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GAO-12-547R:
United States Government Accountability Office:
Washington, DC 20548:
April 26, 2012:
The Honorable Richard Durbin:
Chairman:
The Honorable Jerry Moran:
Ranking Member:
Subcommittee on Financial Services and General Government:
Committee on Appropriations:
United States Senate:
The Honorable Jo Ann Emerson:
Chairman:
The Honorable Jose E. Serrano:
Ranking Member:
Subcommittee on Financial Services and General Government:
Committee on Appropriations:
House of Representatives:
Subject: Community Development Financial Institutions and New Markets
Tax Credit Programs in Metropolitan and Nonmetropolitan Areas:
The Riegle Community Development and Regulatory Improvement Act of
1994 created the Community Development Financial Institutions (CDFI)
Fund under the Department of the Treasury to help promote access to
capital and credit in underserved urban and rural communities across
the country.[Footnote 1] The CDFI Fund carries out this mission
through two primary programs: the CDFI Program and the New Markets Tax
Credit (NMTC) Program. The CDFI Program awards financial and technical
assistance to CDFIs for financial and development services, cash or
capital reserves, operating expenses, and capacity building. CDFIs are
specialized financial institutions--including community development
banks and credit unions and nonregulated institutions such as loan and
venture capital funds--that operate in markets underserved by
traditional financial institutions. The NMTC Program, created by the
Community Renewal Tax Relief Act of 2000, allocates tax credit
authority (in this report, tax credits) to community development
entities (CDE), which are domestic corporations or partnerships with a
primary mission of serving low-income communities or low-income
persons that act as intermediaries in providing loans, investments, or
financial counseling in low-income communities.[Footnote 2] CDEs can
use the tax credits to attract equity investments from investors who
can, in turn, claim a tax credit over 7 years totaling 39 percent of
their qualifying equity investment.[Footnote 3] The CDFI Program
awarded a total of $443 million to CDFIs from fiscal years 2004
through 2010, while the NMTC Program allocated tax credits worth $27
billion to CDEs from fiscal years 2003 through 2010.[Footnote 4] Both
programs' statutes include provisions requiring them to ensure at
least a minimum level of assistance to nonmetropolitan areas.
House Report 112-136, referenced by the Consolidated Appropriations
Act of 2012, requires that we conduct a study on the concentration of
CDFIs and NMTCs in urban areas and comment on the extent that program
design, administration, or history contributed to the early
establishment of CDFIs in urban areas.[Footnote 5] In this report, we
examine (1) how the CDFI Fund awards funds and allocates tax credits
to recipients and how program policies affect the amount of funding
and tax credits to metropolitan and nonmetropolitan areas, and (2) the
extent to which the amounts of program awards and allocations that
recipients receive differ in metropolitan and nonmetropolitan areas.
We used the terms "metropolitan" and "nonmetropolitan" to make
geographic distinctions between areas that have urban and rural
characteristics for consistency in presentation and because some of
the data available in program reports use these designations.
To address the first objective, we reviewed documentation related to
the CDFI Fund's policies and procedures for distributing financial and
technical assistance awards and tax credits to certified CDFIs and
CDEs, respectively. We also reviewed CDFI Fund documents, laws, and
regulations, prior GAO reports, and other applicable documentation to
determine how CDFI and NMTC program policies and other factors have
affected the amount of funding and tax credits directed to CDFIs and
CDEs in metropolitan and nonmetropolitan areas. To address the second
objective, we analyzed CDFI Fund data on primary geographic areas
(metropolitan or nonmetropolitan) served by CDFIs that received awards
or allocations, the total amounts of awards and allocations CDFIs and
CDEs received, and amounts of funding and investments they deployed to
metropolitan and nonmetropolitan areas. Our review focused on the
period for which complete transaction-level data were available for
individual transactions from the CDFI Fund's Community Investment
Impact System database. Specifically, we examined data from fiscal
years 2004 through 2010 for the CDFI Program and fiscal years 2003
through 2010 for the NMTC Program.[Footnote 6] The transaction-level
data for the CDFI Program represent CDFIs' loans and investments
outstanding (which we refer to as total portfolio outstanding) at the
end of each reporting year and reflect CDFI Program awards combined
with all of the CDFIs' other funding sources. In other words, the data
do not allow us to identify which loans and investments outstanding,
or how much of the dollar amount of CDFIs' total portfolios
outstanding, resulted directly from CDFI Program awards. In addition,
because not all CDFI awardees must report transaction-level data, we
cannot generalize the findings to the entire CDFI awardee (recipient)
population. We examined trends in the amount and number of CDFI-and
CDE-financed projects in metropolitan and nonmetropolitan areas. We
interviewed CDFI Fund officials and reviewed information from the CDFI
Fund and its data contractors on the steps taken to ensure the
reliability of their data. For example, we reviewed their processes
for ensuring consistent data entry and for addressing potentially
inaccurate data. We also checked the data for extreme values and
missing data points. We determined that the data were reliable for our
purposes.
We conducted this performance audit from January to April 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives. Enclosure I
provides a more-detailed description of our scope and methodology.
Results in Brief:
The policies and procedures of the CDFI and NMTC Programs help ensure
that awards and allocations generally are proportionate to the numbers
of qualified applicants that serve metropolitan and nonmetropolitan
areas. The CDFI Program's authorizing legislation and regulations
require that award recipients constitute a geographically diverse
group, serving metropolitan and nonmetropolitan areas and Native
communities from different U.S. regions. To meet this requirement,
CDFI Program officials have used the application review process and
established a goal of matching the proportion of awards to the
proportion of qualified applicants that primarily serve
nonmetropolitan areas. This proportion changed from year to year
depending on the number of qualified applicants that served
nonmetropolitan areas. According to officials, revisions to the award
procedures in the fiscal year 2012 funding round will enhance the CDFI
Program's ability to achieve proportionality. In 2006, Congress, in
the Tax Relief and Health Care Act of 2006, added a requirement for
the NMTC Program that nonmetropolitan counties receive a proportional
allocation of qualified equity investments.[Footnote 7] To meet this
requirement, in 2008, the NMTC Program implemented two goals in its
application review process. The first goal requires that a
proportionate number of tax credits are allocated to recipients that
principally serve nonmetropolitan counties.[Footnote 8] The second
goal requires that at least 20 percent of all community investments
resulting from the annual NMTC allocations are made in eligible
nonmetropolitan counties.
The programs awarded the majority of funds and tax credits to
recipients that served metropolitan areas, but both generally met
their proportionality goals with regard to ensuring assistance to
nonmetropolitan areas. From fiscal years 2004 through 2010, CDFI
Program financial assistance awards to recipients serving primarily
nonmetropolitan areas were proportional to the number of qualified
applicants that served those areas in every year except 2008. For
example, in 2010, 29 percent of award recipients primarily served
nonmetropolitan areas, exceeding that year's proportionality goal of
27 percent. Based on recipients' annual reporting for fiscal years
2004 through 2010, about 18 percent of recipients' total annual loans
and investments outstanding were in nonmetropolitan areas. For the
NMTC Program, since implementing the two proportionality goals in the
calendar year 2008 round, program officials stated that they have been
successful in helping ensure that a proportional number of tax credits
went to recipients that serve nonmetropolitan areas and that 20
percent of all NMTC investments were committed to nonmetropolitan
areas. From calendar years 2008 through 2011, recipients committed to
deploy more than $3 billion, or 20 percent of total investments, in
nonmetropolitan areas. In 2010, the proportion of the dollar amount of
NMTC projects financed that went to nonmetropolitan areas increased to
21 percent, which exceeded the program goal of 20 percent.
Background:
In general, financial institutions must be certified as CDFIs or CDEs
before they can receive CDFI Program awards or NMTC allocations,
respectively. Table 1 lists the criteria that entities must meet to
become certified. For example, CDFIs and CDEs generally must be legal
entities that provide the majority of their financial services to low-
income persons or communities and maintain accountability to those
communities by having members that represent them on their governing
or advisory boards. The CDFI Fund follows detailed procedures to
ensure that certified entities meet the criteria.
Table 1: Eligibility Criteria for CDFI and CDE Certification:
CDFI:
* Be a legal entity;
* Have a primary mission of promoting community development;
* Primarily provide financial products, development services, or other
similar financing in arms-length transactions;
* Primarily serve (direct at least 60 percent of financial product
activities to) one or more geographic investment areas meeting certain
poverty or income standards; low-income targeted populations; or other
targeted populations that lack adequate access to capital and
historically have been denied credit;
* Provide development services--such as credit or homebuyer
counseling--in conjunction with financial products;
* Maintain accountability to defined target markets through
representation on governing or advisory board or through outreach
activities;
* Be a nongovernment entity and not be under control of any government
entity (except tribal governments).
CDE:
* Be a legal entity and a domestic corporation or partnership for
federal tax purposes;
* Have a primary mission of serving or providing investment capital to
low-income communities or low-income persons and target at least 60
percent of activities to these groups;
* Maintain accountability to low-income communities through
representation on governing or advisory board;
* Note: Certified CDFIs and Specialized Small Business Investment
Companies automatically qualify as CDEs and only need to register as
CDEs rather than apply for certification.
Sources: CDFI Fund; CDFI and NMTC Program statutes and regulations.
