[Senate Hearing 117-370]
[From the U.S. Government Publishing Office]
S. Hrg. 117-370
THE ROLE THAT COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS AND MINORITY
DEPOSITORY INSTITUTIONS SERVE IN SUPPORTING COMMUNITIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING CDFI'S AND THE EFFECT THEY HAVE ON COMMUNITIES, JOB CREATION,
OUR ECONOMY, AND SMALL BUSINESSES
__________
FEBRUARY 9, 2022
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
___________
U.S. GOVERNMENT PUBLISHING OFFICE
48-644 PDF WASHINGTON : 2022
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
______
Subcommittee on Financial Institutions and Consumer Protection
RAPHAEL WARNOCK, Georgia, Chair
THOM TILLIS, North Carolina, Ranking Republican Member
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana TIM SCOTT, South Carolina
MARK R. WARNER, Virginia MIKE ROUNDS, South Dakota
ELIZABETH WARREN, Massachusetts BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada CYNTHIA LUMMIS, Wyoming
CHRIS VAN HOLLEN, Maryland JERRY MORAN, Kansas
KYRSTEN SINEMA, Arizona KEVIN CRAMER, North Dakota
Max Virkus, Subcommittee Staff Director
Ryan Adams, Republican Subcommittee Staff Director
(ii)
C O N T E N T S
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WEDNESDAY, FEBRUARY 9, 2022
Page
Opening statement of Chairman Warnock............................ 1
Prepared statement....................................... 23
Opening statements, comments, or prepared statements of:
Senator Tillis............................................... 3
Prepared statement....................................... 24
WITNESSES
Robert James II, President and CEO, Carver Financial Corporation,
and Chairman, National Bankers Association, Savannah, Georgia.. 6
Prepared statement........................................... 25
Responses to written questions of:
Senator Tillis........................................... 43
Jeanne Kucey, President and CEO, JetStream Federal Credit Union,
on behalf of the National Association of Federally Insured
Credit Unions, Miami Lakes, Florida............................ 7
Prepared statement........................................... 29
Responses to written questions of:
Senator Tillis........................................... 47
Joel Griffith, Research Fellow, Financial Regulations, Heritage
Foundation, Washington, DC..................................... 9
Prepared statement........................................... 38
Additional Material Supplied for the Record
Letter submitted by Circle Internet Financial LLC................ 49
Statement submitted by ICBA...................................... 50
Letter submitted by CUNA......................................... 53
(iii)
THE ROLE THAT COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS AND MINORITY
DEPOSITORY INSTITUTIONS SERVE IN SUPPORTING COMMUNITIES
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WEDNESDAY, FEBRUARY 9, 2022
U.S. Senate,
Subcommittee on Financial Institutions and Consumer
Protection,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 2:31 p.m., via Webex and in room
538, Dirksen Senate Office Building, Hon. Raphael G. Warnock,
Chair of the Subcommittee, presiding.
OPENING STATEMENT OF CHAIR RAPHAEL WARNOCK
Chair Warnock. This hearing will now come to order.
Welcome to the first hearing of the Subcommittee on
Financial Institutions and Consumer Protection this year. This
hearing is in a hybrid format. Our Members are in person, but
we will have witnesses testifying both in person and by video.
We are grateful for their presence.
For those joining remotely, just a few reminders. Once you
start speaking, there will be a slight delay before you are
displayed on the screen. To minimize background noise, please
click the mute button until it is your turn to speak or ask
questions. I guess I should practice that. You should all have
one box on your screens labeled ``clock'' that will show how
much time is remaining.
As we are all here in person, our speaking order will be as
is traditional, that is, by seniority of the Members here when
the gavel came down and then by seniority of Members arriving
later, alternating between Democrats and Republicans.
I am honored to chair this Subcommittee and to work with
Ranking Member Tillis to ensure stability in our banks, our
credit unions, and other financial institutions that serve
families, small businesses, and communities in Georgia and
around our country, and to ensure that our communities have
equal access to the financial resources that build an economy
that works for all Americans.
Now that brings me to the topic of our hearing today, which
will examine Community Development Financial Institutions, or
CDFIs, and Minority Depository Institutions, or MDIs, and the
role that they play in supporting communities, creating jobs,
boosting our economy, and helping small businesses to thrive.
We will also examine the roles they play to help communities
build resiliency against a crisis, like the pandemic, overcome
crisis, and importantly, recover from the crisis so that our
communities do not simply survive but thrive. Finally, I hope
that our witnesses will discuss ways that Congress can better
support the work that they do every day to grow our economy
from the bottom up.
The economic turbulence of the COVID-19 pandemic has pushed
working families to the brink, often forcing them to choose
between their health and their livelihoods. Thanks in part to
the aid passed by Congress to combat the pandemic, our Nation
is experiencing one of the quickest job market recoveries ever
seen. Last month, the Georgia Department of Labor reported that
the State's unemployment rate is now 2.6 percent, with 97
percent of jobs lost during the height of the pandemic now
recovered. Last week, the jobs report showed that jobs rose by
467,000, defying the expectations of many experts. Critical in
facilitating this recovery has been the work of CDFIs and MDIs,
and I appreciate that we have two before us here today to talk
about the work that they are doing even now in their respective
communities.
Let me say that this is also personal for me. This is not
theoretical stuff. In addition to serving as a Senator for
Georgia, I am also Senior Pastor of the historic Ebenezer
Baptist Church, spiritual home of Martin Luther King, Jr., and
John Lewis. And the bank that our church uses, Citizens Trust
Bank, is in fact one of the many CDFIs and MDIs in Georgia that
have been helping families and institutions in our community to
thrive. I know this firsthand.
And as a pastor and as a Senator, I see my work is grounded
in serving others and my community, and that is what CDFIs and
MDIs are doing. They are serving others and the community.
Whether it has been acting as our Nation's fiscal first
responders immediately there to assist families and small
businesses facing the financial unknown during the first weeks
of the pandemic or facilitating the flow of Federal aid to
communities, CDFIs and MDIs provided economic stability and
certainty to millions of Americans, allowing them to focus on
the health and the safety of themselves and their children.
In Georgia, the Atlanta-based CDFI, Access to Capital for
Entrepreneurs, or ACE, immediately sprung to action early in
the pandemic to help small businesses. In the first months of
the pandemic, they worked with their clients to offer emergency
funds, including Paycheck Protection Program loans, and they
worked with local development authorities and investment
partners to give flexibility for small business borrowers as
the economy recovered. These actions by just one CDFI saved
hundreds of jobs in my home State of Georgia.
The Federal Reserve Bank of San Francisco has rightly
referred to CDFIs as economy shock absorbers for communities in
the worst of the downturn. These institutions make sustainable
investments within our communities. They are members of our
community. They know the folks in the community. They
understand these communities. And, they have the correct
incentives to help communities prepare, work through, and
recover from the crisis.
CDFIs are also helping communities protect themselves
against climate disasters. In Georgia, CDFIs have collaborated
to begin offering green loans, which is capital provided to
small businesses in the State to help them have a business that
is more ecofriendly, such as funding energy efficiency
improvements. These investments help to create green jobs, and
they push Georgia and our Nation toward a sustainable future.
Even with the work done by CDFIs and MDIs to help
communities, the data show that we still have more work to do.
In the crisis we are currently living through, there is no
doubt that the jobs recovery, as strong as it is, is uneven.
Men have entirely recovered their job losses since the pandemic
began while there are one million fewer women in the labor
force than in February of 2020. The recovery has been uneven.
And unemployment among Black Americans remains elevated. And if
history is any indicator, rural communities, like those in my
home State of Georgia, will lose resources and these same
communities will struggle to bounce back as they see resources
leave their communities.
The number of MDIs fell by 31 percent. The number of
Minority Depository Institutions fell by 31 percent from 2008
to 2018 even as the need for these institutions remains higher
than ever.
And there are even those who wish to defund the CDFI Fund
program permanently. I think that is wrong-headed. And I
believe Congress, and this Subcommittee in particular, has an
important role to play to ensure that the financial
institutions that support underserved communities, small
businesses, and working families traditionally overlooked by
larger banks, have the resources, the tools, and the support to
continue their important work, that is, to ensure that ours is
an economy and a capitalism that gives communities, all of our
communities, a chance to thrive.
And so this hearing is about helping people. It is about
helping communities and helping small businesses. Hardworking
American families are on the front line when a crisis strikes a
community, whether it is a natural disaster made worse by
global climate change, economic recession caused by greedy
corporate business practices, or a public health crisis such as
the ongoing COVID-19 pandemic. As families, small businesses,
and communities recover, we must ensure they have the resources
they need not only to survive but to thrive.
Thank you and I will now turn to Ranking Member Tillis for
his opening statement.
OPENING STATEMENT OF SENATOR THOM TILLIS
Senator Tillis. Thank you, Chairman Warnock, and thank you
for holding this hearing. It is our second in this Congress,
first this year. I appreciate it. I also want to thank the
witnesses for being here to testify.
I have long been an advocate for a resilient and diverse
banking ecosystem, one that blends a healthy mix of globally
systemic financial institutions, super-regionals, and
regionals, all the way down to local community banks. Banks and
credit unions of all different sizes bring varied missions and
capabilities to their customers, allowing individuals to select
the banking experience best tailored to them and their
communities. I also would agree that CDFIs and MDIs fit into
that important ecosystem.
And we only have to look at the experience in our response
to the pandemic, when the financial institutions of various
sizes mobilized to actually get desperately needed resources
out to businesses through the Paycheck Protection Program. In
total, the SBA approved over 1.8 million Paycheck Protection
loans, totaling 799 billion in dollars. CDFIs, for their part,
approved over 350,000 PPP loans, totaling $8.4 billion. I want
to thank you all for the mobilization.
And, Chairman Warnock, I was struck by the fact that when
we were mobilizing, having worked in the banking industry in a
regulatory environment for a part of my career, that they were
willing to mobilize when the rules were literally being
written, when they were just putting facts out with the
Treasury. The fact that they were willing to do that, I think,
is extraordinary. And I want to--in this setting, want to thank
the CDFIs and the MDIs who also mobilized and answered the
call.
But that said, I raised concerns in the previous
Subcommittee hearing over the lack of transparency, data, and
transparency, that happened to be related to unemployment
benefits. But I think the flooding of the zone of resources and
various studies point to the fact that we can do a better job
with transparency, accountability, and measuring efficacy in
these programs so that people like me, who believe in them,
will continue to support and sustain them. Policymakers simply
do not receive enough information to adequately judge how
effective the lending operations of the CDFIs are.
A report from the Carsey Institute up in New Hampshire, on
behalf of the Department of Treasury said this: ``In developing
this report, the research team encountered significant data
limitations at every turn . . . '' and identified inadequate
data and nonstandardized auditing practices as significant
barriers to CDFIs achieving better capitalization.
The authors go on to say, `` . . . it is currently simply
impossible to make the most routine analyses that are normally
conducted with other classes of loan assets. It is not
possible, for example, to create a breakdown of default rates
or prepayment speeds for a given class of CDFI loans, or even
to provide a breakdown of borrower or credit scores.''
``What is ironic about this''--I am going on with the
report ``is that CDFI managers feel they are swamped with
reporting requirements, which they routinely fulfill. It is
difficult to reconcile how CDFIs can be doing so much reporting
. . . '' Yet, we have so little to show for it in terms of
meaningful information for people like me, who want to continue
and build on these programs.
And I mention that not to vilify CDFIs but to point out
that I believe there are systemic deficiencies in the CDFI
oversight and transparency that can prevent them from most
effectively serving the communities that they reside in. Given
the tremendous level of funding bestowed on CDFIs and MDIs over
the course of COVID-19, I believe these deficiencies are
especially important to examine and rectify.
Just last year, the CDFI Fund received the same level of
funding that would have previously been appropriated over a
decade, a more than 10-fold increase. Additionally, Congress
established the Emergency Capital Investment Program (ECIP),
which provided an additional $9 billion fund to help stabilize
CDFIs and MDIs.
My colleagues on the other side of the aisle also
reinstated the Obama era State Small Business Credit Initiative
(SSBCI) in the, what was arguably partisan, reconciliation
package that they passed last year. This $10 billion program,
which will also direct money toward CDFIs, was rightly allowed
to expire due to chronic inadequacies that resulted in only 4
States whose SSBCI programs were in compliance, according to
the Inspector General's report.
And North Carolinians are familiar with the lack of
oversight over taxpayer dollars that the SSBCI doled out. The
founding President of the North Carolina Rural Center resigned
and was withheld severance following a State audit which
detailed financial malpractice at the organization.
So without greater transparency and data requirements, I am
concerned we could see the same situation play out again. With
a price tag in the tens of billions between SSBCI, ECIP, and
the 12-fold increase to the CDFI Fund, it is crucial that
policymakers are equipped with concrete data that provides an
accurate view of the impact of CDFIs and MDIs. While a press
release touting how much money went out the door is good,
comprehensive data, greater transparency, a better
understanding of efficacy is also very, very important.
So, Mr. Chairman, I had a brief conversation with a member
on the floor and briefly with a witness before us. I want to
make it very clear that I think that CDFIs and MDIs are a
critical part of a healthy ecosystem for financial--of all
financial institutions. We need to provide access to capital to
unserved and underserved communities. But we also owe it to
those same institutions to make sure that we are getting right,
that they are accountable, and we understand what programs are
working and what programs are not.
I look forward to the witnesses' testimony.
Chair Warnock. Thank you so very much, Ranking Member
Tillis, for your opening statement.
Now let us turn to our witnesses. Testifying today will be
Mr. Robert James II. He is the President and the CEO of the
Carver Financial Corporation. It is a CDFI and an MDI from my
home city of Savannah, Georgia. In fact, Carver State Bank is
right down the street--literally, right up the street from
where I grew up. He is also the Chairman of the National
Bankers Association.
Also testifying is Ms. Jeanne Kucey, President and CEO of
JetStream Federal Credit Union, Miami Lakes, Florida, on behalf
of the National Association of federally Insured Credit Unions.
JetStream was one of the first CDFI credit unions in South
Florida, and we are grateful to have Ms. Kucey here today.
Finally, our last witness is Mr. Griffith, a research
fellow at the Heritage Foundation, where he focuses on
financial regulations.
We appreciate your testimony, and we look forward to this
important discussion.
Mr. James from Savannah, Georgia, God's Country, I will now
turn things over to you.
STATEMENT OF ROBERT JAMES II, PRESIDENT AND CEO, CARVER
FINANCIAL CORPORATION, AND CHAIRMAN, NATIONAL BANKERS
ASSOCIATION, SAVANNAH, GEORGIA
Mr. James. Thank you, Chairman Warnock, Ranking Member
Tillis, and Members of the Subcommittee. Good afternoon. And I
appreciate this opportunity to testify on how MDIs and CDFIs
support communities.
