Community Development

Community-based financial institutions have improved the economic well-being of economically distressed neighborhoods through lending and investments tailored to these communities. In 1994, recognizing that such institutions were relatively few in number and small in size and often had difficulty meeting the demand for their services, Congress created the Community Development Financial Institutions (CDFI) Fund. So far, the Fund has sought to expand access to credit and other financial services in distressed communities through two programs--the CDFI and the Bank Enterprise Award programs. The CDFI program provides a range of for-profit and nonprofit financial institutions with financial and technical help to support their efforts in distressed communities and monitors their performance during a period of at least five years. The Bank Enterprise Award program rewards banks for increased lending and investments in CDFIs or in distressed communities. This testimony focuses on the first year's performance of the CDFI and the Bank Enterprise Award programs and identifies ways to improve their effectiveness. GAO also reviews the Fund's progress in meeting the strategic planning requirements of the Government Performance and Results Act of 1993.

GAO noted that: (1) as of January 1998, the Fund had entered into assistance agreements with 26 of the 31 CDFIs that received awards in 1996; (2) these agreements include performance goals and measures that were based on the business plans submitted by awardees in their application packages and negotiated between the Fund and the awardees, as the CDFI Act requires; (3) GAO found that the performance measures in the assistance agreements generally assess activities rather than the accomplishments reflecting the activities' results; (4) according to Fund officials and CDFIs in GAO's case studies, this emphasis on activity measures is due, in part, to difficulties in isolating and assessing the results of community development initiatives, which may not be observable for many years and may be subject to factors outside the awardees' control; (5) GAO further found that although the performance measures in the assistance agreements are generally related to specific goals, they do not always address the key aspects of the goals, and most assistance agreements lack baseline data that would facilitate tracking progress over time; (6) although the Fund has disbursed about 80 percent of the fiscal year 1996 BEA award funds, it is difficult to determine the extent to which the program has encouraged the 38 awardees to increase their investments in distressed communities; (7) GAO's case studies have five awardees and interviews with Fund officials indicate that although the prospect of receiving a BEA award prompted some banks to increase their investments, it had little or no effect on other banks; (8) GAO found that, in general, other regulatory or economic incentives exerted a stronger influence on banks' investments than the BEA award; (9) in addition, some banks do not collect all of the data on their activities needed to guarantee that increases in investments under the BEA program are not being offset by decreases in other investments in these distressed areas; (10) the CDFI Fund's strategic plan contains all of the elements required by the Government Performance and Results Act and the Office of Management and Budget's (OMB) associated guidance, but these elements generally lack the clarity, specificity, and linkage with one another that the act envisioned; and (11) although the plan identifies key external factors that could affect the Fund's mission, it does not relate these factors to the Fund's strategic goals and objectives and does not indicate how the Fund will take the factors into account when assessing awardee's progress toward goals.