[End of table]
As of February 29, 2012, there were a total of 977 certified CDFIs and
5,500 certified CDEs, including subsidiary CDEs.[Footnote 9] Enclosure
II lists the numbers of certified CDFIs and CDEs by state. The total
number of certified CDFIs and CDEs is much higher than the number that
typically applies for and obtains program awards in any given year. In
addition, not all financial institutions that seek certification will
obtain it. Certification rates for CDFIs averaged about 77 percent
from fiscal years 2004 through 2010, while CDEs obtained certification
about 91 percent of the time from calendar years 2003 through 2010
(see table 2). Agency officials told us that, based on their analysis
of fiscal year 2011 certification data, the most common reasons for
denying CDFI certification applications were failure to meet the
criteria for primary service to eligible target markets and
accountability to those markets. They stated that in prior years,
these were also two of the most common reasons for denials of
certification applications. Failure to meet the financing entity
criteria was also historically a reason for denial. They attributed
the majority of CDE certification denials to failure to establish
accountability to low-income communities.
Table 2: Certification Rates for CDFIs (Fiscal Years 2004-2010) and
CDEs (Calendar Years 2003-2010):
CDFIs: Certified;
2003: N/A;
2004: 34;
2005: 72;
2006: 144;
2007: 32;
2008: 32;
2009: 71;
2010: 162;
Total: 547.
CDFIs: Declined;
2003: N/A;
2004: 50;
2005: 15;
2006: 11;
2007: 12;
2008: 15;
2009: 32;
2010: 30;
Total: 165.
CDFIs: Certification rate;
2003: N/A;
2004: 40%;
2005: 83%;
2006: 93%;
2007: 73%;
2008: 68%;
2009: 69%;
2010: 84%;
Total: 77%.
CDEs: Certified;
2003: 211;
2004: 153;
2005: 155;
2006: 33;
2007: 121;
2008: 100;
2009: 104;
2010: 134;
Total: 1,011.
CDEs: Declined;
2003: 18;
2004: 14;
2005: 12;
2006: 3;
2007: 9;
2008: 9;
2009: 16;
2010: 21;
Total: 102.
CDEs: Certification rate;
2003: 92%;
2004: 92%;
2005: 93%;
2006: 92%;
2007: 93%;
2008: 92%;
2009: 87%;
2010: 86%;
Total: 91%.
Source: GAO analysis of CDFI Fund data.
Note: The CDE certification rates in this table include only
"applicant CDEs" and exclude subsidiary CDEs.
[End of table]
The CDFI Program provides financial or technical assistance to CDFIs
to enhance their ability to make loans and investments and provide
services for the benefit of designated investment areas, targeted
populations, or both.[Footnote 10] CDFIs can apply for (1) financial
assistance awards, which can be used for financial products or
services such as loans and checking and savings accounts, development
services such as financial or homeownership counseling, loan loss and
capital reserves, and operations; or (2) technical assistance awards,
which can be used for capacity-building purposes such as personnel
salary, professional services, travel, training, and equipment and
supplies. As shown in table 3, financial assistance applicants may
apply as regular applicants or as Small and Emerging CDFI Assistance
(SECA) applicants. SECA applicants are CDFIs that have smaller assets
or have been operating for fewer than 5 years. However, regular
applicants can apply for more financial assistance funding (for the
fiscal year 2011 funding round, up to $2 million) than SECA applicants
(which can apply for $600,000). Technical assistance awards were
capped in fiscal year 2011 at $100,000 per awardee. Since 1994, the
CDFI Program has disbursed more than $1 billion in financial and
technical assistance awards.
Table 3: CDFI Financial and Technical Assistance Program Details:
Funding and applicant type: Financial Assistance;
Funding and applicant type: Regular;
Applicant criteria: Certified or certifiable CDFI[B];
Eligible uses for funds:
* Financial products;
* Financial services;
* Development services;
* Loan loss reserves;
* Capital reserves;
* Operations;
Fiscal year 2011 award cap: $2,000,000;
Matching fund requirement[A]: 100% match from nonfederal sources.
Funding and applicant type: Financial Assistance;
Funding and applicant type: Small and Emerging CDFI Assistance (SECA);
Applicant criteria:
* Certified or certifiable CDFI;
* Total assets of up to $5 million (up to $250 million for community
development banks and up to $10 million for insured credit unions and
venture capital funds) or in operation for fewer than 5 years;
Eligible uses for funds:
* Financial products;
* Financial services;
* Development services;
* Loan loss reserves;
* Capital reserves;
* Operations;
Fiscal year 2011 award cap: $600,000;
Matching fund requirement[A]: 100% match from nonfederal sources.
Funding and applicant type: Technical assistance;
Funding and applicant type: [Empty];
Applicant criteria: Certified, certifiable or emerging CDFI[C];
Eligible uses for funds:
* Personnel (salary and fringe benefits);
* Professional services;
* Travel;
* Training;
* Equipment;
* Materials/supplies;
* Other;
Fiscal year 2011 award cap: $100,000;
Matching fund requirement[A]: None.
Source: CDFI Fund 2011 Notice of Funding Availability, 76 Fed. Reg.
68,831.
Notes:
[A] Matching funds must be comparable in form and value to the
financial assistance award. Congress waived the matching funds
requirement in the fiscal year 2009, 2010, and 2011 federal budgets.
[B] A certifiable CDFI has submitted an application to the CDFI Fund
demonstrating that it meets the certification requirements, but the
CDFI Fund has not yet officially certified the entity.
[C] An emerging CDFI is an entity that demonstrates to the CDFI Fund
that it has an acceptable plan to become a certified CDFI within
approximately 3 years.
[End of table]
Congress created the NMTC Program in 2000 under the CDFI Fund to
encourage investors to make investments in impoverished, low-income
communities that traditionally lack access to capital. CDEs may apply
for and receive tax credits, at which point investors can make
qualified equity investments by acquiring stock or a capital interest
in the CDEs in exchange for the ability to claim the tax credits on a
portion of their investment. The CDEs, in turn, must use at least 85
percent of the investment proceeds for community investments, which
can be in qualified low-income community businesses and used for
residential, commercial, and industrial projects or can be used for
other types of activities, such as purchasing loans from other
CDEs.[Footnote 11] Since its inception, the NMTC Program has awarded
$33 billion in tax credits to CDEs. The program expired at the end of
2011, but legislation has been proposed to extend it and the
administration has asked for an extension in its 2013 budget proposal.
[Footnote 12]
The CDFI and NMTC Programs use varying terminology to describe program
activity geographically, depending on the program stage. For example,
in the application stage, both programs ask applicants to indicate
whether they primarily serve major urban, minor urban, or rural
(nonmetropolitan for the NMTC Program) areas.[Footnote 13] The
programs also require awardees and allocatees to commit to the areas
that they will serve with their awards and tax credits. At this point,
the terminologies diverge. While the CDFI Program continues to use the
major and minor urban and rural classifications, the NMTC Program uses
the metropolitan and nonmetropolitan classifications as defined by the
1999 Office of Management and Budget bulletin, with the former term
referring to a metropolitan statistical area with a core city or urban
center of population 50,000 or more and its surrounding communities
and the latter term referring to anything other than a metropolitan
area.[Footnote 14] Finally, when agency officials collect annual data
from awardees and allocatees on the use of their funds, both the CDFI
Program data and the NMTC Program data are classified using the 1999
Office of Management and Budget bulletin (the "metropolitan" and
"nonmetropolitan" system). To simplify the discussion, this report
generally uses metropolitan and nonmetropolitan for both programs, as
defined by the Office of Management and Budget.[Footnote 15] As of
2011, approximately 16 percent of the U.S. population resided in
nonmetropolitan areas.[Footnote 16]
Program Policies and Procedures Aim to Make Awards and Allocations
Proportionate to Numbers of Applicants That Serve Nonmetropolitan
Areas:
CDFI Program:
The CDFI Program's policies and procedures for reviewing funding
applications and making financial and technical assistance awards are
intended to encourage assistance to nonmetropolitan areas. After CDFI
Program staff checks all applications for completeness and applicant
eligibility, reviewers from outside of the CDFI Fund (three reviewers
per financial assistance application and one reviewer per technical
assistance application) evaluate the applications. Specifically,
financial and technical assistance applicants are scored on and can
receive up to 100 points from each reviewer for criteria such as how
they meet the needs of their target market and their delivery
capacity. As shown in figure 1, applicants that meet or exceed an
overall scoring threshold and a threshold in each of the application
sections advance to the second phase of the application review process
in which CDFI Program officials determine--based on a final ranking
score--which applicants will receive awards and how much they will
receive.
Figure 1: CDFI Program Financial and Technical Assistance Award
Process:
[Refer to PDF for image: illustration]
Intake and evaluation:
CDFIs:
Application:
CDFI Program: Completeness and eligibility screening:
Incomplete or ineligible: Application denied;
Complete and eligible: continue.
External reviewers: Assessment and scoring (1 to 100):
Scores of 1 to 49 (non-qualified applicants): Application denied;
Qualified applicants: Scores of 50 or more (ranked highest to lowest).