Again, my name is Robert James II, and I am President of
Carver Financial Corporation, which is the parent of Carver
State Bank in Savannah, Georgia, and I am Chairman of the
National Bankers Association.
The NBA is the leading trade association for the country's
MDIs. A critical part of our mission is to advocate for all
MDIs on legislative and regulatory matters affecting our banks
and the communities we serve. Like Carver, many of our members
are also CDFIs with a primary mission to serve those who are
underserved by traditional banks. Our banks are on the front
lines, trying to eliminate the racial wealth gap that makes our
communities the most vulnerable during good times and bad.
Decades of income disparity, unequal access to health care,
and residential segregation have made communities of color and
other low-income communities less resilient. The COVID-19
pandemic and climate crisis bring this inequity to light.
Eliminating the racial wealth gap is not only the best way to
combat environmental and health injustice, and ensure
resilience in communities of color, but recent research shows
that eliminating this gap would add trillions of dollars to
America's GDP. We believe our banks are best positioned to help
our communities become more resilient in the face of climate
change, health emergencies, and systemic issues that have
placed them at an economic disadvantage.
The Senate Banking Committee has taken concrete steps to
ensure that MDIs and communities we serve are not forgotten
during times of crisis. For example, the bipartisan ECIP
program and increased funding for CDFIs can help many MDIs and
CDFIs scale up and provide more access to capital in
underserved communities. The bipartisan Infrastructure Bill
provides billions of targeted dollars that can be instrumental
in addressing systemic environmental injustice while also
providing new economic opportunities.
The NBA looks forward to working with Congress on
additional legislation to ensure that our communities hardest
hit by the pandemic and system inequity experience lasting,
material changes. I would like to highlight today the need for
legislation that will allow MDIs to continue to augment our
capital bases, push to include banks, our banks and
communities, in opportunities that will flow from the
Infrastructure Bill and address a regulatory process that can
hamper our banks' ability to bring the underserved into the
financial mainstream.
Traditionally, MDIs and CDFIs have served as anchor
institutions in minority and low-income communities.
Unfortunately, our smaller size, particularly among African-
American MDIs, has not allowed us to respond as quickly or with
as much scale as these situations demand. MDIs make up only 3
percent of all American banks, and Black-owned MDIs, only 0.4
percent. When looking at total bank assets, the disparity is
even more stark. As of the second quarter of 2021, Black banks
held about $6 billion in total combined assets as compared with
over $22 trillion in total assets in the U.S. banking system.
Put another way, Black-owned banks only control 27,000ths of 1
percent of total bank assets in the United States. We need more
capital to scale.
Tier 1 capital, or the equity invested in a bank, is the
most critical component of our resilience, and it is what
allows us to grow and scale. MDIs have historically lacked
access to capital markets, limiting our scale and ability to
invest and make our communities more resilient. The ECIP
program is a historic step in the right direction, but
unfortunately, many of our banks were not able to access it due
to the uneven application of regulations that have failed to
consider the unique business models mission-driven banks must
employ to provide basic banking services in markets that are
otherwise ignored by mainstream banks. We need regulators to be
intentional and modernize the examination process for mission
driven banks that do not do business in wealthy areas.
The bipartisan infrastructure law presents a generational
opportunity to not only repair our Nation's roads and bridges
but also to be inclusive. NBA members are eager to participate
in the financing of major projects in our communities and to
connect minority businesses to these opportunities, especially
in new areas like EV charging. Intentionally including our
banks and our customers will strengthen small businesses,
create good jobs, and make our communities more resilient.
The COVID-19 pandemic spurred us to start addressing the
root causes of racial inequity in health outcomes, many of
which revolve around economic disparity. It is time now to
expand the conversation to address the economic roots of
environmental injustice and ensure that all Americans are
protected from the worst effects of climate change. In this
regard, the NBA looks forward to working closely with the
Committee and Subcommittee on workable solutions that ensure
that underresourced communities will not only survive but
ultimately thrive.
Thank you for the opportunity to testify and for your
efforts to ensure equity for all communities across the
country. I will be pleased to answer any questions.
Chair Warnock. Thank you so very much, Mr. James.
Next, we will hear from Ms. Kucey, who will also testify
virtually.
STATEMENT OF JEANNE KUCEY, PRESIDENT AND CEO, JETSTREAM FEDERAL
CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF
FEDERALLY INSURED CREDIT UNIONS, MIAMI LAKES, FLORIDA
Ms. Kucey. Well, good afternoon, Chairman Warnock, Ranking
Member Tillis, and Members of the Subcommittee. My name is
Jeanne Kucey, and I am testifying today on behalf of the NAFCU.
I am the CEO of JetStream Federal Credit Union, a low-income
CDFI and MDI serving Miami Dade County, Florida, and Puerto
Rico.
Credit unions are proud of their record of diversity and
helping their communities. At the end of 2020, there were 520
MDI credit unions, and the number of CDFI credit unions has
been growing, with 416 at the end of 2021.
As we continue the pandemic recovery, NAFCU urges Congress
to consider increased funding levels for the CDFI program. It
is this program that gives credit unions like JetStream an
important resource to help create initiatives to serve our
communities.
At JetStream, we are heavily vested in the prosperity of
the communities we serve, having supported them through
hurricanes, Government shutdowns, and during the COVID-19
pandemic. Our membership is diverse and reflective of the
communities that JetStream serves; 71 percent of our members
are classified as low-income or below, 67.5 percent are
Hispanic, and 18.8 are African American.
Since 2011, JetStream has received $5.8 million in CDFI
grants to sponsor a variety of programs, including small
business lending and a resettlement loan program for low-income
members. The grants also supported the Whole Again loan
program, an initiative that provided $17 million in consumer
loans to replace goods and vehicles destroyed by Hurricanes
Irma and Maria. The two hurricanes were a life-defining moment
for many of our members, and we knew that we had to act through
no cost, zero percent APR short-term loans, deferment of
existing loan payments, elimination of transactional fees, and
financial coaching for our members who were dealing with active
insurance cases and attempting to rebuild their homes.
In 2020, JetStream launched a multipronged COVID-19
emergency relief program that included emergency loans, lines
of credit, a 6-month payment deferral, and fee waivers.
Consumer loan deferments totaled $10.5, and our fee income was
reduced by 32 percent. Additionally, by strictly following CDC
guidelines, JetStream maintained normal operating hours
throughout the crisis.
Our low-income members are more likely to live in urban
heat islands with fewer trees and more pavement as well as
residing in housing with older building materials and
appliances. To address these climate-related challenges of our
members, we are fortunate to have recently been approved for a
CDFI grant for a green loan program. This will address these
challenges with innovative products and underwriting created to
improve efficiencies for low-income homeowners and also help
those who need major repairs to their homes, resulting in
improved housing stock and increased household income. Thanks
to the CDFI Fund, we are looking forward to unveiling this
program to our community later in 2022.
My written testimony outlines a series of steps that can
help MDI and CDFI credit unions continue to serve their
communities and members. Some of these include increased
funding for the CDFI Fund and the NCUA's Community Development
Revolving Loan Fund, creating a CDFI Crisis Fund to quickly
make capital available to CDFIs to address a crisis, improving
and streamlining the process for certification and
recertification as a CDFI, allowing credit unions to serve
underserved areas and have longer loan maturities, requiring
the FHFA and FHA to establish specialized mortgage loan
programs for MDIs and CDFIs, and improving the process for de
novo credit unions.
In conclusion, MDIs and CDFIs play a vital role for
millions of Americans. We urge Congress to support funding for
these programs and take steps to make it easier for credit
unions to serve their members and communities.
Thank you again, Chairman Warnock, Ranking Member Tillis,
and the Members of the Subcommittee, for the invitation to
testify before you today. I welcome any questions you might
have.
Chair Warnock. Thank you, Ms. Kucey.
Next, we will hear from Mr. Griffith who is in person.
STATEMENT OF JOEL GRIFFITH, RESEARCH FELLOW, FINANCIAL
REGULATIONS, HERITAGE FOUNDATION, WASHINGTON, DC
Mr. Griffith. Chair Warnock, Member Tillis, and Members of
the Senate Subcommittee, thank you for the opportunity to
testify today. My name is Joel Griffith. I am a research fellow
at the Heritage Foundation. The views I express today are my
own and should not be construed as representing any official
position of Heritage.
Taxpayer dollars diverted to CDFIs and the CDFI Fund all
too often hinders competition and misallocates limited economic
resources, benefiting select interests. In addition, a lack of
transparency has yielded lax accountability and has resulted in
lost confidence in the fairness of our financial system.
The 2021 Emergency Capital Investment Program highlights
the elevated risk that dominates CDFI lending. Congress, in
March 2021, authorized the Treasury Department to invest up to
$9 billion in CDFIs to enable them to meet capital requirements
and to continue lending even as the threat of defaults on loans
previously made by CDFIs grew. In just an 8-month span, one in
three CDFI depositories requested Treasury investment through
this emergency program. This suggests that distressed loans
threaten the operational capacity of more than one-third of the
CDFI depositories. The extent of the demand for taxpayer
assistance through this emergency program over the past year
underscores the dangers stemming from looser underwriting
standards, Government subsidization of the CDFI business model,
and the lack of transparency.
Another troubling component of the new Government largess
for CDFIs is the State Small Business Credit Initiative. The
American Rescue Plan provided $10 billion to restart this
initiative that funds State programs that provide loan
guarantees to politically favored entities. Numerous problems
have plagued this program in the past. For instance, the
Treasury's Office of Inspector General identified noncompliant
expenditures related to California's loans which constitute a
``reckless misuse of funds.'' The Inspector General also
identified reckless misuse of funds and conflicts of interest
in the New York SSBCI program related to one of the venture
capital firms participating. These States were not alone. The
Inspector General found only four States were in full
compliance with this program that funds CDFIs.
Although marketed as a pandemic response, SSBCI funding is
now available for years into the future, and this basically
allows CDFI funding to operate as a slush fund for politicians
across this country. The fact is Government-provided capital is
sponsoring political ambitions and padding the pockets of
special interests, but it is not filling an unmet funding need
of small businesses.
The vast majority of small businesses are saying they are
generally not looking for more credit. Only 3 percent of
respondents in a January 2022 NFIB survey reported that their
borrowing needs were not satisfied. Only 1 percent of small
businesses reported financing as their top business problem
late last year. In fact, only 2 percent of businesses are
reporting that their most recent loan is any more difficult to
achieve than their last one.
Well, favoritism and inefficient allocation of capital is
even more of a concern now with CDFIs with the advent of
Opportunity Zones because CDFIs are now providing below market
rate debt to finance investment projects in favored
neighborhoods. Unfortunately, research shows that current
residents of targeted areas do not see an increase in wages
following this development aid, but they do experience rising
rental costs. Higher living costs without higher wages result
in a lower standard of living in the communities that
policymakers are trying to help, and these place-based
subsidies have a history of unintended consequences and
corruption.
In conclusion, State and local governments share a
responsibility to eliminate the artificial barriers that
prevent economic growth and that limit affordable housing. This
includes minimum wages, occupational licensing, unreasonable
zoning restrictions, and of course, the failed public education
system, the monopoly that fails millions of students who are
subsequently unable to compete in the labor market. In contrast
to these specific policies just outlined, more Government
investment in CDFIs will fail to yield consistent increases in
employment, wages, or advances to general economic
opportunities. Placed-based programs cannot resolve the
complicated institutional barriers to economic opportunity.
Government-subsidized, placed-based lending and investment
fails to address the underlying causes of concentrated poverty.
These causes are educational choice, the lack thereof,
restrictions on worker freedom, and continued onerous local
regulation and mismanagement.
Thank you to the Subcommittee for your time and the
invitation.
Chair Warnock. Thank you all so much for your testimony. We
turn now to questions.
We know that not all communities have equal access to small
business capital; they simply do not. The institutions we are
discussing today are specifically designed to help these rural
and underserved parts of our communities.
To help protect jobs during COVID-19, Congress passed the
Paycheck Protection Program, or PPP, a new forgivable loan
program for small businesses. However, when launched, small
businesses in underserved communities nationwide discovered
that they were shut out of the process. They were at the back
of the line. The Shake Shacks of the world were in front of the
line. And these entities were shut out of the process by some
of the Nation's biggest banks. It was community lenders that
stepped up to help.
And when the PPP program ended, institutions like CDFIs and
MDIs were the ones most likely to reach small businesses in
underserved communities, with 77.9 percent of their loans for
under $150,000. Smaller size loans like these are critical for
mom-and-pop businesses, and so-called microbusiness loans are
especially an important tool that CDFIs and MDIs can use to
help their communities.
Ms. Kucey, how has JetStream used these microloans to help
your members meet the needs of your community?
Ms. Kucey. Well, it was--we found that access to
microbusiness loans was the largest unfunded financial need in
our local community. Whenever I attended chamber of commerce
meetings or just even feedback from our employees and our
membership, members were looking for these loans, and they were
not able to find them through the banks in the local
communities.
So we did receive a CDFI grant, and it helped us fund a
very robust business lending program. We offered microbusiness
loans from 10 to 50,000. I can tell you 100 percent of those
loans went to minority borrowers and almost 50 percent went to
female borrowers. The loans funded a variety of businesses in
our local communities, including a professional such as a CPA,
real estate agents. We helped launch or expand businesses that
were involved in food service, janitorial, mentoring.
We have a lot of interesting stories. We had one lady come
to us. She had designed and manufactured dancewear, and she
wanted a loan to market this dancewear nationwide. We gave her
that loan, and almost immediately through the marketing she
obtained a contract for the Miami Heat cheerleaders. And that
was such a visible contract that her business expanded
exponentially from there. And this was someone that we gave a
$25,000 loan to, and she is now a very successful entrepreneur.
And I could go on with these stories all day, but I know
that there is a clock. So if you have any other questions, I
would be happy to answer them.
Chair Warnock. Thank you so much. That is a wonderful
story. But can you tell me what are some other hurdles that
still exist between these small and needy borrowers and
microlending services that Congress might still address?
Ms. Kucey. Well, the availability is an issue. There is
definitely not a wide availability of these loans, particularly
to minority and low-income business borrowers. And the rates
and terms are often not favorable. So you know, I would say
those are the largest obstacles.
Chair Warnock. Mr. James, big banks have historically
underserved rural areas, but small businesses in these
communities face the same capital needs that any small business
faces. Would you speak to your experience with CDFIs in helping
rural communities and small businesses in Georgia? What
difference do they make?
