making $1.4 billion in community
development loans and equity investments. This capital helped to create or expand 3,258
businesses and microenterprises, develop or rehabilitate 24,885 units of housing, and
develop or support 411 community facilities. The 411 facilities included childcare centers
and health clinics. The 1999 CDFIs that were depository institutions also provided basic
financial services to their communities. For example, these institutions held 159,000
checking and savings accounts. The reported, average client base of the 106 organizations
was71% low-income, 62% minority, 66% urban, and 34% rural.
The purpose of the FY2000 survey of BEA program awards was to determine how
the program may have influenced the activities of banks and thrifts and how those
institutions receiving awards planned to use them. BEA awards are given for activities
already performed in distressed communities or for the direct support of CDFIs by an
institution. The program does not designate how the award funds are to be spent.
A total of 159 banks and thrifts received BEA program awards totaling $45 million
in FY2000. Most of the individual institutions receiving awards were small, 43% with total
assets of less than $250 million and 59% with total assets of less than $1 billion. The BEA
program awards are given to applicants based on the activities undertaken during an
assessment period. In FY2000 the 159 award recipients provided a total of $244 million
in loans and investments to CDFIs and a total of $1.13 billion in loans, investments and
services to distressed communities.
The FY2000 survey preliminary findings were based on 100 of the 159 FY2000
awardee surveys that had been collected and reviewed by the Fund. A vast majority (83)
of the 100 respondents had earmarked their BEA program monies. Over 85% of the
earmarked funds were reserved for community development initiatives. In addition, 58%
of the respondents reported that the existence of the BEA program facilitated their
institution’s involvement with CDFIs.
History of Funding
Funding for the programs was provided for the first time in the FY1996 VA-HUD-
Independent Agencies appropriation. Calendar year 1996 was the first full year of
operations. Congressional oversight of the Fund’s early awards procedures raised concerns
over certain procedural irregularities and prompted several congressional budget cutting
attempts that would have eliminated the Fund. The Treasury Department worked closely
with the fund to strengthen its internal systems, controls, and procedures. Independent
auditors provided an unqualified opinion on the Fund’s financial statements for the fourth
consecutive year in 2000. Congress continued to provide annual appropriations.
P.L. 107-73 provides the CDFI Fund with $80 million for FY2002 a decrease of 32%
from the FY2001 appropriation. Congress provided the CDFI Fund with gradual increases
during its first 6 years. Congress appropriated $45 million for FY1996, $50 million for
FY1997, $80 million for FY1998, $95 million forFY1999, $95 million for FY2000, and
$118 million for FY2001. The Administration’s budget request for FY2002 was $68
million. The Senate approved an appropriation of $100 million. The House approved an
appropriation of $80 million and this was the amount agreed to by the Conference
Committee. The Conference Committee agreed with the Senate provision for a set-aside

of $5 million for Native American, Alaskan Natives, and Native Hawaiian communities.
The Committee also agreed with the Senate’s request for a report on rural lending practices
to be included as part of the FY2003 budget submission.