Award decisions:
Qualified applicants:
"Highly qualified" (top 20%):
Administrative award review and processing (award amounts determined
as appropriate starting with highest scoring applicants):
Is number of awardees serving nonmetropolitan areas proportional to
qualified applicant pool primarily serving nonmetropolitan areas?[A]
No: Reduce award amounts;
Yes: Make awards.
Not "highly qualified" (lower 80%):
Waiting list;
Add qualified applicants from waiting list[B]:
Make awards.
Source: GAO analysis of CDFI Fund data.
[A] CDFI Program officials also check for diversity with regard to
geographic region and institution type.
[B] Until the fiscal year 2012 funding round, this process might not
have resulted in full proportionality with regard to nonmetropolitan
areas. Because reducing award amounts to allow for additional awards
could decrease the awards' significance to CDFIs, CDFI Program
officials must consider whether award reductions to achieve
proportionality are in the best interest of the overall awardee pool.
[End of figure]
The CDFI Program's authorizing legislation and regulations require
that awardees represent a geographically diverse group, serving
metropolitan and nonmetropolitan areas and Native communities.
[Footnote 17] According to CDFI Program officials, to meet this
requirement, they have tried to match the proportion of awards to the
proportion of the qualified applicant pool with nonmetropolitan
service areas during the application review process. For example, if
25 percent of qualified applicants in a given funding round indicated
a nonmetropolitan service area, the CDFI Program would strive to make
25 percent of the total aggregate number of financial and technical
assistance awards to CDFIs with nonmetropolitan service areas. This
proportion can change from year to year depending on the number of
applicants that serve nonmetropolitan areas and meet the minimum
scoring threshold. Until recently, the CDFI Program's procedures did
not allow officials to bypass other qualified applicants to select
those with nonmetropolitan service areas, which impeded the program's
ability to meet desired proportionality goals in certain years.
However, for the fiscal year 2012 funding round, the CDFI Program's
procedures have been revised to better support goal achievement. That
is, CDFI Program officials can now bypass certain applicants on the
ordered ranking list to select qualified but lower-ranked applicants
to achieve geographic and institutional diversity.
In addition, according to CDFI Program officials, the SECA category
for financial assistance awards, as well as the technical assistance
awards, is helpful to CDFIs located in or serving nonmetropolitan
areas. Officials stated that CDFIs in nonmetropolitan communities are
often smaller in asset size and typically have fewer employees than
their counterparts in metropolitan communities. The SECA category for
financial assistance funding allows CDFIs with assets of less than a
certain amount or in operation for fewer than 5 years to apply and
compete separately from larger and more established CDFIs. In
addition, program officials noted that technical assistance funding is
useful to smaller and less established organizations because it can
help them build capacity. Technical assistance awards can be used for
such items as staff salaries and benefits, consultants, professional
services, and computer equipment.[Footnote 18]
NMTC Program:
The NMTC Program's process for making NMTC awards reflects a recent
policy change that ensures investment commitments in nonmetropolitan
areas. In 2006, Congress required the NMTC Program to ensure that
nonmetropolitan counties receive a proportional allocation of
qualified equity investments.[Footnote 19] To guide its implementation
of the requirement, in 2007, the CDFI Fund published a Request for
Public Comments to obtain feedback on how to define, measure, and
ensure "proportionality." Based on the public comments received, NMTC
Program officials developed two goals, which they implemented in the
calendar year 2008 funding round, to ensure compliance with the new
requirement. First, program officials must review the annual
allocation decisions and add additional allocatees if necessary to
ensure that a proportionate number of applicants that are "rural
CDEs"--CDEs that principally serve nonmetropolitan counties--receive
tax credits. Second, program officials attempt to ensure through
consideration of applicants' commitments to invest in nonmetropolitan
areas that at least 20 percent of the aggregate investments made with
each round of NMTC allocations are made in eligible nonmetropolitan
counties. With regard to the second goal, although public commentators
suggested a variety of benchmarks for the minimum proportion to be
committed to nonmetropolitan areas, program officials chose 20 percent
because it approximated the percentage of the U.S. population that--
according to the CDFI Fund's analysis--resided in nonmetropolitan
counties.[Footnote 20] Thus, in recent years, NMTC Program officials
have used the review process to ensure proportionate selection on two
levels--in terms of areas served and amount of investment committed in
those areas.
For the current review process, the NMTC Program first selects a group
of three external reviewers with demonstrated experience in business,
real estate, or community development finance. Applications are scored
on a scale of 100 points for sections on business strategy, community
impact, management capacity, and capitalization strategy. Applicants
also can receive up to 10 "priority" points by demonstrating a record
of successful investment in disadvantaged communities or businesses
and by investing in businesses unrelated to the applicant.[Footnote 21]
CDEs that meet or exceed an overall scoring threshold and a threshold
in each of the four application sections listed previously advance to
the second phase of the review, in which a panel of up to three NMTC
Program officials determine--based on a final ranking score--which
CDEs will receive allocations and how much they will receive. NMTC
Program staff review the amount of tax credits that the CDEs requested
and, based on the information in the application materials, award
preliminary allocation amounts in the order of CDEs' final ranking
scores until the allocations are exhausted. Not all of the CDEs that
satisfy the minimum application score thresholds receive allocations.
[Footnote 22]
After making award decisions, the NMTC Program analyzes the allocatee
pool to determine whether it has met the two proportionality goals. If
the percentage of allocatees that are rural CDEs is not at least equal
to the percentage of qualified applicants that are rural CDEs, the
fund provides allocations to additional qualified rural CDEs from that
pool in descending order of their final ranking score until it
achieves the appropriate percentage balance. If necessary to
accommodate the additional allocatees without exceeding the available
tax credits, NMTC Program officials apply a reduction to all
allocations to CDEs that have not committed to make at least 20
percent of their community investments in nonmetropolitan areas. For
the second proportionality goal, all applicants must specify a minimum
and maximum percentage of their community investments that they are
willing to commit to nonmetropolitan areas. For example, an applicant
might indicate that it will commit to making at least 15 percent but
no more than 30 percent of its community investments in
nonmetropolitan areas, while another applicant might indicate that it
will make all of its community investments in metropolitan areas. NMTC
Program officials calculate the minimum amount of community
investments that all allocatees have committed to nonmetropolitan
areas. If allocatees have not committed to making at least 20 percent
of their aggregate community investments in nonmetropolitan areas, the
NMTC Program can require allocatees to direct more investments--up to
the maximum percentages they indicated in their applications--to
nonmetropolitan areas. If, after applying the maximum percentages, the
aggregate commitment to nonmetropolitan areas still does not equal at
least 20 percent, the NMTC Program can award additional allocations to
rural CDEs in descending order of their final ranking score, applying
a formula reduction to all allocations for which allocatees have not
committed at least 20 percent of investments to nonmetropolitan areas.
Figure 2 illustrates the NMTC allocation process with a hypothetical
example.
Figure 2: Illustration of the NMTC Program Allocation Process:
[Refer to PDF for image: illustration]
Applicants reviewed and scored:
Total applicants: 250;
Total tax credit allocations available: $3 billion.
Highly qualified applicants (rank-ordered):
Highly qualified applicants: 150;
Rural CDEs: 15 (10%);
Total committed community investments: $2.85 billion.
Preliminary allocation determinations:
Preliminary number of allocatees: 100;
Rural CDEs: 10 (10%);
Minimum aggregate community investment commitments to nonmetropolitan
areas: $513 million (18% of total community investments).
Assessment of preliminary allocatee pool for proportionality goals:
Goal 1: Is the percentage of rural CDEs at least proportional to the
percentage of rural CDEs in the highly qualified applicant pool?
Yes: No further action needed for goal.
Goal 2: Are community investment commitments to nonmetropolitan areas
at least 20% of total community investments?
Non-metropolitan commitments = 18% = $513 million:
Less than 20% of total community investments = $570 million:
No: Adjustments required.
Non-metropolitan commitments = 20.2% = $575 million:
Greater than 20% of total community investments = $570 million + $62
million adjustment[A]:
Yes: No further action needed for goal.
Make final tax credit allocations totaling $3 billion.
Source: GAO analysis of CDFI Fund data.
Notes: This figure is an example of applying NMTC Program
proportionality goals to hypothetical application information.
[A] Require any or all allocatees to direct additional community
investments to nonmetropolitan areas (up to the maximum percentage
they committed to in their applications). Based on track records and
ability to deploy investments in nonmetropolitan areas, require eight
allocatees to direct an additional $62 million in community
investments to nonmetropolitan areas.