Mr. James. Sure. Thank you very much, Chairman Warnock. Our
institutions really focus on all the areas that are
underserved, and as you know, in Georgia, that means many
swaths of our community that are rural in nature. And so we
have taken--at Carver, we have taken a special effort to reach
out to many of those rural communities, including those with
persistent poverty. So for example, we joined up with the city
of Statesboro, Georgia, to make a special loan program
available to Main Street businesses in Statesboro that were
impacted by the pandemic and were not able to get enough
funding from the PPP loan program. We have made additional
efforts in other rural communities around the State. And so
those are just a few examples of how we reach out to rural
communities across a State and across the Nation.
Chair Warnock. Thank you so very much for clarifying the
role, unique role, that these institutions play.
Ranking Member Tillis.
Senator Tillis. Thank you, Mr. Chairman, and again thanks
to all the witnesses. I told the Chairman I had them call the
vote. I was going to step out, but I wanted to hear your
opening testimony. And I have a few questions for you, and then
I will move to the next vote that is pending now.
But, Mr. Griffith, I just wanted to start--when you were
talking about that survey of businesses and their needs being
satisfied. One of the things that I believe that CDFIs and MDIs
do is get to people that may never get to that survey, and I
have to use a personal example. Back probably in 1974, I was
pretty good at carpentry and drywall work because my father
made a living for six kids by doing construction repairs for
insurance jobs. So, a kitchen fire or something.
He did not have the resources to fund even the materials.
So what he would do is he had a relationship with a local bank
that--at that time, when banks were able to do more on
relationship banking versus some of the regulatory hurdles that
have made that very difficult for them to do today, we would
get the money to go to the lumber yard to get the materials,
finish the job, and pay it back. Those are businesses of one or
two, or in some cases, with some of the MDIs and CDFIs, five-
or six-person businesses. It may not be caught up into the
entire need of the community.
So I do agree that there are a lot of banking needs that
probably can be fulfilled through some of the other members of
the ecosystem, but I just intuitively believe that there are
fathers and mothers out there like mine that are searching for
capital and may have limited options, particularly based on
their revenue, their credit history. I am sure at that time the
Tillis Family credit history was not that good. So that is more
of a statement for you, and if I have time I will come back
with a question.
But, Mr. James and Ms. Kucey, first off, have either of you
read the Carsey report?
Mr. James. I have not, Senator.
Ms. Kucey. I have not either.
Senator Tillis. OK. Well, we will make sure our staff gets
you a copy. So I am not going to be unfair and ask you to talk
about any of the specific findings, but I just intuitively
believe that you all probably, given the nature of the
relationships you build--I actually worked pretty closely with
an MDI down in North Carolina when I was Speaker of the House,
and I was actually pretty impressed with their portfolio
projects. They were not all successful, but they were more
successful than not, and that is the nature of lending.
But would you agree that it would be better if we were
equipped with information on efficacy, accountability, some of
the things that Mr. Griffith mentioned, so that in future
committees we are equipped with data that really instruct us on
how to move forward with more of a fact basis for that? Now I
know that when I say that you are probably rolling your eyes
and thinking, oh, gosh, that means more reporting and more
data.
Do you also agree that some of the current reporting
requirements that you have today could be made leaner so that
we can grab this information that would be helpful to us to
administer the programs over time?
And, Ms. Kucey, we will start with you, and then we will go
to Mr. James.
Ms. Kucey. You know, credit unions are highly regulated. So
a lot of that information is available through the requirements
that are reported to the NCUA.
Senator Tillis. That is actually--Ms. Kucey, I am sorry to
cut you off. I just want to be sensitive to time; I know you
have been. But that is true. I am very familiar with credit
unions.
But, Mr. James, maybe you can chime in and give me your
perspective.
Mr. James. Sure. Thank you very much, Ranking Member
Tillis. Yes, I would agree that we can streamline and make more
efficient all of our reporting requirements as CDFIs and MDIs.
Our institutions are similar to Ms. Kucey's, highly regulated.
We are federally insured banks, and so we are very, very highly
regulated.
But I also think that the infusion of new capital into our
sector really does provide us with an unprecedented opportunity
not just to make new loans but also to develop better
infrastructure for capturing and reporting on impact data. So
at the NBA, for example, we have been very intentional over the
past year, including creating a new nonprofit arm that has
through one of its main pillars been gathering and reporting
impact data from the Minority Depository Institutions sector to
make sure that we are tracking our impact and reporting it out
in a much more useful way. And so we look forward to building
out that infrastructure with new resources and being able to
report much more data back to all our stakeholders, including
Members of Congress.
Senator Tillis. Yeah. Well, thank you for that. And I would
just close by saying that I think the Chairman, and most likely
his able staff, picked two good witnesses to come before the
Committee, but we are talking about hundreds of CDFIs and MDIs.
In the banking industry, where I spent most of my career,
looking for some of this baseline data is relative easy to
gather. So I am trying to get at why for the Carsey study and
for other ones it seems to be more difficult. It seems like
there is something more that we can do there that ultimately
benefits you and then it either proves or disproves some of the
concerns that Mr. Griffith has mentioned in his opening
testimony.
Mr. Chairman, I am going to go vote. Thank you for holding
this hearing.
And I thank the witnesses. And I will make sure that my
staff gets you a copy of the report, and I would be interested
if you could either submit for the record or informally your
feedback on it, positive or negative. That would be very
helpful as we move forward.
Thank you, Mr. Chairman.
Chair Warnock. Thank you very much, Ranking Member Tillis,
for staying and missing the vote to hear their testimony, to
engage in this important conversation.
We are waiting on some other members to come, probably, I
am sure, from the vote. We have gone into the second vote for
the afternoon. But as we prepare for them, I am going to change
the topic just a little bit.
Last year, over 2 million Georgian children received $300
per month in the expanded Child Tax Credit. This is the largest
tax cut for working and middle class families in American
history. Eradicating childhood poverty is an issue that touches
me deeply, and championing this tax cut has been one of my
proudest moments in the Senate. We really ought to extend it.
The expanded Child Tax Credit not only helped give working
families in Georgia and across the Nation financial stability
and peace of mind, but it also boosted the economy for all of
us. Unfortunately, last month was the first time since the
summer that these monthly checks did not arrive for families in
need, the same communities served by these MDIs and CDFIs.
Mr. James, community institutions such as your own, Carver
State Bank, literally right down the street from where I grew
up, are acutely aware of the economic well-being of the
communities they serve. What effects did you notice on your
customers and your bank customers while the expanded CDC
payments were being distributed?
Mr. James. Chairman Warnock, thank you for that question.
And you are very familiar, as you stated, with exactly where
our bank is located and the community that we serve. We are
located in the lowest income census tract in Savannah and--
which is where our headquarters is, and that is because there
is a high concentration of public housing in that census tract.
And so we have a number of customers who maintain accounts with
very, very small balances.
One of the things that we noticed during the payments that
were coming in is that a lot of those customers had a little
bit more cushion in their accounts. We did not have to spend as
much time helping people monitor and make sure that they did
not have overdrafts, for example. We saw that there was fewer,
you know, instances where people did not have the ability to
make certain basic payments. And so we applauded the influx of
capital to many of those customers who are, you know, at the
lowest end of the spectrum in the local Savannah community, and
we think that those additional funds were certainly very
beneficial to them as they sought to make ends meet for all
their everyday needs.
Chair Warnock. Thank you so much. And I will continue to
fight to make this expanded Child Tax Credit permanent.
Looks like we are still waiting on other members.
Last year, to provide pandemic relief, Congress provided
$12 billion in capital investments and grants to CDFIs and MDIs
to support their efforts in low-income and minority
communities. These Federal capital investments will help fund
loans for communities who face barriers when accessing capital
and will be used to leverage private funding to amplify the
transformation effects the funds will have on communities.
Mr. James, again, how important are these capital
investments and grant programs to ensure underserved
communities continue to get support they typically receive from
CDFIs and MDIs?
Mr. James. Mr. Chairman, these capital programs have a
historic--we have a historic opportunity with these capital
programs to make an incredible difference that is long-lasting
and in these communities that are so underserved and have been
chronically underserved.
As you mentioned, there were $12 billion that were
allocated. Only $1.2 billion of those funds have actually been
distributed so far. The remaining $9 billion in the ECIP
program has been earmarked but not distributed yet, and the
remaining dollars are in the CDFI Fund awaiting their
development of a new program for institutions that focus on
minority lending.
I just want to emphasize that our institutions are focused
on expanding not only our scale of lending but also building
and improving on our infrastructure so that we can be more
efficient and get these needed loans and services out to
communities of need in a much more efficient way. And so at
Carver, for example, we are focusing on building our technology
capabilities and being able to reach out not just in the
Savannah community but across the State of Georgia. By having
better technology, we will be able to reach into those rural
communities with much more efficiency and be able to provide
services such as the kind of small business lending, home
ownership opportunities, community development lending, and
other kinds of services and products that are so needed.
Chair Warnock. Thank you so very much, Mr. James.
Senator Warren has arrived.
Senator Warren. I have. Thank you, Mr. Chairman. And let me
start by saying, thank you very much, Mr. Chairman, for holding
this hearing. Community Development Financial Institutions and
Minority Depository Institutions provide a range of critical
supports to underserved communities. They do everything from
ensuring that families have access to basic financial services
to fostering small business creation and being on the front
lines of emergency relief when disaster strikes.
So I want to talk about, though, another area where CDFIs
and MDIs play a key role, and that is in promoting the supply
of safe and affordable housing in communities that need it
most, that is, in low- and moderate-income neighborhoods, in
communities of color, and in tribal lands.
Our country is facing a historic housing crisis, with the
impact falling hardest on low-income families and communities
of color. I have one stat on this that just knocks me over.
About 60 percent of very low-income renter households and
nearly 30 percent of Black renter households are putting more
than half their income toward rent.
So, Mr. James, if I could, I would like to start with you.
You have decades of experience in community development,
including promoting affordable housing in Savannah. So let me
ask you just a hypothetical here. If a developer wants to fund
new construction or the rehabilitation of existing housing
units in a low-income minority or Native community, is it easy
for that developer to get traditional financing to fund an
investment in affordable housing? What do you say, Mr. James?
Mr. James. Thank you for the question, Senator Warren.
Unfortunately, the answer is no, it is not easy. Even in
smaller urban markets like Savannah or in rural markets
surrounding us in southeastern Georgia, it is extremely
difficult to make traditional loans to finance affordable
housing development without some sort of subsidy.
In urban markets, with skyrocketing land costs and
compliance with development regulations and standards, and just
the overall high demand for new housing, makes it very
difficult for developers to create affordable product. In rural
markets, the higher costs of construction are having a similar
effect.
And we are not just talking about housing for low-income
people. We are talking about teachers, firefighters, police,
and even those with middle incomes that are increasingly unable
to afford rents but much less home ownership. So we do need to
see more programs and products that will allow us to be able to
effectively make loans for those kinds of developments.
Senator Warren [presiding]. So I appreciate that. Thank you
very much for your expert opinion on that, Mr. James.
So here we have families who need housing, and you have got
developers who may want to provide that housing, but it is hard
for them to be able to reach traditional funding sources. We
all know that one of the tools that Congress has to support
CDFIs in expanding the supply of housing in financially
underserved communities is the Capital Magnet Fund, which
provides grants to CDFIs and nonprofit organizations in order
to spur investment in affordable housing. The idea is to bridge
the gap between what traditional financing would provide and
what it is that these communities need.
My American Housing and Economic Mobility Act would invest
$25 billion in the Capital Magnet Fund over 10 years, an
investment, just to put that in some perspective, that is about
30 times larger than the total amount of awards the Fund has
made up to now. In other words, a whole lot more money.
According to an independent analysis, this investment, which
would be leveraged 10 to 1 with private capital, would fund the
construction of about 770,000 new affordable housing units, so
a real way to get something done.
Mr. James, can I ask, in your view, what would an
investment of this size in the Capital Magnet Fund mean for
housing markets and for families in underserved communities and
communities of color all around our country?
Mr. James. Thank you again for that question, Senator
Warren. The legislation that you are proposing would help us
achieve a scale of investment that matches the scale of the
problem. This legislation would provide CDFIs with critical
resources that would allow us to increase the velocity and
volume of financing for affordable housing. In most communities
around the country, housing demand is, again, far outstripping
the supply, and we just do not have enough resources. And so we
can be a part of that solution if we have more resources to
support affordable housing, so we would definitely support
legislation of this type.
Senator Warren. Well, that is a good partnership. Let us
see what we can do on this, Mr. James.
You know, for CDFIs in Massachusetts, like One United Bank
and Worcester Community Housing Resources, increased access to
funding that support the construction and rehabilitation of
high-quality, affordable housing could help bring down rents
and open the door to home ownership for thousands families. We
need to use every tool we have to address the affordable
housing crisis that is worsening by the day. By leveraging
close relationships that they have on the ground to ensure that
communities are getting the resources they need, CDFIs and MDIs
are able to bring capital to people and to places where
traditional financial institutions either cannot go or will not
go. Ramping up investments in these institutions and the
Capital Magnet Fund to expand the supply of safe, affordable
housing in communities that are feeling the crunch most acutely
is a tool we just cannot afford to ignore.
So, Mr. James, I appreciate your offer of partnership. I
sure hope we can get this done.
And with that, I want to call on Senator Menendez. Our
Chairman has had to go vote. So, Senator Menendez, it is up to
me to recognize you for your questions.
Senator Menendez. Thank you, Senator Warren. Good
afternoon, everyone. Throughout the pandemic, we saw that
minority- and women-owned small businesses were hit
particularly hard. And at the same time, we saw that the vast
majority of funding under the Paycheck Protection Program went
not to these businesses that were most affected but to
predominantly White-owned businesses with preexisting
relationships with banks.
So I know that you all worked pretty hard at trying to meet
that challenge. But what lessons did you learn from the
pandemic that can be brought forward to mitigate
disproportionate harm to minority- and women-owned businesses
in the future? And any one of you.
Ms. Kucey. I definitely think that providing ongoing
funding to these businesses. And I earlier talked about our
microbusiness loan program, where we offered 10 to 50,000
dollar loans in our community to minority and low-income
business owners. And through the various catastrophes,
Hurricanes Irma and Maria, the COVID pandemic, we have been
working very closely with those businesses, and we have been
offering payment deferrals, loan restructures, additional
loans, and also counseling and advice. So I think it is being a
close partner in good times and bad times.
Senator Menendez. Mr. James, any insights?
