Starting November 1, Starbucks Corp. will begin collecting donations to provide capital for Community Development Financial Institutions as part of its “Create Jobs for USA” initiative. While Starbucks should be lauded for its efforts, Congress has already authorized a program that aims to expand the capacity of Community Development Financial Institutions to invest and create jobs in communities struggling to recover from the financial crisis.
But first, what are Community Development Financial Institutions? CDFIs are U.S. Treasury-certified financial institutions that offer financial services to communities traditionally overlooked by mainstream financial institutions. CDFIs include small loan funds with several hundred thousand dollars in assets and large depository institutions such as Self Help Credit Union, which has about $1 billion in assets.
CDFIs provide low-interest loans, basic banking services, and other affordable financial products to low-income households and businesses. This CDFI capital helps fund small businesses, low-income housing projects, community facilities, and other investments in many of the communities hardest hit by the economic downturn. CDFIs provided $5.5 billion in financing in fiscal year 2008 (the last year for which data are available), according to a study of 495 CDFIs by Opportunity Finance Network. This created more than 60,000 affordable housing units and created or retained more than 35,000 jobs.
To help that process along, the new CDFI Bond Guarantee program expands access to affordable, long-term financing for CDFIs so that they may better finance worthy projects in distressed communities. A year since the program’s creation, all that remains is for the program to become operational. Given the promise of this program, and the fact that it has already been authorized, the Obama administration should establish a clear plan to get the program up and running within the next six months.
Certainly the need is there. “[W]e believe the CDFI Bond Program will create significant new opportunities and could encourage substantial new lending by banks and other financial institutions. For that reason alone, fast action on the CDFI Bond Program is particularly critical today,” wrote 92 community organizations in a public letter to Treasury Secretary Tim Geithner in February.
The mission-driven work of CDFIs, to invest in underserved communities, means they are more likely to work with their borrowers to ensure they can meet their debt obligations. The result: a mutually beneficial arrangement that lowers default rates while raising the borrower’s financial know-how.
But CDFIs also have their challenges. Borrowers need longer-maturity loans, yet CDFIs only have access to short-term capital. Banks occasionally provide longer-term loans to CDFIs to meet their community financing obligations under the Community Reinvestment Act, which encourages depository institutions to lend to the low- and moderate-income neighborhoods in which they operate. But well-priced patient capital does not flow naturally to CDFIs, which are unable to access the capital markets themselves as mainstream lenders and investors are often reluctant to provide longer-maturity loans for distressed communities.
This is problematic. Many of the projects that CDFIs help finance require long-term capital because of their longer economic lives. By not having stable and affordable access to long-term capital, CDFIs are not always able to meet the needs of their borrowers.
The CDFI Bond Guarantee program was meant to address this need for well-priced long-term capital. The program runs through FY 2014 and authorizes the Treasury to guarantee up to $1 billion in bonds with maturities up to 30 years. The guarantee reduces the borrowing costs on long-term debt of participating CDFIs by enhancing the bonds’ creditworthiness. With access to less-expensive long-term capital, CDFIs are better positioned to provide high-quality, affordable financial products to low-income households, businesses, and communities.
The clock is ticking on the CDFI Bond Guarantee program. The first year of the program’s four-year authorization has already lapsed. To be fair, it takes time to craft appropriate rules and procedures to ensure any new program operates according to plan. And in the case of this program, government managers have the added task of creating a program with a credit subsidy score of zero. This means the guarantee must be designed to generate no estimated costs to the federal government, and that any losses be covered by guarantee fees levied on, or reserves posted by participating CDFIs.
But we are in danger of losing a valuable opportunity to pilot a potentially transformative program that could increase CDFIs’ access to long-term patient capital and help devastated communities rebuild. Fortunately, this program is already law; Congress doesn’t have to do a thing. The Obama administration should set forth a plan to ensure the program is operational within six months. While the CDFI Bond Guarantee program is untested and may eventually require modifications, we’ll never know what needs fixing unless we get the program up and running.
The CDFI Bond Guarantee program can build on the important role CDFIs already play in creating jobs and serving the needs of distressed communities—a role Starbucks clearly understands. Let’s get this program moving by March. The needs of communities and the potential benefits of the program are too great for us to wait any longer.
Jordan Eizenga is a Policy Analyst and James Hairston is a Research Associate with the Economic Policy team at American Progress.