[End of figure]
To address potential challenges in implementing NMTC projects in
nonmetropolitan communities, the NMTC Program gives rural CDEs an
extra year to raise qualified equity investments and deploy the
proceeds for community investments. Specifically, most CDEs must raise
at least 20 percent of their qualified equity investments (in exchange
for the tax credits that they can provide to investors) within 1 year
after they receive their allocations, and they must deploy the
proceeds of those qualified equity investments to qualified businesses
within 1 year after raising the investments. However, rural CDEs
receive an extra year to meet these requirements because of the
potential difficulties in carrying out NMTC projects in
nonmetropolitan areas. In particular, we have previously reported that
CDEs can face challenges in using NMTCs to invest in smaller projects
because transaction costs, such as legal fees or compliance monitoring
costs, tend to be fixed (thus, smaller transactions would not incur
lower transaction costs relative to the size of the project).[Footnote
23] Because of high transaction costs, NMTC Program officials said
that the minimum investment size of an NMTC transaction is commonly $5
million to $6 million. They explained that the federal tax structure
related to the NMTC Program tends to benefit larger-size projects or
deals. This structure may put CDEs that wish to invest in
nonmetropolitan areas--where projects can be smaller than in
metropolitan areas--at a disadvantage.[Footnote 24]
Both Programs Directed Most Awards and Tax Credits to Metropolitan
Areas, but Generally Met Proportionality Goals for Nonmetropolitan
Areas:
The CDFI and NMTC Programs awarded the majority of funds and tax
credits to recipients that served metropolitan areas, but both
generally met their goals with regard to proportionality in
nonmetropolitan areas. For both programs, we looked at the differences
in the level of assistance provided to metropolitan and
nonmetropolitan areas. Specifically, for each of the programs, we
looked at the metropolitan and nonmetropolitan distributions of (1)
awards and commitments, and (2) total portfolio outstanding (CDFI
Program) and projects financed (NMTC Program).
CDFI Program:
CDFI Program officials stated that they typically had been able to
meet their goal of making awards proportionate to the number of
qualified applicants that primarily serve nonmetropolitan areas. We
analyzed the financial assistance award data for fiscal years 2004
through 2010 to determine the extent to which the CDFI Program met the
geographic diversity goal. During this period, the proportion of
awardees that primarily served nonmetropolitan areas equaled or
exceeded the proportion of qualified applicants that served these
areas every year except in 2008, when awardees serving nonmetropolitan
areas represented 26 percent of all awardees compared with 35 percent
of all qualified applicants (see table 4).
Table 4: Proportion of Qualified Applicants and Awardees Serving
Nonmetropolitan Areas for CDFI Program, Fiscal Years 2004-2010:
Fiscal year: 2004[A];
Qualified applicants:
Total: 78;
Number serving nonmetropolitan areas: 21;
Percentage serving nonmetropolitan areas: 27%;
Awardees:
Total: 67;
Number serving nonmetropolitan areas: 19;
Percentage serving nonmetropolitan areas: 28%.
Fiscal year: 2005;
Qualified applicants:
Total: 124;
Number serving nonmetropolitan areas: 37;
Percentage serving nonmetropolitan areas: 30%;
Awardees:
Total: 48;
Number serving nonmetropolitan areas: 17;
Percentage serving nonmetropolitan areas: 35%.
Fiscal year: 2006;
Qualified applicants:
Total: 121;
Number serving nonmetropolitan areas: 28;
Percentage serving nonmetropolitan areas: 23%;
Awardees:
Total: 52;
Number serving nonmetropolitan areas: 15;
Percentage serving nonmetropolitan areas: 29%.
Fiscal year: 2007;
Qualified applicants:
Total: 119;
Number serving nonmetropolitan areas: 26;
Percentage serving nonmetropolitan areas: 22%;
Awardees:
Total: 49;
Number serving nonmetropolitan areas: 11;
Percentage serving nonmetropolitan areas: 22%.
Fiscal year: 2008;
Qualified applicants:
Total: 158;
Number serving nonmetropolitan areas: 56;
Percentage serving nonmetropolitan areas: 35%;
Awardees:
Total: 66;
Number serving nonmetropolitan areas: 17;
Percentage serving nonmetropolitan areas: 26%.
Fiscal year: 2009;
Qualified applicants:
Total: 337;
Number serving nonmetropolitan areas: 89;
Percentage serving nonmetropolitan areas: 26%;
Awardees:
Total: 121;
Number serving nonmetropolitan areas: 33;
Percentage serving nonmetropolitan areas: 27%.
Fiscal year: 2010;
Qualified applicants:
Total: 292;
Number serving nonmetropolitan areas: 79;
Percentage serving nonmetropolitan areas: 27%;
Awardees:
Total: 147;
Number serving nonmetropolitan areas: 42;
Percentage serving nonmetropolitan areas: 29%.
Source: GAO analysis of CDFI Fund data.
Notes: The data in the table reflect the CDFI Program's financial
assistance awards only. Data on technical assistance awards were not
readily available within the time frames of this review. According to
an official, recipients of technical assistance awards are more likely
to serve nonmetropolitan areas. As a result, the percentages in the
table are likely understated, but the extent of this difference is
limited since the CDFI Program makes considerably fewer technical
assistance awards compared with financial assistance awards.
[A] The CDFI Program utilized a different scoring method for regular
and Small and Emerging CDFI Assistance (SECA) applicants and a
different applicant grouping process to categorize the two applicant
types in fiscal year 2004. However, because applicants in 2004 still
had to meet a minimum scoring threshold to be considered qualified, we
believe that this does not significantly impact our analysis.
[End of table]
The total financial and technical assistance award amounts varied for
CDFIs primarily serving nonmetropolitan areas.[Footnote 25] From
fiscal years 2004 through 2010, awards to CDFIs that indicated they
primarily served nonmetropolitan areas totaled about $126 million, or
about 29 percent of the $436 million in all awards for that period,
compared with about $311 million (71 percent) that went to CDFIs
serving primarily metropolitan areas.[Footnote 26] As shown in figure
3, the proportion of awards to these CDFIs varied considerably over
the review period. However, it averaged just under 30 percent across
that time period.
Figure 3: Total Financial and Technical Assistance Award Amounts by
CDFIs' Primary Service Area, Fiscal Years 2004-2010:
[Refer to PDF for image: combined vertical bar and line graph]
Year: 2004;
Nonmetropolitan: $10.03 million (23%);
Metropolitan: $34.46 million (77%).
Year: 2005;
Nonmetropolitan: $11.42 million (33%);
Metropolitan: $23.48 million (67%).
Year: 2006;
Nonmetropolitan: $7.84 million (34%);
Metropolitan: $14.96 million (66%).
Year: 2007;
Nonmetropolitan: $6.68 million (24%);
Metropolitan: $20.65 million (76%).
Year: 2008;
Nonmetropolitan: $11.5 million (21%);
Metropolitan: $42.75 million (79%).
Year: 2009;
Nonmetropolitan: $47.79 million (33%);
Metropolitan: $98.17 million (67%).
Year: 2010;
Nonmetropolitan: $30.41 million (29%);
Metropolitan: $74.13 million (71%).
Source: GAO analysis of CDFI Fund data.
[End of figure]
Note: The increase in funding amount in the last 2 years of the period
is a result of additional funding from the American Recovery and
Reinvestment Act in 2009 and a higher appropriation in 2010 than in
previous years.
For fiscal years 2004 through 2010, CDFIs' total loans and investments
outstanding in nonmetropolitan areas annually averaged about 18
percent of their total portfolios outstanding, reflecting an increase
to nonmetropolitan areas in recent years (see fig. 4). As stated
earlier, CDFIs must report all of their loans and investments
outstanding, which includes program awards combined with all of their
other sources of funding.[Footnote 27] From a low of about $55 million
in 2004, the dollar amount of CDFIs' total loans and investments
outstanding in nonmetropolitan areas grew fivefold in 2005 and then
increased steadily until 2009 and marginally decreased in 2010. From
2008 through 2010, CDFIs' total loans and investments outstanding in
nonmetropolitan areas exceeded $1 billion annually. As a percentage of
CDFIs' total portfolios, the dollar amounts to nonmetropolitan areas
remained fairly stable throughout this period. A similar trend
occurred in metropolitan areas for the same period, as the total loans
and investments outstanding increased fivefold from 2004 to 2005,
steadily increased for 3 years, and plateaued at approximately $4.3
billion annually from 2008 through 2010. CDFI Fund officials stated
that the growth in both metropolitan and nonmetropolitan total loans
and investments outstanding was a result of two factors. First, the
overall level of CDFI Program awards increased substantially over the
time period. In 2004, total financial and technical assistance awards
were about $46 million, and in 2010 the combined awards totaled almost
$105 million. Second, partly because of the increase in total awards,
the size of the individual CDFIs' assets increased, as reflected by
the number and amount of loans and investments made by reporting
CDFIs. For example, the total portfolio outstanding for both
metropolitan and nonmetropolitan CDFIs in 2004 was $330 million, and
the total portfolio outstanding in 2010 was over $5 billion. See
enclosure III for more details on CDFIs' loans and investments
outstanding in nonmetropolitan areas, by state.
Figure 4: Total Dollar Amount and Number of CDFI Loans and Investments
Outstanding in Metropolitan and Nonmetropolitan Areas, Fiscal Years
2004-2010:
[Refer to PDF for image: 2 combined vertical bar and line graphs]
Dollar amount of CDFI loans and investments:
Year: 2004;
Nonmetropolitan: $0.05 billion (16.5%);
Metropolitan: $0.28 billion (83.5%).
Year: 2005;
Nonmetropolitan: $0.28 billion (15.8%);
Metropolitan: $1.49 billion (84.2%).
Year: 2006;
Nonmetropolitan: $0.59 billion (14.4%);
Metropolitan: $3.48 billion (85.6%).
Year: 2007;
Nonmetropolitan: $0.71 billion (15.8%);
Metropolitan: $3.80 billion (84.2%).