Mr. James. Senator Menendez, thank you. It is an excellent
question. We learned quite a few lessons in my bank, Carver
State Bank in Savannah, as well as across the National Bankers
Association. One of the lessons that we learned is that our
institutions really needed to scale up. We need more capital so
that we can invest in technology and people so that we can be
ready to meet a crisis when it happens but also to be ready to
deploy more capital in these communities, to make them more
resilient so that they can withstand the crisis before it
comes.
So for example, our institution will be using ECIP dollars
to partner with a fintech company to make consumer loan
products that are safe, effective, and low-cost, available to
communities that are subject to predation from title pawn
lenders and others in the State of Georgia that take advantage
of communities. We also want to be able to automate the small
business lending process and make it much more efficient so
that we can make more small business dollars available in
communities across the State, not just in the Savannah market.
The other lesson that I learned from it was just personal,
that many of the minority businesses that we were able to
help--you know, our bank made probably 90 percent of our loans
to minority-owned businesses, but some of them came from
outside of our market, well outside, people who were in
California or in New York, who found us online and were able to
get a PPP loan even when they had a bank account at another
bank but their large bank was not prioritizing their loan
application.
And so those are the kinds of lessons that we learned, that
we need more capital so that we can scale and we need to be
able to reach out to those communities and people who are
underserved.
Senator Menendez. Thank you for those great insights. You
know, with climate change causing more frequent and more
intense natural disasters, small businesses face unprecedented
risk to their operations. Furthermore, low-income and minority
communities have been found to be more likely to face the
impacts of these natural disasters. In the aftermath of
Hurricane Sandy, New Jersey Community Capital, a CDFI in my
State, raised $3 million in lending capital in a matter of
weeks and provided small businesses with flexible, low-interest
loans to help recover from the storm, resulting in over 100
jobs that were saved. That is just one example.
Ms. Kucey, what role should CDFIs have in helping small
businesses and communities recover from natural disasters? And
how have MDIs played a role in disaster recovery, in Puerto
Rico particularly, after Hurricane Maria?
Ms. Kucey. Well, we were the first credit union to reopen
in Puerto Rico after the hurricane. So that really enabled us
to help a lot of people. We knew it was a life-defining moment
for many of our members, and we knew that we had to act fast.
And we did that through offering no-cost, zero percent APR,
short-term loans, deferment of existing loan payments,
elimination of transactional fees, and financial coaching for
our members who were dealing with active insurance cases and
attempting to rebuild their homes. We also provided $17 million
in loans to assist people and enable them to replace household
appliances, furniture, and autos.
And after the hurricane, we actually had a very unique
program where we assisted Puerto Ricans that were moving from
the mainland, and we assisted them in transporting their
vehicles and coming up with first and last month rent and
rental deposits which, as you can imagine, quite high in Miami.
So we offered a variety of programs to get them through and
help them recover after the hurricane.
Senator Menendez. I see. I see my colleague, Senator
Tester. I do not know if he has had a chance to ask his
questions yet, but if not, I will yield to him.
Senator Warren. Thank you, Senator Menendez. It is my
responsibility to call on Senator Tester now. Thank you.
Senator Tester.
Senator Menendez. I did not know if you were still on.
Thank you.
Senator Tester. Well, thank you, Senator Menendez and
Senator Warren. It is great to get doubly recognized today.
And I want to thank the panelists for being here.
Look, CDFIs and MDIs in my State of Montana, they provide
critical resources for communities all across our State. Their
efforts have been tireless and persistent, and it has allowed
our Main Street businesses to access the Paycheck Protection
Program as this pandemic started.
And I want to tell you a comment was made previously, I
think, by Mr. James. The work that the CDFIs did in our State
to get this Paycheck Protection Program out, when big banks
could have cared less, it was stellar. And I want to thank you
for that.
But they also help us in home ownership, down payment
assistance programs, and allow Montana families to realize the
dream of home ownership, piecing together the financing for new
and improved community facilities. The small community folks
and nature of these institutions is a part of what makes their
work so impactful, but it also can mean that it is harder for
folks to get access or even know about these great resources.
So, Mr. James, from your work in the industry, are there
barriers to the growth and scale necessary to reach more of the
folks in your community left out of the financial mainstream?
Mr. James. Thank you, Senator Tester. The short answer is,
yes, there are barriers. The biggest one in my estimation, in
particular for the MDIs, is lack of scale, and that lack of
scale is due to a lack of capital. And in particular in the
African-American community our institutions have had a very
historic, longstanding lack of access to the traditional
capital markets, which has constrained our ability to grow and
be able to reach deep into the community, to make sure that
they have access to mainstream financial services.
So that is one of the reasons why we are so enthusiastic
about the ECIP program, which is going to put some historic
amounts of capital at play in our sector. But I do want to make
sure that I point out that many of our institutions were unable
to access ECIP because of an unfortunate situation in regards
to how regulation gets applied to many of our institutions.
So our banks are regulated just like every other bank. We
are FDIC-insured, and so we have to be regulated by either the
OCC or the FDIC. And those regulatory bodies are under a
congressional mandate from the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 or FIRREA. In section 308
of that act it says that the regulators and the Department of
Treasury and the Federal Reserve have an obligation to preserve
and promote MDIs.
Yet, since 2008, over half of the Black-owned banks have
failed. And what we found is that there is an uneven
application of regulation when it comes to our supervisory
authorities that do not take into account the mission that we
provide and the specialized business models that we have to use
in order to serve underserved communities.
And so one of the things that we would like to see is a
revisiting of how our institutions are regulated, not to make
them less safe or sound, but just to take into account the fact
that we are banking people who are harder to reach, who have
less resources and are harder to serve so that we can be able
to keep more MDIs around and alive so that we can access more
capital and provide more services to these communities that are
so desperately in need.
Senator Tester. Thank you for that. Thank you for that
answer, and you answered my second question almost.
Ms. Kucey, are there similar barriers that you see in the
credit union world?
Ms. Kucey. I am sorry. Could you repeat that question?
Senator Tester. Are there similar barriers that you have
seen in the credit union world?
Ms. Kucey. Well, you know, we are not able to raise money
through the capital markets. There is no secondary market or
subordinated debt. So you know, I know that that is a challenge
to many credit unions.
Senator Tester. OK. And for both of you, is one of the
barriers that you see that Americans simply do not know about
CDFIs? Go ahead.
Ms. Kucey. I mean, that is possible, definitely. You know,
I am sure Mr. James is the same. We are involved in quite a bit
of outreach to get the word out there.
Mr. James. Yes, I agree. I mean, there is a lot of
outreach, but I do think that we can make the public much more
aware of what we are doing and the services that we provide.
And so--you know. But again that goes back to scale and the
ability to, you know, engage in the kind of marketing campaigns
that are necessary to kind of get people--make sure that people
are aware of what we are doing.
We do a lot of this on a one on one basis, and it is
relationship based. And we do not want to ever lose that. But
every time I turn on the TV and I see an ad for a new neobank
or a digital, you know, sort of bank replacement or fintech
company, I think about the fact that they are kind of targeting
a lot of the same communities that we want to serve. And we
want to make sure that we are able to give those communities
fair and responsibly priced products in addition to, you know,
a slick marketing campaign.
Senator Tester. Well, I just want to thank you both for
what you do, and I appreciate you being in front of the
Committee today. And hopefully, we can continue this
conversation moving forward because I think you are an
incredibly important resource to have out there for folks to
really allow our Main Street businesses and families to thrive.
With that, I will kick it back to you, Senator Warren.
Chair Warnock [presiding]. Thank you so very much.
Our Chairman of this Committee, Senator Brown.
Chairman Brown. Well, thank you, Mr. Chair.
A couple of first comments I would like to say. Thank you,
Mr. James, for your support of a fellow Georgian, Lisa Cook,
for the Federal Reserve. It is one of the President's
outstanding appointments and one that I would credit your
Senator with helping to encourage the President. They call our
role in nominations--the President does the nominations, but we
advise and consent. And let us just say that your Senator, Mr.
James, your Senator did a lot of advising to the President on
this for the banker, not the banker, the economist from
Milledgeville, Georgia. And so thank you for weighing in and
thanks for what you do with the National Bankers Association,
too.
And, one other comment and then I just have one question. I
am so appreciative of Senator Warnock as the Chair of the
Subcommittee. We, the Democrats, have been in control of this
Committee, been chairing this Committee and other committees,
in large part because of his victory and the other Georgia
Senator.
But one of the things I have really liked watching is our
Subcommittee chairs on this Committee, Subcommittees that were
not very active in the past, have become very active. This is
Senator Warnock's second hearing, first one this year. Senator
Warren, Senator Smith, Senator Menendez, and Senator Warner all
understand the role of subcommittees, and it makes this place
run better. So thank you for that.
And thanks to the witnesses on the importance, the critical
importance, of CDFIs and MDIs.
So my question, Mr. James, is for you. I will just have one
question. I know Senator Warnock is doing many things today.
Mission-based lenders like yours are often the best and
sometimes the only option for workers to get basic financial
services and for small businesses and underserved communities
to get the funding they need to start or expand their
businesses. It is what I hear from MDIs and CDFIs, and I hear
that from communities in Ohio.
In Build Back Better, we include additional funds,
investments for CDFIs that support affordable housing and
investments. You have touched on those issues with my
colleagues. What will happen--walk through what happens if we
are successful with Build Back Better in doing more investments
in CDFIs and MDIs. What does it mean to Carver Financial? What
does it mean nationally with the way you look at things from a
National Bankers Association perspective?
Mr. James. Chairman Brown, thank you so much for the
question and thank you for your support and comments regarding
Dr. Cook and Senator Warnock.
Yes, in response to your question, what I see is with both
the ECIP program, the infrastructure package, and with the
proposed Build Back Better legislation really a virtuous cycle
where we can not only strengthen the institutions but also,
much more importantly, strengthen the communities that we serve
and make them much more resilient.
And so, for example, if we can connect the dots between the
capital that is coming into our sector through ECIP and the
dollars that are going to be invested in America's
infrastructure, and make sure that not only our banks have an
opportunity to provide financing where it is needed on
infrastructure projects that are to rebuild communities that
oftentimes were destroyed by the way that infrastructure in
America has been placed over many decades but also put people
to work, put minority-owned businesses to work, rebuilding that
infrastructure, doing new things like placing EV charger--EV
charging stations in communities of color across the country,
and let our banks be the financing entities for that.
If we can connect all those dots, we really, you know, lift
the entire economy. We help to reduce the racial wealth gap. We
can reduce the home ownership gap. We can create long-lasting
job opportunities for everyone and have the kind of
environmental impacts and overall health impacts that we would
like to see. And so that is what I sort of envision if we are
able to see all these different pieces come together, not just
in words but also with action and intentionality.
Chairman Brown. Thank you, Mr. Chair.
Chair Warnock. Thank you so very much, Chairman Brown, and
thanks to all of our witnesses. Thank you, Mr. James, Ms.
Kucey, Mr. Griffith, for sharing your important perspective
here today.
It was particularly poignant for me to hear, even as Mr.
James made his closing statement, talk about the work being
done by the CDFI that is Carver Savings Bank, literally sits in
the kind of community that he described, communities that have
literally been split in two. Federal public policymakes a
difference, sometimes positively, negatively. That bank sits
near Interstate 16, which literally split a historic Black
community in two, putting people on the other side, literally,
of prosperity. This is something that this Committee has also
tried--is focused on addressing as we talk about reconnecting
communities. That bill seeks to address that.
And it is right there that that CDFI, like others, are
doing their work. Similarly, Citizens Trust Bank, near my
church, near a community split in two in the name of urban
renewal at a different time in America. And so these banks are
responding to disinvestment over a long period of time.
And so I am grateful for all of our witnesses for taking
the time to be with us today and for providing their testimony.
Today's hearing highlighted how important these institutions
are in helping families and small businesses and communities to
prepare, survive, and recover from crisis. And I look forward
to working with my colleagues on both sides of the aisle to
continue to ensure that they have adequate resources to achieve
their mission of helping the underserved.
I am grateful for Ranking Member Tillis's comments. We
certainly are not adverse to transparency, accountability,
getting the kind of data that we need in order to make these
institutions as effective as possible.
And as I said at the onset, this topic is about creating an
economy that works for all Americans and about ensuring that
hardworking families are not swindled out of a shot at
financial stability.
For Senators who wish to submit questions for the record,
those questions are due 1 week from today. That is Wednesday,
February 16th.
For our witnesses, you have 45 days to respond to any
questions. Thank you again.
And with that, this hearing is adjourned.
[Whereupon, at 3:48 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIR RAPHAEL WARNOCK
I'm honored to Chair this Subcommittee and to work with Ranking
Member Tillis to ensure stability in our banks, credit unions, and
other financial institutions that serve families, small businesses, and
communities in Georgia and around our country, and to ensure that our
communities have equal access to the financial resources that build an
economy that works for all Americans.
Now that brings me to the topic of our hearing today, which will
examine Community Development Financial Institutions, or CDFIs, and
Minority Depository Institutions, or MDIs, and the role that they play
in supporting communities, creating jobs, boosting our economy, and
helping small businesses to thrive. We will also examine the roles they
play to help communities build resiliency against the crisis, like the
pandemic, overcome crisis, and, importantly, recover from the crisis,
so that our communities do not simply survive, but thrive.
Finally, I hope that our witnesses will discuss ways that Congress
can better support the work they do every day to grow our economy from
the bottom up.
The economic turbulence of the COVID-19 pandemic has pushed working
families to the brink, often forcing them to choose between their
health and their livelihoods. Thanks in part to the aid passed by
Congress to combat the pandemic, our Nation is experiencing one of the
quickest job market recoveries ever seen.
Last month, the Georgia Department of Labor reported that the
State's unemployment rate is now 2.6 percent, with 97 percent of jobs
lost during the height of the pandemic now recovered. Last week, the
jobs report showed that jobs rose by 467,000, defying the expectations
of many experts.
Critical in facilitating this recovery has been the work by CDFIs
and MDIs. I appreciate that we have two before us here today, to talk
about the work that they are doing even now, in their respective
communities.
Let me say that this is also personal for me: this is not
theoretical. In addition to serving as a Senator for Georgia, I'm also
the Senior Pastor of the historic Ebenezer Baptist Church, spiritual
home of Martin Luther King, Jr., and John Lewis.
The bank our church uses, Citizens Trust Bank, is in fact one of
the many CDFIs and MDIs in Georgia that have been helping families and
institutions in our community to thrive. I know this firsthand.
And as a pastor and as a Senator, I see my work as grounded in
serving others and my community--and that's what CDFIs and MDIs are
doing: they are serving others and the community.
