This is the latest installment of a new CAP series called “Big Ideas for Small Business.” The weekly series aims to offer a collection of bold proposals that taken together will form a progressive pro-business agenda for the small- and medium-sized companies—and future big companies—our economic competitiveness depends on.
In this space CAP’s economic policy team will offer a weekly pro-growth alternative to the simplistic conservative advocacy for irresponsible tax policy and unaccountable government that are hardly the real priorities of small businesses—and that will do nothing to boost economic growth and ensure widely shared prosperity.
The problem
The federal government has not yet implemented a program, authorized in legislation passed in September 2010, which, once up and running, will help so-called Community Development Financial Institutions invest in small businesses and communities hardest hit by the financial crisis.
The 2010 CDFI Bond Guarantee Program will expand access to low-cost capital for Community Development Financial Institutions, or CDFIs. These are U.S. Treasury-certified entities that offer basic financial services to communities traditionally overlooked by banks. CDFIs provide low-interest loans, basic banking services, and other affordable financial products to low-income households and businesses. The more than 800 CDFIs range from small loan funds with less than $1 million to lend to large banks and credit unions with billions of dollars in assets.
CDFIs are more willing than traditional banks to take a chance on low-wealth borrowers. Access to credit can prevent a small business from laying off employees or ensure an affordable housing project goes forward. Indeed, CDFIs played an especially important role in the recent economic recovery, as many mainstream lenders pulled back from the communities most affected by the housing foreclosure crisis. In 2008, the most recent year for which comprehensive data are available, CDFIs provided more than $5.5 billion in financing for community-development activities and created or retained more than 35,000 jobs, according to a study of 495 CDFIs by Opportunity Finance Network.
But CDFIs also have their challenges. Many of their customers need long-term loans, but CDFIs tend to have access only to private, short-term capital for their own funding. That’s because banks are often uncomfortable lending to financial institutions that primarily serve lower-income communities, and the CDFI industry, in general, has been unable to issue bonds. It’s risky for financial institutions including CDFIs to make long-term loans that are funded by short-term debt because they are exposed to interest-rate changes. So CDFIs are often unable to efficiently meet the needs of their customers.
The solution
The CDFI Bond Guarantee Program was meant to address this need for low-cost, long-term capital. The authorizing legislation permits the Treasury Department to guarantee up to $1 billion in CDFI-issued bonds per year, with maturities up to 30 years, through fiscal year 2014. The guarantee makes CDFI bonds palatable to the credit markets and lowers CDFI’s borrowing costs. This better positions them to provide high-quality, affordable financial products to low-income households, businesses, and communities.
Next steps
For more than a year, this program has been authorized but not operational. Given the challenges facing the communities that CDFIs serve, and the fact that this program is already authorized by Congress, the Obama administration should establish a clear plan to get the new bond-guarantee program up and running as soon as possible.
To be fair, this program is a complex one for the devoted government officers who manage it because of requirements to receive a credit-subsidy score of zero. That is, the program must be structured to not generate any net losses to the taxpayer.
This is not an insurmountable challenge, however, and it should be tackled soon. Regulations for the program need to be finalized and made public, detailing, among other things, the size of guarantee fees levied on participating CDFIs to cover expected losses from the program.
The longer we delay, the less time we have to pilot a potentially transformative program that provides additional assistance for small businesses and households in devastated communities to get back on track at a time when our economy needs them most.
Let’s get this thing up and running. Let’s implement the CDFI Bond Guarantee Program.
Jordan Eizenga is an Economic Policy Analyst at the Center for American Progress.