Year: 2008;
Nonmetropolitan: $1.00 billion (18.9%);
Metropolitan: $4.29 billion (81.1%).
Year: 2009;
Nonmetropolitan: $1.12 billion (20.6%);
Metropolitan: $4.31 billion (79.4%).
Year: 2010;
Nonmetropolitan: $1.02 billion (19.1%);
Metropolitan: $4.35 billion (80.9%).
Number of CDFI loans and investments:
Year: 2004;
Nonmetropolitan: 701,000 (11%);
Metropolitan: 5,714,000 (89%).
Year: 2005;
Nonmetropolitan: 9,364,000 (28%);
Metropolitan: 23,956,000 (72%).
Year: 2006;
Nonmetropolitan: 19,183,000 (35%);
Metropolitan: 36,374,000 (65%).
Year: 2007;
Nonmetropolitan: 20,289,000 (30%);
Metropolitan: 47,656,000 (70%).
Year: 2008;
Nonmetropolitan: 24,147,000 (27%);
Metropolitan: 65,369,000 (73%).
Year: 2009;
Nonmetropolitan: 23,620,000 (23%);
Metropolitan: 77,257,000 (77%).
Year: 2010;
Nonmetropolitan: 11,741,000 (24%);
Metropolitan: 38,144,000 (76%).
Source: GAO analysis of CDFI Fund data.
[End of figure]
Figure 4 also shows the number of loans and investments that CDFIs
made in metropolitan and nonmetropolitan areas from fiscal years 2004
through 2010. CDFIs made more than 290,000 loans and investments in
metropolitan areas (73 percent) and more than 109,000 loans and
investments in nonmetropolitan areas (27 percent) over the entire
period. In addition, the proportion of loans and investments (27
percent) was greater than the proportion dollar amounts (18 percent)
of those loans and investments in nonmetropolitan areas for the same
period. The percentage of loans and investments in nonmetropolitan
areas steadily decreased from its peak at 34 percent in 2006 to 23
percent in 2009.
NMTC Program:
Policy changes to the NMTC Program have helped to ensure that about 20
percent of CDEs' community investments were committed to
nonmetropolitan areas in recent years. Since the two goals related to
the proportionality requirement were implemented in the 2008 funding
round, the NMTC Program has met the proportionality requirement. For
the first proportionality goal, NMTC Program officials stated that
they have been able to ensure that a proportional number of rural CDEs
received tax credits and, for the second proportionality goal, that 20
percent of all NMTC community investments were committed to
nonmetropolitan counties. From calendar years 2008 through 2011, rural
CDEs received tax credits totaling almost $2 billion. On the basis of
their designation as rural CDEs, they were obligated to deploy at
least 50 percent of this amount in nonmetropolitan areas. During the
same time period, CDEs (including both rural and nonrural CDEs)
committed to deploy more than $3 billion, or 20 percent of total
investments, in nonmetropolitan areas (see table 5). Data on
investment commitments by areas served are not available prior to 2008
because the NMTC Program did not track this information.
Table 5: Total CDE Community Investment Commitments to Nonmetropolitan
Counties, Calendar Years 2008-2011:
Dollars in millions:
Calendar year: 2008[B];
Total community investments: $4,895;
Number of CDEs making nonmetropolitan commitments[A]: 60;
Total investments committed to nonmetropolitan counties: $989;
Percentage of total investments committed to nonmetropolitan counties:
20%.
Calendar year: 2009;
Total community investments: $4,880;
Number of CDEs making nonmetropolitan commitments[A]: 49;
Total investments committed to nonmetropolitan counties: $971;
Percentage of total investments committed to nonmetropolitan counties:
20%.
Calendar year: 2010;
Total community investments: $3,409;
Number of CDEs making nonmetropolitan commitments[A]: 46;
Total investments committed to nonmetropolitan counties: $682;
Percentage of total investments committed to nonmetropolitan counties:
20%.
Calendar year: 2011[C];
Total community investments: $3,526;
Number of CDEs making nonmetropolitan commitments[A]: 34;
Total investments committed to nonmetropolitan counties: $708;
Percentage of total investments committed to nonmetropolitan counties:
20%.
Calendar year: Totals;
Total community investments: $16,710;
Number of CDEs making nonmetropolitan commitments[A]: 189;
Total investments committed to nonmetropolitan counties: $3,350;
Percentage of total investments committed to nonmetropolitan counties:
20%.
Source: GAO analysis of CDFI Fund data.
[A] The numbers in this column reflect only CDEs that committed to
make a minimal percentage of their investments in nonmetropolitan
counties, including rural CDEs. CDEs do not have to commit to
investments in nonmetropolitan counties. However, if CDEs do so, they
must uphold the commitments.
[B] There were two NMTC allocation rounds for applicants that applied
in 2008: the regular NMTC annual allocation round and an additional
allocation round authorized by the American Recovery and Reinvestment
Act. Data in the 2008 row reflect both allocation rounds.
[C] The NMTC Program announced the results of the calendar year 2011
allocation round in February 2012 and provided publicly available data
on tax credits to rural CDEs and overall investment commitments to
nonmetropolitan counties.
[End of table]
Based on our review of annual data reported by CDEs through the fiscal
year 2010 reporting period, the proportion of NMTC projects financed
in nonmetropolitan areas varied from 2003 through 2010 but increased
appreciably in 2010 following the 2008 policy change requiring
proportional investments in these areas (see fig. 5).[Footnote 28]
From 2003 to 2005, the dollar amount of projects financed in
nonmetropolitan areas increased from about $9 million to $239 million
(or from 11 percent of total projects financed to 16 percent of total
projects financed). During 2006 to 2009, the dollar amount of projects
financed in nonmetropolitan areas fluctuated between a low of $108
million to a high of $401 million. In the last year of the review
period, the dollar amount of projects financed in nonmetropolitan
areas increased to over $1 billion (or 21 percent of the total amount
of projects financed). The dollar amount of projects financed in
metropolitan areas also varied throughout the review period but
totaled over $4 billion in both fiscal years 2009 and 2010. See
enclosure IV for more details on CDEs' projects financed in
nonmetropolitan areas, by state.
Figure 5: Dollar Amount and Number of CDE Projects Financed in
Metropolitan and Nonmetropolitan Areas, Fiscal Years 2003-2010:
[Refer to PDF for image: 2 combined vertical bar and line graphs]
Dollar amount of CDE projects financed:
Year: 2003;
Nonmetropolitan: $0.01 billion (11%);
Metropolitan: $0.07 billion (89%).
Year: 2004;
Nonmetropolitan: $0.1 billion (15%);
Metropolitan: $0.55 billion (85%).
Year: 2005;
Nonmetropolitan: $0.24 billion (16%);
Metropolitan: $1.33 billion (84%).
Year: 2006;
Nonmetropolitan: $0.11 billion (4%);
Metropolitan: $2.33 billion (96%).
Year: 2007;
Nonmetropolitan: $0.32 billion (9%);
Metropolitan: $3.19 billion (91%).
Year: 2008;
Nonmetropolitan: $0.28 billion (10%);
Metropolitan: $2.56 billion (90%).
Year: 2009;
Nonmetropolitan: $0.4 billion (9%);
Metropolitan: $4.17 billion (91%).
Year: 2010;
Nonmetropolitan: $1.14 billion (21%);
Metropolitan: $4.19 billion (79%).
Number of CDE projects financed:
Year: 2003;
Nonmetropolitan: 2 (15%);
Metropolitan: 11 (85%).
Year: 2004;
Nonmetropolitan: 49 (31%);
Metropolitan: 110 (69%).
Year: 2005;
Nonmetropolitan: 56 (18%);
Metropolitan: 253 (82%).
Year: 2006;
Nonmetropolitan: 66 (14%);
Metropolitan: 392 (86%).
Year: 2007;
Nonmetropolitan: 80 (13%);
Metropolitan: 522 (87%).
Year: 2008;
Nonmetropolitan: 102 (20%);
Metropolitan: 398 (80%).
Year: 2009;
Nonmetropolitan: 76 (15%);
Metropolitan: 432 (85%).
Year: 2010;
Nonmetropolitan: 95 (19%);
Metropolitan: 416 (81%).
Source: GAO analysis of CDFI Fund data.
[End of figure]
According to an NMTC Program official, for several reasons, NMTC
Program data do not immediately reflect the increased investments in
nonmetropolitan areas that would be expected to follow from the
proportionality goals instituted in 2008. First, some of the 2008
awards were not closed until 2009 under the American Recovery and
Reinvestment Act of 2009. Second, rural CDEs have an additional year
to raise qualified equity investments and deploy the proceeds as
community investments. Lastly, CDEs have up to 180 days after the end
of their fiscal year to report to the CDFI Fund on projects financed.
Consequently, in 2010, the data for projects financed in
nonmetropolitan areas reflect a substantial increase following from
the 2008 policy change.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Secretary of the Treasury
for review and comment. In its written comments, reproduced in
enclosure V, Treasury concurred with the report's observations
regarding the process and distribution of assistance to metropolitan
and nonmetropolitan areas for both programs. Treasury also provided
technical comments that we incorporated into the report, as
appropriate.
