Hearing Of The Select Revenue Measures Subcommittee Of The House Ways And Meands Committee - The New Markets Tax Credit Program

Statement

Chaired By: Rep. Richard Neal

Witnesses: Donna J. Gambrell, Director, Community Development Financial Insititutions Fund, Department Of the Treasury; Michael Brostek Director, Tax Issues, Strategic Issues Team, Government, Accountability Office; Ron Phillips, President, Coastal Enterprises, INC., President, New Markets Tax Credits Coalition; Blondel A. Pinnock, President, Carver Community Development Corporation, Senior Vice President, Carver Federal Saving Bank; Joseph Haskins, Jr. Chairman, President And Cheif Executive Office Harbor Bank Of Maryland; William Michael Cunningham, Social investing Advisor, Creative Investment Research, INC.; James R. Klein, Chief Executive Officers Ohio Community Development Finance Fund

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REP. RICHARD NEAL (D-MA): Today it looks as though we're going to be called to the floor in short order for what will be a very long day as currently suggested up to 26 votes. So we want to, if we can, with the cooperation of the witnesses and the members that are here, try within the confines of that statement to move things along.

Let me welcome to the committee our colleagues who are joining us for this joint hearing today between select revenue measures subcommittee and domestic policy subcommittee members of the financial services committee, my friend Mr. Watt and Mr. Paul. Our hearing today is an examination of the new market's tax credit program of which both Mr. Tiberi and I are supporters. We have seen firsthand the differences that this program can make in our districts and home states, and as we will hear today, 88 percent of the investors in this program say they would not have invested in a low income community without the credit. The risk of investing in a distressed community is often too high for many investors. As a former mayor, I know how difficult it can be to pull together financing from every corner imaginable in order to get new investment in a neighborhood that perhaps some have given up on.

And sometimes, that new investment is simply to get a new grocery store, a restaurant or a retailer to locate in the heart of a blighted neighborhood. Pope John Paul a community needs a soul if it is to become a true home for human beings. I have seen many of these neighborhoods missing their souls. Investments in jobs, businesses, and people can really turn these communities around and I have witnessed that as well. I believe the new markets tax credit is an efficient way to target investment into the neediest communities around the country.

Of course we also need to ensure that community organizations, many which are smaller or minority owned, have a fair shot at competing for these tax credits, and today we will hear from a number of experts on the subject who will share their experiences and recommendations for improvement.

Let me at this time recognize Mr. Tiberi for his opening statement.

REP. PAT TIBERI (R-OH): Mr. Chairman, I know we're under some severe time shortages so I would just ask that my opening statement be submitted for the record and thank you for this hearing and your leadership and yield back.

REP. NEAL: Thank you. I'd like to call on Mr. Watt for an opening statement.

REP. MEL WATT (D-NC): Thank you Mr. Chairman. And I'd be tempted to do the same thing but I'm kind of the culprit -- (laughter) -- here who started this process so I wanted to kind of frame what we're here about. Let me first thank Chairman Neal and Chairman Rangel and the Ranking Member, both Ranking Members for being a part of this hearing today.

The purpose of today's hearing is to examine a recent GAO report entitled, "New Markets Tax Credit, Minority Entities Are Less Successful in Obtaining Awards Than Non-Minority Entities". The request for the GAO report originated actually in a hearing in the financial services oversight and investigation subcommittee that I chaired in the last term of Congress on preserving and expanding minority banks. During that hearing, we learned that minority owned banks were having difficulty obtaining new markets tax credits and as a result Chairman Rangel, Chairman Neal, Chairman Barney Frank of the Financial Services Committee and I requested the GAO to investigate which firms have been receiving new markets tax credits and whether any barriers exist to minority owned firms competing fairly to obtain such allocations.

What we suspected back in the last term of Congress has now been confirmed by the GAO report. The title of the report says it all, minority firms are less successful in obtaining awards under the new markets tax credit program. This has major significance because the CDFI funds award roughly $5 billion in new market tax credits annually but only a handful of minority owned firms have received allocations in the eight year history of the program. And so we're trying to get to an assessment of why that is the case.

I'm certainly not here as a critic of the New Markets Tax Credit Program. To the contrary, I recognize the important contributions these credits have had on fostering economic development in traditionally underserved areas throughout the nation. There are several of them which I won't describe in my own Congressional district in fact so I know first hand the importance of them.