Whether it has been acting as our Nation's fiscal first responders,
immediately there to assist families and small businesses facing the
financial unknown during the first weeks of the pandemic or
facilitating the flow of Federal aid to communities, CDFIs and MDIs
provided economic stability and certainty to millions of Americans,
allowing them to focus on the health and safety of themselves and their
children.
In Georgia, the Atlanta-based CDFI Access to Capital for
Entrepreneurs, or ACE, immediately sprung to action early in the
pandemic to help small businesses. In the first months of the pandemic,
they worked with their clients to offer emergency funds, including
Paycheck Protection Program loans, and they worked with local
development authorities and investment partners to give flexibility for
small business borrowers as the economy recovered. These actions by
just one CDFI saved hundreds of jobs in my home State of Georgia.
The Federal Reserve Bank of San Francisco has rightly referred to
CDFIs as ``economy shock absorbers for . . . communities in the worst
of the downturn.'' These institutions make sustainable investments
within our communities. They are members of our community. They know
the folks in the community. They understand these communities. And they
have the correct incentives to help communities prepare, work through,
and recover from the crisis.
CDFIs are also helping communities protect themselves against
climate disasters. In Georgia, CDFIs have collaborated to begin
offering Green Loans, which is capital provided to small businesses in
the State to help them have a business that is more eco-friendly, such
as funding energy-efficiency improvements. These investments help to
create green jobs and they push Georgia and our Nation towards a
sustainable future.
Even with the work done by CDFIs and MDIs to help communities, the
data show that we still have more work to do. In the crisis we are
currently living through, there's no doubt that the jobs recovery, as
strong as it is, is uneven. Men have entirely recovered their job
losses since the pandemic began, while there are 1 million fewer women
in the labor force than in February 2020.
Unemployment among Black Americans remains elevated, and if history
is any indicator, rural communities, like those in my home State of
Georgia, will lose resources and these same communities will struggle
to bounce back, as they see resources leave their communities. The
number of minority depository institutions fell by 31 percent from 2008
to 2018, even as the need for these institutions remains higher than
ever, and there are even those who wish to defund the CDFI Fund program
permanently.
______
PREPARED STATEMENT OF SENATOR THOM TILLIS
I want to thank Chairman Warnock for holding this hearing, our
second for the Subcommittee on Financial Institutions and Consumer
Protection. Also thank you to the witnesses for your willingness to
testify today.
I have long been an advocate for a resilient and varied banking
ecosystem, one that blends a healthy mix of globally systemic financial
institutions, super-regionals and regionals, all the way down to local
community banks. Banks and credit unions of all different sizes bring
varied missions and capabilities to their customers, allowing
individuals to select the banking experience best tailored for them.
And I agree that CDFIs and MDIs fit into an important niche in that
system.
This was apparent during the pandemic, when financial institutions
of varying sizes across the banking ecosystem stepped up to provide
economic relief to American businesses and workers, most notably
through the Paycheck Protection Program (PPP). In total, the SBA
approved over 11.8 million PPP loans, totaling $799.8 billion. CDFIs
for their part, approved over 350,000 PPP loans totaling $8.4 billion.
For that I thank you all.
That said, just as I raised concerns in our previous Subcommittee
hearing over the lack of data and transparency that has likely led to
significant fraud in the COVID-era unemployment insurance programs, I
likewise have concerns with the similar lack of data and transparency
that critics of the CDFI Fund have long identified.
Put bluntly, policymakers simply do not receive enough information
to adequately judge how effective the lending operations of CDFIs are.
Consider a report on CDFIs and the CDFI Fund compiled by the Carsey
Institute at the University of New Hampshire on behalf of the
Department of the Treasury. The authors write, ``In developing this
report, the research team encountered significant data limitations at
every turn'' and identify ''inadequate data and nonstandardized
auditing practices'' as significant barriers to CDFIs achieving better
capitalization.
The authors go on to say, `` . . . it is currently simply
impossible to make the most routine analyses that are normally
conducted with other classes of loan assets. It is not possible, for
example, to create a breakdown of default rates or prepayment speeds
for a given class of CDFI loans, or even to provide a breakdown of
borrower credit scores. What is ironic about this is that CDFI managers
feel they are swamped with reporting requirements, which they routinely
fulfill. It is difficult to reconcile how CDFIs can be doing so much
reporting yet have so little to show for it.''
I mention this not to vilify CDFIs but to point out what I believe
are systematic deficiencies in CDFI oversight and transparency that can
prevent them from most effectively serving the communities they reside
in. Given the tremendous level of funding bestowed on CDFIs and MDIs
over the course of COVID-19, I believe these deficiencies are
especially important to examine and rectify.
Just last year, the CDFI Fund received the same level of funding as
it previously would have been appropriated over an entire decade.
Additionally, Congress established the Emergency Capital Investment
Program (ECIP) which provided an additional $9 billion fund to help
stabilize CDFIs and MDIs.
My Democratic colleagues also resuscitated the Obama-era State
Small Business Credit Initiative (SSBCI) in the partisan reconciliation
package they passed early last year. This $10 billion program, which
will also direct money towards CDFIs, was rightly allowed to expire due
to chronic inadequacies that resulted in only 4 States whose SSBCI
programs were in compliance according to an Inspector General report.
North Carolinians are certainly familiar with the lack of oversight
over of taxpayer dollars that SSBCI doled out. The founding president
of the NC Rural Center resigned and was withheld severance following a
State audit which detailed financial malpractice at the organization.
Without greater transparency and data requirements, I'm concerned
we could see the same situation play out again. With a price tag in the
tens of billions between SSBCI, ECIP and the 12-fold increase to the
base CDFI Fund, it is crucial that policymakers are equipped with
concrete data that provides an accurate view of the impact that CDFIs
and MDIs are making. While a press release touting how much money went
out the door is good, comprehensive data and greater transparency on
how the money was spent and how successful it was in supporting
economic opportunity is better. I look forward to examining these
questions with the witness here today. Thank you Mr. Chairman.
______
PREPARED STATEMENT OF ROBERT JAMES II
President and CEO, Carver Financial Corporation, and Chairman, National
Bankers Association, Savannah, Georgia
February 9, 2022
Chairman Warnock, Ranking Member Tillis, and Members of the
Subcommittee, good morning and thank you for this opportunity to
testify on roles Minority Depository Institutions (MDIs) and Community
Development Financial Institutions (CDFIs) serve in supporting
communities. It gives me great hope that one of this Subcommittee's
first hearings of the new year is aimed at shining a light on this
critical issue.
My name is Robert James II, and I am President of Carver Financial
Corporation, parent of Carver State Bank of Savannah, Georgia, and
Chairman of the National Bankers Association (NBA). The NBA is the
leading trade association for the country's MDIs. A critical part of
our mission is to serve as an advocate for the Nation's MDIs on all
legislative and regulatory matters concerning and affecting our member
institutions as well as the communities they serve.
Like Carver, many of our member institutions are also CDFIs and are
the only banks with a primary mission to serve consumers and businesses
who are underserved by traditional banks and financial service
providers. Members of our association are on the front lines, trying to
reduce the economic hardship in minority communities, which are
historically the most vulnerable during good times and bad. We believe
our banks are best positioned to help our communities bolster their
defenses in the face of climate change, health emergencies, and
overcome many of the systemic issues that have placed them at an
economic disadvantage.
The Senate Banking Committee and Chairman Warnock have been
instrumental in the inclusion of several provisions in multiple
legislative packages adopted during the course of the last year that
ensure that MDIs and the communities we serve are not forgotten during
times of crisis.
The creation and implementation of the Emergency Capital Investment
Program and the $3 billion increase in funding the CDFI fund can help
banks like those within the NBA scale up and provide more access to
credit for individuals and small businesses in low- and moderate-income
communities most impacted by the pandemic. The Bipartisan
Infrastructure Bill also provides billions of targeted dollars that can
be instrumental in addressing the needs in our communities created by a
changing climate and systemic environmental injustice. The NBA applauds
the Congress for the adoption of these important measures and very much
look forward to continuing to work with you on additional legislation
to ensure that our communities, hardest hit by the pandemic and
systemic inequity, experience lasting, material changes that will
support broad and deep economic growth that will benefit all Americans.
The growing climate crisis has disproportionately hit low-income
Black and Brown communities in great measure because they are under
resourced. These are the same communities that have been hit hardest by
the COVID-19 pandemic. The unequal burden that COVID-19 and climate
change has placed on communities of color is not coincidental. Decades
of income disparity, unequal access to health care, housing
discrimination, and residential segregation have resulted in uneven
resiliency among communities of color and other low-income communities.
This inequity threatens our Nation as a whole.
Low-income neighborhoods are disproportionately victimized by
environmental hazards and are far more likely to live in areas with
heavy pollution or elevated flood risk. African Americans, Latinos, and
Native Americans get sick and die from the COVID-19 virus and other
health pandemics at rates higher than their White counterparts, and
higher than their shares of the population. Similarly, people of color
are more likely to die of environmental causes, and more than half of
the people who live close to hazardous waste are people of color. These
communities are most likely to suffer in natural disasters like floods
and hurricanes, or man-made disasters such as pollution-related
illness.
Tackling economic inequity and eliminating the racial wealth gap is
the best way to combat environmental and health injustice and ensure
resilience in communities of color. This goal is important not just for
those directly impacted by racial discrimination but also for society
at large, as research shows that racism harms the whole economy and
manifests in different ways, even in the distribution of Government
aid.
One of the most noticeable effects of environmental injustice
occurs during natural disasters. After a natural disaster hits a
community, Government aid is typically sent to the area to rebuild
infrastructure and restore homes and businesses. However, the unequal
dispersal of aid is one way in which minorities and low-income
communities are hurt by natural disasters. In a study done by Rice
University and the University of Pittsburgh, it was found that
predominately White counties saw an increase in average wealth after
natural disasters while predominantly minority counties saw a wealth
decrease. The study notes that White communities saw higher levels of
reinvestment in their communities after natural disasters in comparison
to their minority counterparts.
Additionally, it was found that White families in communities with
significant damage from natural disasters saw an increase in wealth due
to generous reinvestment initiatives. However, minority families in
communities with similar damage from natural disasters saw a smaller
increase in wealth or they actually saw a decrease in wealth.
Furthermore, low-income Americans are more likely to suffer from the
consequences of tropical storms due to inadequate infrastructure and
lack of proper insurance. Low-income and minority populations are also
more likely to live near industrial facilities and are therefore at a
higher risk for chemical spills and toxic leaks resulting from tropical
storms. For example, 60 percent of African Americans in Baltimore live
within one mile of a Toxic Release Industry, and 70 percent percent of
African Americans live within 2 to 4 miles of one.
Traditionally following natural disasters, MDIs and CDFIs have
served as a source of strength and an economic development engine due
to their relative concentration in minority and low-income communities,
and established relationships. This is especially true in African-
American communities. Many of our institutions participate in numerous
relief programs offered by various State and Federal Government
agencies. Unfortunately, MDIs' smaller size, especially among African-
American MDIs, has not allowed us to respond as quickly or with as much
scale as many of these situations demand.
Our banks provide basic banking services to communities that are
more likely to be unbanked or underbanked, but our impact is limited
due to our small size, both in total assets and in number of
institutions. Racial minorities, especially Black and Hispanic, are
more likely to be unbanked and underbanked according to a Federal
Reserve Report on the Economic Well-Being of U.S. Households in 2020.
MDIs can be a solution to this problem if our banks can access more
capital and scale up. Several studies have shown that minorities,
especially Black and Brown Americans, are more likely to have bank
accounts and access to fair and reasonably priced mortgage and small
business loans if there is an MDI in their neighborhood. \1\ It is
important to note that an average of 70 percent of minorities do not
have a bank branch in their neighborhood. At the same time, MDI
branches are in census tracts with a 77 percent minority population.
Properly scaled, MDI banks are best positioned to provide access to
capital for minority communities.
---------------------------------------------------------------------------
\1\ Broady, et al., ``An Analysis of Financial Institutions in
Black-Majority Communities: Black Borrowers and Depositors Face
Considerable Challenges in Accessing Banking Services'', Brookings
(2021); Florant, et al., ``The Case for Accelerating Financial
Inclusion in Black Communities'', McKinsey and Company (2020); Barth,
et al., ``Minority-Owned Depository Institutions: A Market Overview'',
Milken Institute (2019).
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Unfortunately, MDIs' smaller size, especially among African-
American MDIs, has not allowed them to respond as quickly or with as
much scale as the current economic situation in LMI communities
demands. MDIs only make up 3 percent of all American banks, and Black-
owned MDIs only 0.4 percent. When looking at total bank assets, the
disparity is even more stark. As of the second quarter of 2021, Black
banks held about $6 billion dollars in total combined assets, as
compared to over $22 trillion dollars in total assets in the U.S.
banking system as a whole. Put another way, Black-owned banks only
control 27 thousandths of one percent of total bank assets in the
United States.
Given the important role these institutions play in the communities
they serve, we need to do more to preserve and promote them. Our
obligation in this regard is not just morally justified but required by
Federal statute. Passed into law in 1989, Section 308 of the Financial
Institutions Reform, Recovery, and Enforcement Act, or FIRREA, requires
the Treasury, Federal Reserve, OCC, and FDIC to preserve and promote
MDIs in a variety of ways, including preserving the number of MDIs.
This statutory obligation should be considered a part of Treasury and
the regulators' overall mission to maintain stability and public
confidence in the Nation's financial system.
The Treasury and bank supervisory agencies have unfortunately
failed to preserve and promote MDIs. The overall number of MDIs has
declined by 33 percent since 2008, and among Black-owned MDIs, the
problem is especially pronounced, as Black-owned banks have suffered
from many of the same conditions and structural lack of access to
capital as the Black community as a whole. Of the 4,377 total insured
commercial banks in the U.S., only 144 are MDIs, and only 19 of those
are controlled by Black people. Prior to the Great Recession of 2008-
2009, there were 41 Black-owned commercial banks in the United States,
a loss of more than 50 percent.
Like most community banks, MDIs primarily make loans secured by
real estate. The legacy of redlining and associated chronic
undervaluing of real estate in Black communities created lower asset
values for minority banks' collateral, which led to massive write-downs
of bank collateral.
Tier 1 Capital, or the equity invested in a bank, is the most
critical component of the resilience of any bank, and it is what allows
banks to grow and scale. MDIs, particularly African-American MDIs, have
historically lacked access to capital markets that would allow them to
scale. Without sufficient Tier 1 Capital, not only are banks limited in
the amount of deposits they can take in, but they are also hampered in
their ability to withstand loan losses. Without access to capital
markets or large pools of high-net-worth investors, many Black MDIs
were forced to exhaust their capital reserves, failing as a result.