We are sending copies of this report to the appropriate congressional
committees and the Secretary of the Treasury. In addition, the report
is available at no charge on the GAO website at [hyperlink,
http://www.gao.gov].
f you or your staff have any questions about this report, please
contact me at (202) 512-8678 or garciadiazd@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. GAO staff who made key
contributions to this report are listed in enclosure VI.
Signed by:
Daniel Garcia-Diaz Acting:
Director, Financial Markets and Community Investment:
Enclosures:
[End of section]
Enclosure I: Objectives, Scope, and Methodology:
The objectives of this report were to assess (1) how the Community
Development Financial Institutions (CDFI) Fund awards funds and
allocates tax credits to recipients and how program policies affect
the amount of funding and tax credits to metropolitan and
nonmetropolitan areas, and (2) the extent to which the amounts of
program awards and allocations that recipients receive differ in
metropolitan and nonmetropolitan areas.
To address the first objective, we reviewed the CDFI and New Markets
Tax Credit (NMTC) Programs' policies and procedures for distributing
financial and technical assistance awards and tax credits to certified
CDFIs and community development entities (CDE), respectively. We
reviewed how the programs' policies and procedures considered and
weighed applicants' geographic location in making funding and tax
credit allocation decisions. We also reviewed annual notices of
funding and allocation availability, reports on annual awards and
allocations, applicable laws and regulations, prior GAO reports, and
other documentation. We further reviewed the CDFI Fund's guidance for
certifying CDFIs and CDEs because financial institutions generally
must apply to the CDFI Fund for certification as CDFIs or CDEs before
they can apply for CDFI awards or NMTC allocations, respectively. We
also obtained program data to determine the numbers of approved and
denied applicants for CDFI and CDE certification. The CDFI
certification data covered fiscal years 2004 through 2010 and the CDE
certification data covered calendar years 2003 through 2010. We
reviewed lists of all certified CDFIs and CDEs as of February 29,
2012, from the CDFI Fund's website. We also interviewed CDFI Fund
officials.
Both programs used varying terms to describe geographic areas such as
urban and rural areas. To simplify presentation of geographic
designations and develop consistent terminology for use in our report,
we consulted with agency officials and agreed to report information
using "metropolitan" and "nonmetropolitan" categories. Specifically,
the CDFI and NMTC Program applications require applicants to indicate
the types of geographic areas they primarily serve--major urban, minor
urban, or rural.[Footnote 29] For CDFI and NMTC Program applicants and
awardees that indicated they served primarily major or minor urban
areas, we reclassified them as serving metropolitan areas. For
applicants and awardees that indicated they served primarily rural
areas, we reclassified them as serving nonmetropolitan areas. The
transaction-level data we received on CDFIs' loans and investments
outstanding and CDEs' projects financed already were presented in
metropolitan and nonmetropolitan terms and therefore did not require
reclassification.
To address the second objective, we compared program data for
metropolitan and nonmetropolitan areas on (1) the number of CDFIs that
received awards by primary geographic service area, (2) the total
amounts of awards and allocations CDFIs and CDEs received, and (3) the
total amounts of funding and investments deployed. We reviewed CDFI
and NMTC Program documentation to better understand each program's
proportionality goal. We conducted interviews with program officials,
including the CDFI Fund Office for Financial Strategies and Research
and Office of Certification, Compliance Monitoring and Evaluation to
discuss the data captured by the various databases.
Analysis of CDFI Program Awards:
The CDFI Program regulations require that awardees represent a
geographically diverse group serving metropolitan and nonmetropolitan
areas. To assess the CDFI Program's progress toward its geographic
diversity goal, we analyzed the proportion of qualified applicants to
the proportion of CDFI awardees serving nonmetropolitan areas for
fiscal years 2004 through 2010. From the CDFI Program, we obtained
financial assistance application and award data on the total number of
qualified applicants and awardees. We calculated the percentage of
qualified applicants and awardees serving nonmetropolitan areas. We
used financial assistance award data and not technical assistance
award data in our analysis of the geographic diversity goal because of
time constraints to collect the qualified applicant data broken down
by primary areas served. Our analysis of overall award data indicated
that recipients of technical assistance awards are slightly more
likely to serve nonmetropolitan areas. As a result, our discussion of
proportionality in the CDFI Program may understate the percentage of
awards that went to CDFIs serving nonmetropolitan areas. However, the
extent of this difference is limited since the CDFI Program makes
fewer technical assistance awards than financial assistance awards.
CDFI Program officials told us that in fiscal year 2004, they used a
different scoring method and a different applicant grouping process to
categorize regular and Small and Emerging CDFI Assistance (SECA)
applicants.[Footnote 30] We note these differences in our presentation
of the 2004 data on proportions of qualified CDFI Program applicants
and awardees serving nonmetropolitan areas.
To assess the primary geographic areas that CDFIs reported they
served, we analyzed CDFI Program data on award amounts for financial
and technical assistance by CDFIs' reported primary geographic market
served (metropolitan and nonmetropolitan). We obtained historical
application and award data from the CDFI Fund on awardee, primary
geographic market, amount of technical assistance funding, and amount
of financial assistance funding for fiscal years 2004 through 2010.
The applications for financial and technical assistance capture the
primary geographic market variable. Applicants can serve a combination
of geographic markets (metropolitan or nonmetropolitan) but can self-
select the geographic market that they primarily serve. Because
applicants choose only one area as "primarily" served, the data do not
necessarily capture where CDFIs ultimately make loans and investments
or capture CDFIs that self-identify as primarily serving metropolitan
areas but also make loans and investments in nonmetropolitan areas.
Therefore, we cannot say with certainty that CDFIs invest all of their
awards in the areas that they select as their primary geographic
markets. In addition, for 2004, data on the primary geographic market
for technical assistance applicants were not readily available because
the 2004 applications were paper based. As a result, we did not
include 100 awardees from 2004 in our data set. In addition to these
limitations, the data do not reflect de-obligation of awards completed
before May 2008 because the CDFI Fund did not have any electronic
system to record de-obligations before that time.
To assess the amounts and number of investments and loans that CDFIs
deployed to metropolitan and nonmetropolitan areas, we obtained
transaction-level program data. Our review focused on fiscal years
2004 through 2010, for which complete transaction-level data were
available for individual transactions (for example, a loan made to a
local business) from the Community Investment Impact System (CIIS)
database. We obtained aggregate data on the number and dollar amount
of loans and investments outstanding, as well as the percentage of
transactions and percentage of dollars outstanding by year and
metropolitan status. There are two main limitations to the data set.
First, the transaction-level data for the CDFI Program represent
CDFIs' loans and investments outstanding (to which we also refer as
total portfolio outstanding) at the end of each reporting year and
reflect CDFI Program awards combined with the CDFIs' other funding
sources. Therefore, the data do not allow us to identify which loans
and investments resulted directly from CDFI Program awards. In
addition, the program does not require certain types of financial
institutions (for example, regulated depository institutions such as
banks, bank holding companies, and credit unions) to report loan and
investment data because bank call reports (quarterly reports that
collect basic financial data from commercial banks) already capture
this information. Technical assistance awardees also are not required
to submit transaction-level reports because these awards are intended
for internal capacity-building activities rather than for providing
financial and developmental services to the community. However, some
of these CDFIs voluntarily submit transaction-level data to the CDFI
Fund. For example, program officials stated that in fiscal year 2011,
21 of 37 regulated depository institutions, or about 57 percent,
voluntarily submitted these data reports. They also stated that, in
general, 70 percent of all financial and technical assistance awardees
submitted these reports, as did approximately 85 percent of all
financial assistance awardees. But because not all CDFI awardees must
report transaction-level data, we cannot generalize the findings to
the entire CDFI awardee population.
Analysis of NMTC Program Allocations:
The NMTC Program ensures that a proportionate number of applicants
that are "rural CDEs"--CDEs that principally serve nonmetropolitan
areas--receive tax credits. It also attempts to ensure that at least
20 percent of the aggregate investments made with each round of NMTC
allocations are made in eligible nonmetropolitan areas. To describe
the extent to which the NMTC Program allocated tax credits to rural
CDEs, we reviewed annual allocation reports. To assess the extent to
which the NMTC Program has met the proportionality goal for
investments in nonmetropolitan areas, we analyzed the total CDE
community investments to nonmetropolitan areas for calendar years 2008
through 2011. Using the annual NMTC Program allocation reports, we
compiled data on total funding, the number of CDEs making investments
in nonmetropolitan areas, and total investments committed to
nonmetropolitan areas for the years the policy was in place (from
2008). We calculated the percentage of the total investments committed
to nonmetropolitan areas and present the data in terms of calendar
years because the program conducts its allocation rounds on a calendar
year basis.
To assess the amounts and number of investments and loans that CDEs
deployed to metropolitan and nonmetropolitan areas, we analyzed the
dollar amount and number of CDE projects financed in metropolitan and
nonmetropolitan areas for fiscal years 2003 through 2010. The NMTC
Program provided us with aggregate transaction-level data on the total
amount of qualified low-income community investment and with the
metropolitan statistical area and combined metropolitan statistical
area of the project location (MSACMSA code). To sort the data by
metropolitan and nonmetropolitan, we created a new variable based on
the MSACMSA code. We calculated the percentage of dollars and
percentage of community investments for fiscal years 2003 through
2010. We present this information in terms of fiscal years because
this is how the NMTC Program collects the data.
For all the analysis on CDFI and NMTC programs, we used data obtained
from the CDFI Fund's CIIS and internal certification, application, and
award databases. We conducted a reliability assessment of the data by
reviewing documentation from the CDFI Fund and its data contractor,
Kearney & Company, which maintains and manages the CIIS database.
Specifically, we reviewed their processes for ensuring consistent data
entry and for addressing potentially inaccurate data. We also
interviewed officials from the CDFI Fund to address questions about
the reliability of the information and checked the data for extreme
values and missing data points. We found the data to be sufficiently
reliable for our purposes.
We conducted this performance audit from January to April 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Enclosure II: Certified CDFIs and CDEs by State or Territory as of
February 29, 2012:
Figure 6 lists all certified Community Development Financial
Institutions (CDFI) and Community Development Entities (CDE) as of
February 29, 2012. The numbers of CDEs represent both the applicant
CDEs and their subsidiaries, which are legal entities that applicant
CDEs own or directly control and to which CDEs can transfer all or
part of their allocation authority.
Figure 6: Certified CDFIs and CDEs by State or Territory as of
February 29, 2012:
[Refer to PDF for image: horizontal bar graph]
Alabama:
CDFIs: 20;
CDEs: 45.
Alaska:
CDFIs: 10;
CDEs: 18.
American Samoa:
CDFIs: 0;
CDEs: 0.
Arizona:
CDFIs: 17;
CDEs: 69.
Arkansas:
CDFIs: 9;
CDEs: 32.
California:
CDFIs: 86;
CDEs: 475.
Colorado:
CDFIs: 14;
CDEs: 105.
Connecticut:
CDFIs: 15;
CDEs: 40.
Delaware:
CDFIs: 3;
CDEs: 17.
District of Columbia:
CDFIs: 19;
CDEs: 196.
Florida:
CDFIs: 24;
CDEs: 148.
Georgia:
CDFIs: 23;
CDEs: 96.
Guam:
CDFIs: 1;
CDEs: 0.
Hawaii:
CDFIs: 23;
CDEs: 22.
Idaho:
CDFIs: 4;
CDEs: 4.
Illinois:
CDFIs: 42;
CDEs: 207.
Indiana:
CDFIs: 8;
CDEs: 185.
Iowa:
CDFIs: 8;
CDEs: 70.
Kansas:
CDFIs: 1;
CDEs: 10.
Kentucky:
CDFIs: 14;
CDEs: 68.
Louisiana:
CDFIs: 31;
CDEs: 374.
Maine:
CDFIs: 11;
CDEs: 66.
Maryland:
CDFIs: 18;
CDEs: 224.
Massachusetts:
CDFIs: 30;
CDEs: 196.
Michigan:
CDFIs: 19;
CDEs: 117.
Minnesota:
CDFIs: 38;
CDEs: 108.
Mississippi:
CDFIs: 38;
CDEs: 57.
Missouri:
CDFIs: 12;
CDEs: 334.
Montana:
CDFIs: 17;
CDEs: 28.
Nebraska:
CDFIs: 5;
CDEs: 20.
Nevada:
CDFIs: 3;
CDEs: 11.
New Hampshire:
CDFIs: 3;
CDEs: 14.
New Jersey:
CDFIs: 16;
CDEs: 97.
New Mexico:
CDFIs: 12;
CDEs: 25.
New York:
CDFIs: 80;
CDEs: 486.
North Carolina:
CDFIs: 21;
CDEs: 96.
North Dakota:
CDFIs: 6;
CDEs: 2.
Northern Marianas Islands:
CDFIs: 0;
CDEs: 0.
Ohio:
CDFIs: 24;
CDEs: 206.
Oklahoma:
CDFIs: 18;
CDEs: 67.
Oregon:
CDFIs: 19;
CDEs: 103.
Pennsylvania:
CDFIs: 34;
CDEs: 220.
Rhode Island:
CDFIs: 4;
CDEs: 4.
South Carolina:
CDFIs: 10;
CDEs: 77.
South Dakota:
CDFIs: 16;
CDEs: 33.
Tennessee:
CDFIs: 17;
CDEs: 61.
Texas:
CDFIs: 40;
CDEs: 174.
Utah:
CDFIs: 5;
CDEs: 12.
Vermont:
CDFIs: 6;
CDEs: 16.
Virgin Islands:
CDFIs: 1;
CDEs: 1.
Virginia:
CDFIs: 19;
CDEs: 201.
Washington:
CDFIs: 24;
CDEs: 77.
West Virginia:
CDFIs: 4;
CDEs: 12.
Wisconsin:
CDFIs: 20;
CDEs: 177.
Wyoming:
CDFIs: 4;
CDEs: 0.
Total:
CDFIs: 977;
CDEs: 5,500.
[End of figure]
[End of section]
Enclosure III: CDFIs' Percentages of Total Portfolios Outstanding in
Nonmetropolitan Areas by State, Fiscal Years 2004-2010:
[End of figure]
We obtained data from the CDFI Program on the total dollar amount of
CDFIs' loans and investments outstanding (also referred to as total
portfolio outstanding) by state and metropolitan or nonmetropolitan
status for fiscal years 2004 through 2010. Figure 7 represents the
percentage of total portfolios outstanding in nonmetropolitan areas in
each state over this time period.
Figure 7: CDFIs' Percentages of Total Portfolios Outstanding in
Nonmetropolitan Areas by State, Fiscal Years 2004-2010:
[Refer to PDF for image: illustrated U.S. map]
Projects financed in nonmetropolitan areas:
Percentages of Total Portfolios Outstanding: 0;
District of Columbia:
New Jersey:
Rhode Island:
Percentages of Total Portfolios Outstanding: 1%-20%;
Alabama:
California:
Connecticut:
Delaware:
Florida:
Georgia:
Illinois:
Indiana:
Kansas:
Louisiana:
Maryland:
Massachusetts:
Missouri:
New Mexico:
New York:
North Carolina:
North Dakota:
Ohio:
Pennsylvania:
Tennessee:
Texas:
Virginia:
Washington:
Wisconsin:
Percentages of Total Portfolios Outstanding: 21%-40%;
Arizona:
Mississippi:
Nevada:
Oklahoma:
Oregon:
South Carolina:
Percentages of Total Portfolios Outstanding: 41%-60%;
Alaska:
Colorado:
Idaho:
Maine:
Michigan:
New Hampshire:
Utah:
Vermont:
Percentages of Total Portfolios Outstanding: 61%-80%;
Iowa:
Minnesota:
Montana:
Nebraska:
Percentages of Total Portfolios Outstanding: 81%-100%;
Arkansas:
Hawaii:
Kentucky:
South Dakota:
West Virginia:
Wyoming:
Source: GAO analysis of CDFI fund data; map (MapInfo).
[End of figure]
[End of section]
Enclosure IV: CDEs' Percentages of Projects Financed in
Nonmetropolitan Areas by State, Fiscal Years 2003-2010:
We obtained data from the NMTC Program on the dollar amount of
projects financed by CDEs by state and nonmetropolitan status for
fiscal years 2004 through 2010. Figure 8 represents the percentage of
projects financed in nonmetropolitan areas in each state over this
time period.
Figure 8: CDEs' Percentages of Projects Financed in Nonmetropolitan
Areas by State, Fiscal Years 2003-2010:
[Refer to PDF for image: illustrated U.S. map]
Projects financed in nonmetropolitan areas: 0%;
Connecticut:
Delaware:
District of Columbia:
Massachusetts:
Nebraska:
Nevada:
New Jersey:
Rhode Island:
Projects financed in nonmetropolitan areas: 1%-20%;
Alabama:
Arizona:
California:
Colorado:
Florida:
Georgia:
Idaho:
Illinois:
Indiana:
Louisiana:
Maryland:
Missouri:
New York:
North Carolina:
Ohio:
Oregon:
Pennsylvania:
South Carolina:
Tennessee:
Texas:
Utah:
Virginia:
Washington:
Projects financed in nonmetropolitan areas: 21%-40%;
Alaska:
Kansas:
Kentucky:
Iowa:
Michigan:
Minnesota:
Mississippi:
New Mexico:
Oklahoma:
Wisconsin:
Projects financed in nonmetropolitan areas: 41%-60%;
Arkansas:
Montana:
New Hampshire:
Projects financed in nonmetropolitan areas: 61%-80%;
Wyoming:
Projects financed in nonmetropolitan areas: 81%-100%;
Hawaii:
Maine:
North Dakota:
South Dakota:
Vermont:
West Virginia:
Source: GAO analysis of CDFI fund data; map (MapInfo).
[End of figure]
[End of section]
Enclosure V: Comments from the Department of the Treasury:
Department Of The Treasury:
Community Development Financial Institutions Fund:
601 Thirteenth Street, NW, Suite 200 South:
Washington, DC 20005:
April 18, 2012:
Mr. Daniel Garcia-Diaz:
Acting Director, Financial Markets and Community Development:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. Garcia-Diaz:
Thank you for providing the Community Development Financial
Institutions (CDFI) Fund with the opportunity to comment on the draft
GAO report, "Community Development Financial Institutions and New
Markets Tax Credit Programs in Metropolitan and Nonmetropolitan Areas"
required under House Report 112436, referenced by the Consolidated
Appropriations Act of 2012.