Those who have been able to participate in relief efforts have been
limited in the amount of loans that can be extended, even with Federal
guarantees or direct support, as they are unable to weather loan
significant loan losses. Following natural disasters, many financial
institutions, especially those in underserved communities, often have
increased delinquent loans. Although Federal Government efforts to
stand up loan loss reserve and other similar programs have been
somewhat beneficial, it has been the experience of many MDIs many of
these programs are not sufficient without adequate capital at the bank
level and less red tape at the Federal level. Both create bottlenecks
when speed is necessary.
Access to capital will allow MDIs to not only respond better during
times of crisis but allow us to reverse the situations in our
communities that lead to worse outcomes during natural disasters. The
ECIP capital is a historic step in the right direction, but
unfortunately many of our banks were not able to access ECIP due to
prior regulatory challenges, based on examination standards that do not
take into account the unique business models many mission driven banks
need to employ to provide basic banking services in markets that would
otherwise be ignored by the financial services mainstream. We need to
find additional ways to direct capital and business opportunities to
those banks and the communities they serve.
President Biden and Congressional Democrats have made good on their
promise to steer money toward frontline communities as the United
States makes historic investments in climate resilience and mitigation.
Provisions in the recent enacted infrastructure law and a $29 billion
provision included in the proposed Build Back Better bill go a long way
in achieving this goal, but MDIs must be included in the financing
opportunities that will arise, giving our banks opportunity, but more
importantly allowing us to connect our customers to opportunities to
strengthen their businesses, add more jobs, and thereby make their
communities more resilient.
While there are many provisions in the Bipartisan Infrastructure
Law aimed at addressing environmental inequities, I will focus on one
in the context of today's hearing. The law invests in the deployment of
electric vehicle (EV) charging infrastructure as one of many important
ways to confront the climate crisis. Through a National Electric
Vehicle Formula Program (EV Charging Program), the law provides funding
to States to strategically deploy EV charging infrastructure and to
establish an interconnected network to facilitate data collection,
access, and reliability. The law also establishes a discretionary grant
program for Charging and Fueling Infrastructure (Charging and Fueling
Infrastructure Program) to strategically deploy publicly accessible EV
charging infrastructure and hydrogen, propane, and natural gas fueling
infrastructure along designated alternative fuel corridors or in
certain other locations that are accessible to all drivers of such
vehicles. The law directs DOT, in coordination or consultation with the
Department of Energy (DOE), to develop guidance for both programs. We
believe that MDIs and our customers--minority owned businesses--should
be direct and active participants in the deployment of this new
infrastructure.
The implementation of the new EV charging station programs and the
disbursement of unprecedented levels of Federal funding will provide
for more access to cleaner vehicles, reduced demand for polluting fuels
and provide job opportunities. While the law does not speak to specific
financing models, the Biden administration has been vocally committed
to ensuring that the funds available be utilized in LMI communities and
that institutions who serve these communities be intrinsically
involved. We believe this is an area where MDIs should actively
participate. However, the need for capital at our institutions poses a
challenge for broad participation by many of our institutions. We can
combat this lack of capital by banding together in syndicates to
provide financing for this critical infrastructure in our communities.
We can also manage Federal contract funds in a transparent and
equitable way. Perhaps most importantly, our banks can connect
underrepresented minority owned businesses to contract opportunities to
build the infrastructure in their communities, providing not only
critical new infrastructure, but strengthening minority businesses,
creating quality jobs, and making the communities we serve more
resilient. We believe our participation is crucial as it ensures that
the promise of the program will be realized in the communities we serve
for generations to come.
The pending BBB contains a provision establishing a ``Greenhouse
Gas Reduction Fund'' that for the first time would infuse green
investments into a vast network of local financiers--some of which have
decades-long connections with the very communities that are already,
and disproportionately, feeling the effects of rising temperatures.
Among them are MDIs and CDFIs.
As Senator Van Hollen recently noted ``The bottom line is we have
two important goals. Obviously, we want to deploy clean energy
technology as quickly and efficiently as possible. And we also want to
make sure that . . . communities that have been overlooked in the past
are not overlooked again. CDFIs have an essential role to play in the
Build Back Better agenda, right? I mean, [especially in] making sure
that communities that have often been overlooked when it comes to
important investments have that capital available to them.''
While we agree with the Senator's sentiment, many MDIs and CDFIs
still face barriers to expanding their green portfolios. Those
obstacles include hiring and training staff to develop and run new loan
products and forming partnerships with the installers or service
providers of electric vehicle charging stations, heating, ventilating
and air conditioning systems; solar panels; and more.
Most, if not all, of our member institutions already have robust
vetting and risk assessment processes in place when it comes to
examining, for example, mortgages or small business loans. But many
still are working to build the same sort of capacity and expertise when
it comes to clean energy. Additional Federal funding focused
specifically on global warming in conjunction with increased capital
could help chip away at those obstacles.
Conclusion
The NBA again applauds the Subcommittee for holding this important
hearing and for the full Committee's ongoing efforts to ensure equity
for all communities across the country. People of color are on the
front lines of the climate crisis and the health crisis. For decades,
power imbalances have constrained the ability of communities of color
to respond to the impact of climate change and contribute local
knowledge to climate solutions. These same imbalances leave our
communities more vulnerable to health crises. Building political and
economic power, as well as speaking up about the challenges, are
critical components of climate resilience and improving the social
determinants of health like stable employment and quality housing. We
have begun the monumental task of addressing the root causes of
inequity in health outcomes, many of which revolve around economic
disparity. It's time to expand the conversation to include the economic
roots of climate injustice to ensure that all people, regardless of
race and ethnicity, are guaranteed protections from the worst effects
of climate change. While we commend Congress on its leadership to date
in responding to the current crisis, we firmly believe much work
remains to be done in supporting the MDI sector as we respond to the
needs of the communities and small businesses that our member
institutions serve that have disproportionately shouldered the burden.
In this regard, the NBA and its member banks look forward to working
closely with the Committee and Subcommittee on workable solutions that
ensure LMI communities and minority small business do not just simply
survive but ultimately thrive. Thank you again for the opportunity to
testify. I will be pleased to answer any questions.
______
PREPARED STATEMENT OF JEANNE KUCEY
President and CEO, JetStream Federal Credit Union, on Behalf of the
National Association of Federally Insured Credit Unions, Miami Lakes,
Florida
February 9, 2022
Introduction
Good afternoon, Chairman Warnock, Ranking Member Tillis, and
Members of the Subcommittee. My name is Jeanne Kucey, and I am
testifying today on behalf of the National Association of Federally
Insured Credit Unions (NAFCU), where I served on the Board of Directors
for 9 years including the final 2 years as Board Chair. I currently
serve as CEO of JetStream Federal Credit Union, a low-income designated
Community Development Financial Institution (CDFI) operating in Miami-
Dade County, Florida, and Puerto Rico. We are also classified as a
Minority Depository Institution (MDI). Thank you for holding this
important hearing today. We appreciate the opportunity to share our
views on the important role that CDFIs and MDIs play in the economy and
our communities. In addition to our testimony, NAFCU member credit
unions look forward to continuing to work with you beyond this hearing
to ensure access to robust financial services products for all
Americans.
Founded in 1948 and headquartered in Miami Lakes, Florida,
JetStream FCU has $240 million in assets and serves more than 18,000
members in five locations, including one in Puerto Rico. Membership is
open to those who live or work in Miami-Dade County, Florida, or in
Carolina, Trujillo Alto, or San Juan, Puerto Rico. Today, the credit
union offers a variety of products, including checking and savings
accounts, credit cards, auto loans, home equity lines of credit,
business loans, several types of green loans, and no credit check
loans. We also offer a complete menu of remote services through mobile
banking and various digital channels.
Background on Credit Unions
Credit unions serve a unique function in the delivery of necessary
financial services to Americans. Established by an act of Congress in
1934, the Federal credit union system serves to promote thrift and make
financial services available to all consumers, many of whom would
otherwise have limited access to financial services. Every credit union
is a cooperative institution organized ``for the purpose of promoting
thrift among its members and creating a source of credit for provident
or productive purposes'' (12 U.S.C. 1752(1)). Congress established
credit unions as an alternative to banks and to meet a precise public
need, and today credit unions provide financial services to over 127
million people. Since President Franklin D. Roosevelt signed the
Federal Credit Union Act (FCU Act) into law nearly 88 years ago, two
fundamental principles regarding the operation of credit unions remain
every bit as important today as in 1934:
1. Credit unions remain totally committed to providing their members
with efficient, low-cost, personal financial services; and,
2. Credit unions continue to emphasize traditional cooperative
values such as democracy and volunteerism.
The Nation's approximately 5,000 federally insured credit unions
serve a different purpose and have a fundamentally different structure
than traditional banks. Credit unions exist solely for providing
financial services to their members, while banks aim to make a profit
for a limited number of shareholders. As owners of cooperative
financial institutions, united by a common bond, all credit union
members have an equal say in the operation of their credit union--``one
member, one vote''--regardless of the dollar amount they have on
account. These singular rights extend all the way from making basic
operating decisions to electing the board of directors, something
unheard of among for-profit, stock-owned banks. Unlike their
counterparts at banks and thrifts, Federal credit union directors
generally serve without remuneration, epitomizing the true volunteer
spirit permeating the credit union community.
Credit unions continue to play a very important role in the lives
of millions of Americans from all walks of life. Since the Great
Recession, consolidation of the commercial banking sector has
progressed at an increasingly rapid rate. At a time when for-profit
banks are deemphasizing the human touch for financial services, credit
unions are second-to-none in providing their members with quality
personal financial services at the lowest possible cost.
Credit Unions as MDIs, CDFIs
Credit unions are proud of their record of diversity. As you can
see from the charts on the next page, credit unions outpace banks when
it comes to MDIs and in having female CEOs. According to NCUA's ``2020
Minority Depository Institutions Report to Congress'', at the end of
2020 there were 520 federally insured credit unions designated as MDIs,
417 of which also have the low-income credit union designation. Credit
union MDIs are located in 37 States, Washington, DC, Puerto Rico, and
the U.S. Virgin Islands. These institutions serve over 4.3 million
members and tend to be smaller institutions; 82 percent of MDI credit
unions have assets of $100 million or less. They also tend to
underperform growth in all categories, including asset size,
membership, and loan volume, in comparison to the rest of the credit
union industry, and the disparity is growing.
Credit unions are also proud of their participation in the CDFI
program, which provides grants to allow credit unions to better serve
low-income members and underbanked communities. There were 416 CDFI-
designated credit unions as of December 28, 2021, up from 285 in
November of 2018, serving nearly 17 million predominantly low-income
consumers and communities of color. In addition to helping credit
unions in low-income areas serve members in need, the CDFI program
gives credit unions access to funds that they are not able to raise
from the capital markets. As the country continues its pandemic
recovery, NAFCU urges Congress to consider increased funding levels for
CDFI programs in any future Fiscal Year appropriations bills. It is
this program that gives credit unions like JetStream an important
resource to help create programs to serve their communities.
Furthermore, while Congress is considering support for the CDFI
funds, we urge you to ensure that the Treasury Department is given the
necessary resources to clear out the current CDFI application backlog.
As the number of credit unions applying to become CDFI designated
institutions continues to grow, many applicants have seen the
application process drag on as they await approval. NAFCU also supports
legislative measures to streamline and modernize the requirements and
application process to make it easier for institutions to be approved
as a CDFI.
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In 2011, JetStream became an NCUA designated low-income credit
union, and a year later became CDFI certified. We were the first credit
union to service both Miami-Dade County, FL, and Puerto Rico to do so.
We are heavily vested in the prosperity of the communities we serve. We
have supported our members during hurricanes, Government shutdowns, and
most recently during the COVID-19 pandemic. Since 2011, JetStream has
received $5.8 million dollars in CDFI grants to support a plethora of
programs, including small business lending and a resettlement loan
program for low-income members. The grants also supported the Whole
Again loan program, an initiative that provided $17 million in consumer
loans to replace goods and vehicles destroyed by Hurricanes Irma and
Mar!a. In 2021, JetStream was awarded a grant to fund green energy and
home rehabilitations. Since 2014, we have worked to ensure that every
person employed at JetStream, including interns, receive certification
in Community Development Certified Financial Counseling from the
National Cooperative Business Association. This program trains our
staff to identify financial distress within our membership and
proactively work to prevent financial catastrophe.
Our membership is diverse, and reflective of the communities
Jetstream serves:
71 percent of JetStream members are classified as low-
income or below;
40 percent are classified as extremely low income;
67.5 percent of our members are Hispanic (27 percent of
which are Puerto Rican)
18.8 percent of our membership is African American.
JetStream is also a ``Juntos Avanzamos'' credit union (Together We
Advance), which is a community of credit unions committed to serving
and empowering Hispanic communities. We were the first credit union in
Florida to receive such a designation. JetStream is committed to
meeting the needs of our members, and that has led us to offer a number
of products to help immigrants and those with lower incomes, such as a
second chance checking program, low dollar loans, and even a
resettlement loan program for those moving from Puerto Rico to the
mainland.
Jetstream, along with NAFCU, regularly works with Inclusiv, a
certified CDFI intermediary and a national network of nearly 450 CDFI
certified and minority designated credit unions. Inclusiv provides
capital, makes connections, builds capacity, develops innovative
products and services for community development credit unions (CDCUs).
Due to the geographical areas JetStream services, Hurricane Irma
and Hurricane Maria critically affected our membership in September
2017. The two Hurricanes were a life-defining moment for many of our
members, and we knew that we had to act. JetStream provided $2.5
million of critical financial relief to our members during the first 8
months of recovery, including no-cost, zero percent APR short-term
loans, deferment of existing loan payments, elimination of
transactional fees, and financial coaching for our members who were
dealing with active insurance cases and attempting to rebuild their
homes.
We played a big role for our members with small businesses after
the hurricanes. When Hurricane Maria hit the island of Puerto Rico,
almost every household was affected. During this time, residents looked
for ways to help their neighbors. One of our members saw the necessity
on the island for accessible diesel gas to refuel generators in
people's houses. He and his wife bought a truck in the States and
brought it to the island to start their new business, Chester Energia y
Transportes. He worked with the credit union to open a business account
to help their business get off the ground. Due to high demand, their
business took off rapidly and they were able to assist other large and
small businesses.
When the COVID-19 pandemic hit, Jetstream decided that the credit
union's branches would stay open. By strictly following CDC guidelines,
we were able to keep our employees safe while serving our membership in
their time of need. Jetstream maintained normal operating hours
throughout the crisis. This also meant support for members of other
credit unions through shared branching. Jetstream's shared branching
activity skyrocketed, earning recognition from Florida Credit Union
Shared Services in their annual report.