As always, we appreciate your team's familiarity with the programs
that are administered by the CDFI Fund. The CDFI Fund concurs with the
observations made by the GAO regarding the process and distribution of
assistance to metropolitan and nonmetropolitan areas. Therefore, we
have only a few edits we would like the GAO to take into consideration
(please see attachment).
Thank you again for the opportunity to review and comment upon your
draft report. We appreciate your efforts and collaboration during this
review. Please do not hesitate to contact me or my staff should you
wish to have any further discussion on the draft report.
Sincerely,
Signed by:
Donna J. Gambrell:
Director:
Attachment: CDFI Fund Comments.
[End of section]
Enclosure VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Daniel Garcia-Diaz, (202) 512-8678 or garciadiazd@gao.gov.
Staff Acknowledgments:
In addition to the contact named above, Paul Schmidt, Assistant
Director; William R. Chatlos; Elizabeth Jimenez; Marc Molino; Patricia
Moye; Lisa Reynolds; and Barbara Roesmann made key contributions to
this report.
[End of section]
Footnotes:
[1] The Riegle Community Development and Regulatory Improvement Act of
1994, Pub. L. No. 103-325, 108 Stat. 2160 (1994).
[2] The Community Renewal Tax Relief Act of 2000, Pub. L. No. 106-554,
§ 121, 114 Stat. 2763 (2000). The Act generally defines low-income
communities as census tracts with poverty rates of at least 20 percent
or median family incomes of no more than 80 percent of statewide
median family income. The NMTC Program generally defines low-income
persons as individuals with income of not more than 80 percent of the
area median family income.
[3] A qualified equity investment is any equity investment in a CDE
that an investor acquires at its original issue solely in exchange for
cash. The CDE must use at least 85 percent of the cash to make
investments in NMTC-eligible low-income communities.
[4] The time periods for these data reflect the periods for which
public release data were available from the CDFI Fund's Community
Investment Impact System. The CDFI and NMTC Programs began making
awards in 1994 and 2002, respectively.
[5] Consolidated Appropriations Act of 2012, Pub. L. No. 112-74, 125
Stat. 786 (2012); H.R. Rep. No. 112-136, at 14 (2012).
[6] Although we present CDE transaction-level data on a fiscal year
basis, the NMTC Program conducts its allocation rounds on a calendar
year basis. Therefore, this report presents NMTC Program allocation
data (in other words, information on tax credit allocations the NMTC
Program made to CDEs) in terms of calendar years.
[7] Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, Div.
A, Tit. I, § 102(b), 120 Stat. 2922 (2006).
[8] Specifically, such a recipient is one that, over the past 5 years,
has dedicated at least 50 percent of its direct financing dollars to
nonmetropolitan counties and has committed in its application to
dedicate at least 50 percent of its future NMTC direct financing
dollars to such areas. The recipient is not required to be physically
located in a nonmetropolitan area to be designated as such.
[9] Subsidiary CDEs are legal entities that applicant CDEs own or
directly control and to which CDEs can transfer all or part of their
allocation authority.
[10] Financial assistance can be in the form of grants, loans, credit
union shares, equity investments, and deposits to CDFIs. However, most
financial assistance awards are in the form of grants. Investment
areas and targeted populations are defined in 12 C.F.R. §
1805.201(b)(3).
[11] CDEs make community investments with the proceeds of qualified
equity investments from outside investors. The community investments
can include any capital or equity investments in, or loans to,
qualified active low-income community businesses; loans purchased from
other CDEs; financial counseling and other services to qualified
active low-income community businesses, or to residents of a low-
income community; or equity investments in, or loans to, other CDEs.
For more information about the NMTC investment process, see GAO, New
Markets Tax Credit: The Credit Helps Fund a Variety of Projects in Low-
Income Communities, but Could Be Simplified, GAO-10-334 (Washington,
D.C.: Jan. 29, 2010).
[12] See S. 996, 112th Cong. (2011); H.R. 2655, 112th Cong. (2011);
Office of Management and Budget, Executive Office of the President,
Fiscal Year 2013 Budget of the U.S. Government (2012).
[13] According to the CDFI Fund, a major urban area is a metropolitan
statistical area with a population equal to or greater than 1 million,
including both central city and surrounding suburbs. A minor urban
area is a metropolitan statistical area with a population of more than
50,000 and less than 1 million, including both central city and
surrounding suburbs. A rural area is any area not contained in a major
or minor urban area.
[14] See OMB Bulletin No. 99-04.
[15] See enclosure I for more detail on how we classified geographic
areas in this report.
[16] U.S. Census Bureau, Core Based Statistical Area (CBSA) Status for
the United States, Regions, and Divisions, and for Puerto Rico: 2010
and 2011, CBSA-EST2011-12 (Washington, D.C.: April 2012).
[17] 12 CFR §1805.700(d).
[18] While not within the scope of this report, the CDFI Fund's Native
American CDFI Assistance Program provides similar awards to CDFIs and
organizations that serve economically distressed Native communities.
According to the CDFI Fund, these organizations serve mostly rural
communities. In 2009, the CDFI Fund also implemented a Capacity
Building Initiative to provide technical assistance and training
opportunities for CDFIs. The initiative also focuses on extending CDFI
coverage to underserved communities, including a specialized focus in
rural areas.
[19] Pub. L. No. 109-432, Div. A, Tit. I, § 102(b).
[20] The NMTC Program applies the 1999 Office of Management and Budget
bulletin definition of nonmetropolitan areas to 2000 data to determine
eligibility. According to this classification system, 19.6 percent of
the U.S. population lived in nonmetropolitan counties in 2000.
[21] The NMTC Program's review process is similar to the CDFI
program's review process; see figure 1.
[22] For a more-detailed description of the criteria used to evaluate
NMTC Program applications, see GAO, New Markets Tax Credit: Minority
Entities Are Less Successful in Obtaining Awards Than Non-Minority
Entities, GAO-09-536 (Washington, D.C., Apr. 30, 2009).
[23] GAO-10-334.
[24] Under IRC §45D(g)(3), there is a recapture provision by which an
investor can lose the right to claim the NMTC if certain conditions
are not met throughout the seven-year period after the qualified
equity investment is made. In its February 6, 2012 response to the
CDFI Fund's Request for Public Comments on the NMTC Program,
Novogradac and Company stated on behalf of the NMTC Working Group that
the recapture provision increases transaction costs and discourages
investments in specific types of businesses, including non-real estate
businesses. The Internal Revenue Service recently indicated that non-
real estate investments may be smaller than real estate investments,
and it has proposed regulations that would modify the NMTC Program to
facilitate and encourage investments in non-real-estate businesses in
low-income communities. In addition, it requested comments on
potential regulatory changes that would simplify the substantiation
requirements in cases where CDEs invest qualified equity investment
proceeds in other CDEs that then make smaller (i.e., less than
$250,000) loans to non-real-estate businesses in low-income
communities.
[25] From fiscal years 2004 through 2010, the CDFI program awarded a
total of $436 million, of which approximately $414 million (95
percent) was in financial assistance awards and $23 million (5
percent) was in technical assistance awards. Dollar amounts have been
rounded.
[26] Amounts do not sum to $436 million because of rounding. As part
of the CDFI application for combined financial and technical awards,
applicants select the primary geographic market they serve, although
they may also serve a combination of metropolitan and nonmetropolitan
markets.
[27] According to CDFI Fund officials, the Fund does not require
certain types of financial institutions (for example, regulated
depository institutions such as banks, bank holding companies, and
credit unions) to report loan and investment data because call reports
capture this information. In addition, technical assistance awardees
are not required to submit detailed data because these awards are to
be used for internal capacity-building activities rather than for
financial and developmental services to the community. However, some
of these awardees voluntarily submit the data to the CDFI Fund. For
example, CDFI Fund officials stated that in fiscal year 2011, 21 of 37
regulated depository institutions, or about 57 percent, voluntarily
submitted these data reports. They also stated that, in general, 70
percent of all financial and technical assistance awardees submit
these reports, as do approximately 85 percent of all financial
assistance awardees.
[28] The number of projects that CDEs financed in nonmetropolitan
areas from fiscal years 2003 through 2010 remained relatively steady
as a percentage of all projects financed (approximately 17 percent).
[29] According to the CDFI Fund, a major urban area is a metropolitan
statistical area with a population equal to or greater than 1 million,
including both central city and surrounding suburbs. A minor urban
area is a metropolitan statistical area with a population of more than
50,000 and less than 1 million, including both central city and
surrounding suburbs. A rural area is any area not contained in a major
or minor urban area. In the NMTC Program application, applicants must
indicate whether they serve major urban, minor urban, or
nonmetropolitan areas.
[30] The SECA category allows CDFIs with assets of less than a certain
amount or in operation for fewer than 5 years to apply separately from
larger and more established (regular) CDFIs. From fiscal years 2004
through 2010, SECA applicants received approximately 13 percent of the
total dollar amount of financial assistance awards, while regular
applicants received approximately 87 percent of financial assistance
funding.
[End of section]
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