In 2020, Jetstream launched a multipronged COVID-19 emergency
relief program that included emergency loans, lines of credit, a 6-
month payment deferral for qualifying loans, and fee waivers. Consumer
loan deferments totaled 1,291, for a total of $10.5 million, and fee
income was reduced by 32 percent. Jetstream saw a reduction of $348,011
to its net income. Net income for 2021 was positive, but not quite back
to prepandemic levels. For us, this was an investment in our members
during their time of need. I am proud of our team and their dedication
to serve our members.
Our low-income members are more likely to live in urban heat
islands with fewer trees and more pavement, as well as reside in
housing with older building materials and appliances. In Miami, 65
percent of the housing stock is over 50 years old. As a result, there
is a huge need for major repairs and retrofitting such as new roofs,
installing impact windows, performing mold remediation, replacement of
air conditioning units, and making energy-efficient upgrades. While our
current Home Equity Credit Line product enables many of our members to
finance these repairs, we have identified a segment of our membership
that does not qualify for this type of loan due to a lack of equity,
poor credit history, or high debt ratios. They are trapped in older,
energy inefficient homes that are often in dire need of substantial
repairs.
Our answer was JetStream's Increasing Climate Resiliency and Health
Equity through Energy Efficiency (ICRHEEE) strategy, and we are
fortunate to have recently been approved for a CDFI grant for this
program. The ICRHEEE addresses these challenges with innovative Green
Loan products and underwriting created to improve energy efficiencies
for low-income homeowners and also help those who need major repairs to
their homes, resulting in improved housing stock and increased
household income. This strategy includes loan options that do not
require equity and are lenient with respect to debt ratios and poor
credit. The strategy also includes financial counseling, coaching, and
community outreach. We are looking forward to unveiling these new
products and services to our members in 2022 in an effort to meet more
of the needs of our membership and the local community.
Energy costs have been rising across the U.S. and these rising
costs have a disproportionately high impact, also known as energy
burden, on low- and moderate-income (LMI) communities and communities
of color. These are precisely the communities that have not had
equitable access to financing critical energy efficiency and clean
energy building upgrades that could ease this energy burden. As
financial cooperatives committed to investing in strong and healthy
communities, CDFIs, like JetStream, are uniquely poised to serve as
vehicles to deploy affordable green loan programs that combat climate
change while helping to lower the high energy burden on low- and
moderate-income and communities of color. CDFI credit unions have the
underwriting expertise and financial coaching capacity to reach a broad
range of consumers and to connect the benefits of clean energy to
household budgets.
As we work to address this, and as part of our involvement with
Inclusiv, we have sent our lending team through their Solar Finance
Training Program for CDFIs and other community-based lenders. In this
training, CDFIs design and launch affordable green loan products for
their communities--something we will bring to our ICRHEEE strategy.
Recommendations
As the Subcommittee examines approaches to aid CDFIs and MDIs, we
believe it is important to properly fund Federal support for CDFIs and
MDIs. This includes increased funding through the annual appropriations
process for both the CDFI Fund and the NCUA's Community Development
Revolving Loan Fund (CDRLF). The CDRLF is an important tool for credit
unions to serve low-income areas by providing grants to low-income
credit unions to meet needs in those areas, often to provide technology
resources to help members. During the pandemic, CDRLF requests have far
outpaced available funding. NCUA Chairman Todd Harper has specifically
called for additional CDRLF funding to help low-income credit unions.
Additionally, we would support creating a CDFI Crisis Fund that
would automatically make additional capital available to CDFIs to
address natural disasters and economic crises when they occur in their
community as proposed by Senator Brian Schatz.
Finally, we would urge you to consider the following areas to
assist CDFI and MDI credit unions:
Improve the Process for Certification as a CDFI
As noted earlier in my testimony, NAFCU has heard from many credit
unions that have been waiting several months for certification as a
CDFI with little clarity or insight on their status. While it is
important that the CDFI Fund have the resources to handle the volume of
applications in a more timely manner, it is also critical that
technical issues or overburdensome requirements do not hamper efforts
by credit unions to serve those who want to help members in need. We
believe that the CDFI Fund is best situated as a resource for
institutions, and not a regulator. Additionally, transparency is key.
As such, we believe the process for certifying, and maintaining
certification, for a credit union, as an insured depository institution
(IDI), should recognize our unique nature. Examples of how this can be
done include:
Ensuring that the ``primary mission test'' is not a hurdle
for credit unions as not-for-profit member-owned cooperatives;
The ``target market test'' for certification should focus
on those to whom the credit union provides a wider range of
financial services, and not just to whom it has already made
loans, to meet thresholds; and
Allowing a longer ``cure period'' to maintain certification
that ensures credit unions can keep existing CDFI-backed
programs in place. Credit unions, as not-for-profit, member-
owned financial institutions, often face limited resources and
staffing, which may impact their ability to quickly cure any
issues, but they are still required to meet the same regulatory
burdens and subject to the same market pressures as large, for-
profit banks. A longer ``cure period'' for CDFI credit unions
will allow us to meet the challenges of unforeseen events like
natural disasters and pandemics--and deal with existing
regulatory requirements, some of which are unique to credit
unions--all while continuing to serve our communities.
Allow All Credit Unions To Serve Underserved Areas
As has been noted by Members of Congress across the political
spectrum, credit unions were not the cause of the Great Recession, and
an examination of their lending data indicates that credit union
mortgage lending outperformed bank mortgage lending during the
downturn. This is partly because credit unions did not contribute to
the proliferation of subprime loans. Before, during, and after the
financial crisis, credit unions continued to make quality loans through
sound underwriting practices focused on providing their members with
solid products they can afford.
In addition, both during and after the crisis, credit unions have
been committed to helping the portions of their communities that are
most in need obtain high quality products and services. This has been
demonstrated once again during the pandemic. Unfortunately, credit
unions that want to do more are limited in who they can serve by the
FCU Act, which restricts credit unions to serving a distinct field of
membership. Many credit unions want to help those in underserved areas
but the ability to add underserved areas to their fields of membership
is limited. Currently, only multiple-common-bond credit unions have the
authority to add underserved areas. We urge the Committee to amend the
FCU Act to allow all credit unions the ability to add underserved areas
to their fields of membership.
Loan Maturity Limits
The FCU Act has a general statutory limit on Federal credit union
loans of 15 years, with a limited number of exceptions, such as
mortgage loans for a primary residence. The rigid and limited set of
exceptions to the FCU Act's general 15-year maturity limit does not
provide the NCUA with the ability to expand the types of loans that may
be made with a longer maturity limit through regulation. For example,
many military members may purchase a home to move to when their service
ends, but because it is not their current primary residence, they may
be unable to obtain a loan with a term longer than 15 years.
Additionally, a number of credit unions have been approached by members
wanting to obtain financing for solar loans with a longer term to make
the loan more affordable. Both of these examples highlight the fact
that the current 15-year limit is outdated and does not conform to
maturities that are commonly accepted in the market today, resulting in
credit unions turning away members in need and losing market share in a
growing area of climate-friendly lending. In a rising interest rate
environment, it is important that consumers have options for longer
maturity products. We urge you to support S. 762, the Expanding Access
to Lending Options Act, introduced by Senators Tim Scott, R-SC, and
Catherine Cortez Masto, D-NV, to address this issue.
Allow GSEs To Purchase Non-Conforming Loans From CDFIs
An important aspect of the CDFI Fund is that it provides awards to
CDFI institutions to allow them to finance mortgage lending for first-
time homebuyers and be able to provide flexible underwriting for
community facilities. CDFIs often provide educational services such as
credit counseling and homebuyer classes to help their borrowers use
credit effectively and ensure they are able to keep up with their loan
obligations. However, the majority of the mortgages originated by CDFIs
are considered nonconforming (as they do not meet the loan-to-value,
debt-to-income, FICO score, or other requirements), and Fannie Mae and
Freddie Mac (the Government-Sponsored Enterprises (GSEs)) are unable to
purchase these loans. NAFCU has urged the Federal Housing Finance
Agency (FHFA) to create a pilot program to allow the GSEs to buy such
nonconforming loans from CDFIs because they are serving the exact
communities that the GSEs aim to serve through their statutorily
mandated missions.
Credit unions that are classified as CDFIs are best situated to
originate loans to the communities most in need. NAFCU believes that
one way to help address the widening home ownership gap for minorities
would be for the FHFA to permit the GSEs to purchase mortgages like the
ones made by CDFIs to their communities through new pilot programs with
less stringent purchase criteria. Establishing such pilot programs will
facilitate the development of a vibrant secondary market, thus ensuring
the long-term viability and even expansion of such lending programs in
the primary mortgage market. This would mean CDFIs could make more of
these loans to support their communities and help resolve some of the
access and equity issues currently impacting many borrowers. Should the
FHFA prove unwilling to allow the GSEs to purchase these mortgages, we
urge you to consider taking legislative action on behalf of CDFIs and
the underserved areas they serve to bring about this change.
Federal Housing Administration (FHA) Lending
Credit unions in general, and especially credit unions designated
as CDFIs and MDIs, play a vital role in supporting underserved
communities. As noted above, to obtain and maintain their
certification, CDFIs must demonstrate that at least 60 percent of their
lending activity is directed to one or a combination of target markets:
economically distressed geographies (Investment Areas); low-income
targeted populations (LITP) and minority communities, specifically
African Americans, Hispanics, and Native Americans (other targeted
populations--OTP). One of CDFIs' most important values to these
communities is their ability to provide responsible and affordable
mortgage lending for first-time homebuyers, lending to small
businesses, and offer flexible underwriting for community facilities.
The financial products offered by CDFIs are designed to support the
specific needs of the borrower, particularly low- and moderate-income,
as well as minority borrowers, as most are fixed-rate and self-
amortizing with lower origination fees. This keeps payments affordable
and allows borrowers to decrease the principal, so the loan is actually
paid off at the end of the term. Although these products provide much-
needed credit in their respective communities, their specialized nature
may set them apart from conventional mortgage products. NAFCU has urged
the Federal Housing Administration (FHA) to introduce additional
programs that provide insurance for CDFI loans and that make it easier
for these communities to have access to FHA-backed mortgage products.
We recommend that Congress require the U.S. Department of Housing
and Urban Development to conduct a study to determine the level of
participation of CDFIs in FHA loan insurance programs and offer
targeted training and resources to grow the number of CDFIs that are
FHA-approved lenders.
De Novo Credit Unions
The rising cost of compliance deters many would-be de novo (start-
up) credit unions. Additionally, the initial capital infusion and cash
outlays are often too great for many communities and associations, and
there is little to no return on investment. Starting a new credit union
is essentially an altruistic endeavor, as there is no ultimate
financial incentive for those that are successful, and the costs and
hurdles can be discouraging. Furthermore, the complex chartering
process is relatively easy and straightforward when compared to what a
de novo credit union will face once it is chartered and operating. All
of these factors contribute to a significant decline in the pace of de
novo credit unions post financial crisis.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The chart above outlines the number of de novo federally insured
credit unions chartered since the year 2000.
The NCUA takes an active role in helping new credit unions form and
provides support. NAFCU appreciates the NCUA's strategic focus on
easing barriers to the formation of new credit unions, including
streamlining the chartering process, offering assistance to groups
attempting to establish a new credit union in earlier stages, and
providing newly formed credit unions with additional flexibility in
meeting regulatory requirements.
Still, the NCUA's abilities are limited by what is allowed under
statute. NAFCU urges Congress to modernize the FCU Act to promote the
chartering of de novo credit unions and to provide greater flexibility
regarding prompt corrective action capital requirements for de novo
credit unions. Although the FCU Act gives the NCUA the authority to
offer some prompt corrective action flexibility for new credit unions,
expanding the agency's authority would be helpful.
Subordinated Debt
Congress may provide more flexibility to credit unions' ability to
serve low- and moderate-income individuals in their communities by
supporting the NCUA in its efforts to permit credit unions to issue
subordinated debt. Currently, low-income credit unions are able to
offer a form of subordinated debt called secondary capital. Low-income
credit unions may issue secondary capital accounts to non-natural
persons and these accounts are generally treated as regulatory capital.
The approval process to offer secondary capital can, however, be
complex. NAFCU appreciates the NCUA's recent supervisory guidance
pertaining to the evaluation of secondary capital plans, as it provides
valuable insight into why a secondary capital plan may be denied.
Nonetheless, NAFCU continues to urge the agency to provide further
support and guidance to low-income credit unions so they can better
utilize this important resource.
NAFCU advocates for a more streamlined process for the approval of
secondary capital applications. Although every secondary capital plan
is necessarily different depending on the credit union in question, the
process should be more standardized to help credit unions anticipate
and better prepare their secondary capital plans for approval.
Additional flexibility, guidance, and other resources, particularly on
how credit unions can more comprehensively project future performance
over a reasonable time horizon would be helpful as many low-income
credit unions continue to face obstacles in the approval process.
Additionally, NAFCU supports improved flexibility in credit unions'
capital framework to enhance consistency across regions regarding the
treatment of secondary capital as it applies to a credit union's net
worth calculation. Taking the steps outline above, as well as
supporting existing proposals such as S. 3441, the CDFI Bond Guarantee
Program Improvement Act offered by Senators Tina Smith, D-MN, and Mike
Rounds, R-SD, would go a long way to helping meet the needs of CDFIs
and allowing us to meet the challenges that arise.
Conclusion
MDIs and CDFIs play a vital role in the daily lives for millions of
Americans. Preserving MDI and CDFI credit unions and fostering the
development of new ones would continue to grow the financial industry
as an inclusive part of the American economy.
Credit unions throughout the country are proud of the work they
have done to serve minority and underserved populations. We urge the
Subcommittee to support improving the CDFI experience, including
regulatory relief for credit unions and support for modernizing and
updating the FCU Act. Allowing established credit unions to service the
communities that need the most help and providing pragmatic regulatory
relief for chartering new credit unions would bring more Americans into
financial institutions that put their financial well-being over
profits.
Thank you again, Chair Warnock, Ranking Member Tillis, and Members
of the Subcommittee for the invitation to testify before you today. I
welcome any questions you might have.
______
PREPARED STATEMENT OF JOEL GRIFFITH
Research Fellow, Financial Regulations, Heritage Foundation,
Washington, DC
February 9, 2022
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM ROBERT JAMES II
Q.1. I appreciated your participation in the February 9, 2022,
Subcommittee hearing. As we discussed during the hearing, a
common refrain by those concerned by CDFis is the lack of
concrete data that can be used to analysis and vet their
efficacy. Specifically, the Carsey Institute at the University
of New Hampshire, which issued a report on CDFis at the behest
of the CDFI Fund, notes, ``In developing this report, the
research team encountered significant data limitations at every
turn'' and identifies ``inadequate data and nonstandardized
auditing practices'' as significant barriers to CDFis achieving
better capitalization.
Can you speak to the current data limitations you believe
exist in the CDFI structure and their data reporting
requirements?
A.1. Senator, while we would agree that there are limitations
on how the data provided to the Fund is standardized and
utilized the NBA does not agree that there is a lack of
sufficient data provided on the operation of CDFIs. Much of the
limitations on standardizing the data is due to the wide array
of institutions that are certified as CDFI (loan funds, credit
unions, MDIs, nonprofits, etc.) In many instances, the only
common thread amongst these different types of CDFIs is their
mission-driven mandate. We believe it is critically important
to take this into consideration when examining the data
available on the operation of individual or classes of CDFIs
from a capitalization perspective.
CDFIs as a whole provide extensive data, often at great
expense, on an annual basis to the Community Development
Financial Institutions Fund (CDFI Fund) as part of their
certification requirements and prudential regulator as a part
of their Community Reinvestment Act (CRA) reporting
obligations. There is significant overlap in the data provided
to each respective entity and in our view is sufficient to
provide insight into the capital needs of these institutions.
The CDFI Fund produces an annual certification and data
collection report (ACR) which allows the Fund to gain insight
on the CDFI industry. Certified CDFIs are required to submit
ACRs on an annual basis through the CDFI Fund's Awards
Management Information System (AMIS). CDFIs are required to
submit their ACR within 90 days of the end of their
organization's fiscal year. Failure to submit a required ACR
may result in a loss of Certification status and additional
sanctions for CDFIs that are award program recipients. This ACR
report provides key summary data and comparisons by CDFI
institution type (including banks/thrifts, credit unions, loan
funds and venture capital funds).
The ACR is comprised of four main sections:
Section 1: Organizational Information--collects
organizational profile information, line(s) of
business, governance structure, and details related to
the seven requirements for Certification.
Section 2: Financial Data Detail--collects
information and data related to a Certified CDFI's
assets, liabilities, income, expenses, and loan and
investment portfolio.
Section 3: Financial Products Portfolio Breakdown
Detail--collects specific data related to Financial
Products, types and subtypes of loans and investments,
as well as detailed Target Market activity.
Section 4: Development Services Detail--collects
information on Development Services provided by a
Certified CDFI, including clients served and
Development Services provided in Target Markets.
These annual data reports provide evidence of how CDFIs are
providing Financial Products and Development Services to
distressed communities and underserved populations while
maintaining safety and soundness. Below is a snapshot from the
2020 ACR report from the CDFI Fund.
Loan funds constitute the largest share of Certified CDFIs.
Certified CDFIs are located in all 50 States as well as
several U.S. territories.
Loans are the dominant Financial Product (in contrast to
equity investments and loan guarantees) offered by Certified
CDFIs by dollar amount and count.
Consumer financing is the most reported type of financing
provided in both count and dollar amount.
Financial education is the most popular Development Service
used by clients of Certified CDFIs.
Certified CDFI credit unions report the highest total
assets amount and the most financing capital available.
Q.2. The authors of the Carsey report go on to say, `` . . . it
is currently simply impossible to make the most routine
analyses that are normally conducted with other classes of loan
assets. It is not possible, for example, to create a breakdown
of default rates or prepayment speeds for a given class of CDFI
loans, or even to provide a breakdown of borrower credit
scores. What is ironic about this is that CDFI managers feel
they are swamped with reporting requirements, which they
routinely fulfill. It is difficult to reconcile how CDFIs can
be doing so much reporting yet have so little to show for it.''
I believe we must reconcile the lack of actionable data
from CDFIs with the feedback that CDFI managers feeling
``swamped with reporting requirements.''
What areas of CDFI reporting requirements should
policymakers look at to broaden pertinent data sets?
Likewise, what areas would be helpful for policymakers to
streamline to ease burdens?
A.2. Senator as noted previously we believe our member
institutions as a class of CDFI provides significant data on
the financial products we offer to the communities that we
serve. I will speak for that class, MDIs, with regards to your
very important question. The NBA strongly support the purposes
and objectives of CRA, but we believe it is long overdue for an
overhaul that recognizes the differences between the types of
institutions that are subject to it. Enacted 40 years ago, CRA
has been instrumental in ensuring LMI communities have access
to credit and financial services, but the last significant
regulatory overhaul of CRA occurred two decades ago. In that
time, the financial services industry has radically changed
but, CRA has not. We strongly support modernization that
ensures CRA does not lose effectiveness for LMI communities and
that also creates a regulatory framework that streamlines
financial institutions' ability to comply with the CRA. The
success of CRA reform effort should be measured by whether it
will result in more credit and services delivered to LMI
communities that doesn't create unnecessary regulatory burdens
on the financial institutions that best serve these
communities.
Federal regulators and Congress have recognized that MDIs
play an important role in addressing the need for financial
services in minority communities. Regulators have been charged
by Congress to regulate in a way to promote and sustain MDIs.
This is done as a way to help remedy past practices by the
banking industry and the Federal Government that have made it
more difficult for minorities to achieve financial success. Yet
CRA rules as currently written are applied in a way that puts
MDIs at a disadvantage compared to mainstream banks. We have
consistently provided feedback on modernizing the CRA, but
unfortunately this has taken place after proposals have already
been released by regulators. In this instance we are glad to
provide you our view ahead of the proposed rules in an effort
to have those changes reflect the reality all of our member
institutions face while serving our communities.
As previously noted, the vast majority of the Association's
member institutions are also CDFIs requiring that they annually
certify that no less than 60 percent of their lending activity
occurs in LMI communities. In many instances, the work that the
Association's member institutions do to retain their CDFI
certification would either be sufficient for meeting their CRA
obligations or includes activities that should largely be CRA
qualifying activity. Unfortunately, there is no reciprocity
between the CDFI certification, data collection, reporting, and
recordkeeping process and what is required for CRA examinations
despite clear overlap in objectives and qualifying activity
regarding both the CRA and the requirements for CDFI
certification. We believe that regulators should use this new
proposed rule as an opportunity to change this dynamic.
Many of our smallest member institutions that are CDFIs
expend staff and financial resources to comply with competing
regimes that should otherwise be aligned. The proposed
regulations do not provide accommodations for CDFIs that would
streamline their CRA obligations or that allows CDFIs to enjoy
a rebuttable presumption of CRA compliance (at least a
``Satisfactory'' rating). We believe that the proposed
regulations in the past consistently missed the opportunity to
eliminate--or at least reduce--the regulatory burdens that
mission-driven lenders face and to harmonize what should be
complementary regulatory regimes. Specifically, we would
recommend considering the following accommodations for MDIs in
meeting their CRA obligations:
MDIs should be able to submit their Annual Certification
and Data Collection Report Form and be deemed in compliance
with both the existing CRA reporting, data collection, and
reporting requirements as well as the newly proposed
requirements; and
Deemed compliance shall constitute an ``Outstanding
Rating'' given the kinds of investments and the scale of
investments (60 percent of a CDFI's financing activities must
occur in LMI areas) necessary to obtain and maintain CDFI
certification.
While we hope regulators will exempt MDIs from the current
CRA regime based on their mission and CDFI compliance, if that
is not possible, we hope the following recommendations are
considered in the base text of any new proposed rule. First,
providing clarity around the description of CRA qualifying
activity regarding MDIs. We recommend modifying the current
language to include ``capital investment, deposits, loans, all
loan participations, other financial and nonfinancial support,
or other ventures undertaken.'' We believe this will eliminate
any ambiguity with examiners that the full range of non-MDI
bank support to MDIs is always CRA qualified activity.
In addition to the support our institutions receive from
non-MDIs, we believe the CRA should encourage MDIs to invest in
themselves. The CRA regulations should not impose more
stringent qualification criteria on MDIs than it does on other
banks. Something that is CRA qualifying at a mainstream bank
should also be CRA qualifying at an MDI. If a mainstream bank
invests some of its earnings and capital in an MDI instead of
paying it as dividend to shareholders, it receives CRA credit.
But if an MDI retains some of its earnings and invests in
itself instead of paying that portion of earnings as a dividend
to shareholders, it does not receive credit. Similarly, a
mainstream bank can get CRA credit for buying or selling
participation interests in loans to or from MDIs. But MDIs
routinely buy and sell loan participations among one another in
order to increase our lending and reduce risk, but MDI banks do
not get CRA credit for this. The reason that has been given is
that this is business as usual for an MDI and not a CRA
initiative. But should a bank not get CRA credit for building
CRA goals into its core business model and only get credit if,
as with mainstream banks, it is something only done through the
CRA Department of the bank.
Another example of MDI status being disregarded under the
current CRA rules is that an outreach program by a large
mainstream bank to a particular ethnic group may receive CRA
credit, but a program by a minority bank aimed at the same
ethnic group might not receive positive mention because it is
viewed as part of their business as usual and not part of their
specific CRA program. We do not believe these results are
mandated by the current CRA law or rules but that is how they
are often implemented. An MDI, where CRA is business as usual,
should get the same CRA credit for the same activities as a
mainstream bank where the activity is done through the CRA
Department.
Second, we feel it is important for the CRA to provide for
a multiplier for capital investments in MDIs--irrespective of
an MDI's location. The soon to be withdrawn rule addresses this
issue with respect to the kinds of activity that potentially
warrant CRA multipliers to encourage banks to engage in certain
types of activity and we hope this language is included in the
revamped rule. The Association takes the position that our
institutions over-index in the impact that our activity has in
meeting the credit needs of LMI and/or communities of color.
And, like many minority-owned businesses, our member
institutions often encounter significant barriers to raising
capital due in part to the mission-oriented lending our banks
tend to engage in. The Act has long provided for CRA credit for
capital investments in MDIs, but the instances where
institutions have taken advantage of this provision to make
capital investments in MDIs has been sporadic at best. To that
end, we believe that a multiplier for capital investments in
MDIs above a specified minimum threshold sends the appropriate
signal to the potential bank investors, and it would directly
support the community development work that CRA seeks to
encourage and that MDIs already engage in. We also recommend
that capital investments in MDIs always be CRA-eligible
multiplier effect activity even if an MDI is not in the CRA
assessment area of the institution making the capital
investment. This reflects the limited geographic reach of many
MDIs, and if adopted, would maximize the potential
opportunities for CRA-qualified capital investment in MDIs.
Finally, any final rule should vary the multiplier across
qualifying activity with an MDI such that capital investments
receive the highest multiplier.
We strongly believe these long overdue changes will lead to
a much more robust MDI sector and allow regulators to adhere
more closely with their charge of to regulate in a way to
promote and sustain MDIs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM JEANNE KUCEY
Q.1. I appreciated your participation in the February 9, 2022,
Subcommittee hearing. As we discussed during the hearing, a
common refrain by those concerned by CDFIs is the lack of
concrete data that can be used to analysis and vet their
efficacy. Specifically, the Carsey Institute at the University
of New Hampshire, which issued a report on CDFIs at the behest
of the CDFI Fund, notes, ``In developing this report, the
research team encountered significant data limitations at every
turn'' and identifies ``inadequate data and nonstandardized
auditing practices'' as significant barriers to CDFIs achieving
better capitalization.
Can you speak to the current data limitations you believe
exist in the CDFI structure and their data reporting
requirements?
A.1. Many CDFIs are smaller financial institutions where
increased data collection could become a significant burden,
which could present increased costs and hinder the mission of
the Fund to help communities in need. We believe the Fund
should recognize the role of mission-driven regulated financial
institutions, such as credit unions, that are already heavily
regulated and supervised and/or examined by a Federal
regulator, as compared to other entities that participate in
the CDFI program and are certified by the Fund. Credit unions
are subject to regulatory audit requirements and must maintain
comprehensive financial statements. Expanded data reporting
should only serve as a way for the Fund to oversee these other
entities that may not be regulated elsewhere by the Federal
Government.
Q.2. The authors of the Carsey report go on to say, `` . . . it
is currently simply impossible to make the most routine
analyses that are normally conducted with other classes of loan
assets. It is not possible, for example, to create a breakdown
of default rates or prepayment speeds for a given class of CDFI
loans, or even to provide a breakdown of borrower credit
scores. What is ironic about this is that CDFI managers feel
they are swamped with reporting requirements, which they
routinely fulfill. It is difficult to reconcile how CDFIs can
be doing so much reporting yet have so little to show for it.''
I believe we must reconcile the lack of actionable data
from CDFIs with the feedback that CDFI managers feeling
``swamped with reporting requirements.''
What areas of CDFI reporting requirements should
policymakers look at to broaden pertinent data sets?
A.2. I appreciate the Committee's effort to improve the data
regarding lending done by CDFI's. We all want to ensure that
taxpayer dollars are used efficiently and properly. I think
that the best answer to your question about CDFI's and their
reporting burdens is to look at the totality of reporting
required for small institutions like mine. Many CDFI's are very
small financial institutions, with limited staff. Small insured
depository CDFIs are still subject to the whole array of
reporting requirements for a depository institution, including
HMDA, SARs, CTRs, and many more. These requirements all carry
with them liability for penalties from the regulators for
mistakes and errors. At a smaller institution, like many CDFI
credit unions are, these reports are often filled out by just
one or two people. Adding on yet another report would be
another burden to bear. So, while I support the goal of having
good information, when I look at the potential burden of
layering on yet another reporting requirement for being a CDFI
for my credit union, I have to question whether we could take
on yet another regulatory reporting requirement. Every dollar
spent on regulatory reporting requirements is one less dollar
available to serve our members.
Q.3. Likewise, what areas would be helpful for policymakers to
streamline to ease burdens?
A.3. We believe measures such as the National Credit Union
Administration's (NCUA) streamlined application for CDFI
certification must be maintained. Currently, smaller, low-
income designated credit unions can use a streamlined
application process, which is helpful for these smaller and MDI
credit unions as it reduces the burdens associated with the
certification application. Unfortunately, the Fund has
announced that new requirements for transaction level data that
will go into effect in 2023, which will lead the NCUA to phase
out this streamlined process as they do not have that data to
assist credit unions with the application. This is an example
of how more data (from an already heavily regulated entity) may
provide little additional benefit, but could actually hurt the
overall program mission as it drives smaller institutions out
of the program due to increased costs and burdens.
Additional Material Supplied for the Record
LETTER SUBMITTED BY CIRCLE INTERNET FINANCIAL LLC
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY ICBA
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY CUNA
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]