But our theoretical assumption I think when this program was undertaken was that minority banking institutions being based in minority communities, underserved communities would be the logical recipient of at least part of these tax credits and the GAO has gone into describing some of the reasons why problems are encountered. I won't go into those either in the interest of time, but I do want to emphasize the third finding that the GAO made in that that was that even after controlling for the factors that could be influencing this, asset sized proposed project characteristics, minority status was still associated with a lower probability of receiving an allocation. And is the only factor that rated a "significant negative" and this simply shouldn't be the case.

So we're here today to try to get to the bottom of what's happening with this and I appreciate again the chairman convening the hearing and I hope we get a chance to pursue it without 26 votes on the floor.

REP. NEAL: Thank you Mr. Watt Mr. Paul.

REP. RON PAUL (R-TX): Thank you Mr. Chairman. I thank you for calling this hearing on the topic of the New Markets Tax Credit Program. I've been a consistent proponent of tax credits in a wide variety of areas.

Tax credits have a successful track record as with the New Markets Tax Credit, which helps to revitalize low income areas in both rural and urban communities. Allegations that minority entities are discriminated against are distributing the but solution is not to establish quotas that favor some community development entities over others. Instead, given the popularity of this program, perhaps the size and/or scope of the program should be expanded. For me, there is no such thing as too many tax credits.

Thank you Mr. Chairman.

REP. NEAL: Thank you very much Mr. Paul. Let me now introduce our witnesses. First I want to welcome Donna Gambrell the director of the Community Development Financial Institutions Fund, the agency that operates the New Markets Tax Credit Program for the Treasury Department.

I also want to welcome back to the committee Michael Brostek the Director of Tax Issues on the Strategic Issues Team at GAO who has always here to offer constructive comments as well.

And our second panel we will hear from Ron Phillips the president of Coastal Enterprises, from Wiscasset, Maine.

Let me also welcome Blondel Pinnock the president of Carver Community Development and the Senior Vice President at Carver Federal Savings Bank in New York City.

We also want to welcome from Baltimore, Maryland Mr. Joseph Haskins who serves as chairman, president and CEO of Harbor Bank.

And we welcome William Michael Cunningham a social investing advisor at Creative Investment Research here in Washington.

And finally, we welcome before the committee today James Klein the CEO of the Ohio Community Development Finance Fund in Columbus, Ohio.

We are very fortunate to have a panel of experts from around the country to share their experiences with the New Markets Program. We look forward to their testimony today. We want to thank you for your participation and without objection, any other members wishing to insert statements as part of the record may do so. All written statements written by the witnesses will be inserting into the record as well.

Let me recognize Director Gambrell for her opening statement.

REP. WATT: Mr. Chairman, before you do that, could I make a constructive, what I hope will be a constructive suggestion, it may be one possibility since we did just get handed this notice that we're going to have 26 recorded votes on the floor, that we might just take all of the witnesses testimony, try to get those in, and then do the questioning all as one group as opposed to, you know, at least we could try to get the testimony and if necessary then maybe we could submit our questions to them in writing subsequent to the hearing --

REP. NEAL: I think that's a very good idea. Are there any objections? Hearing none, I think that we'll accept the suggestion that's been offered by Mr. Watt.

Ms. Gambrell.

MS. GAMBRELL: Thank you. Good morning Chairman Watt, Chairman Neal, Ranking Member Paul, and distinguished Members of the Committee on Financial Services, and the Committee on Ways and Means. I am delighted to be here today to testify at this hearing on the U.S. Government Accountability Office's recent report that addresses the success rates of minority entities in the New Markets Tax Credit Program.

As director of the U.S. Department of the Treasury's Community Development Financial Institutions Fund, or CDFI Fund, I want to assure Congress that since I became director almost two years ago, I have been committed to expanding participation in all of our programs.

First, I would like to thank Chairman Neal and Ranking Member Tiberi for recently introducing H.R. 2628, "The New Markets Tax Credit Extension Act of 2009" that would extend the New Markets Tax Credit Program through 2013, and allow New Markets Tax Credit investments to be used as an offset against Alternative Minimum Tax liabilities for awards made in 2009.

Last month, and just 100 days after the president signed into law the Recovery Act, I had the privilege of joining Treasury Secretary Tim Geithner, Chairman Frank, Congressman Capuano, and Governor Deval Patrick in Roxbury, Massachusetts to announce that 32 organizations had been selected to receive $1.5 billion in New Markets Tax Credit allocation authority that was made available under the Recovery Act

The event was held at the headquarters of Project Hope, a multi- service agency that provides low-income women with children access to education, jobs, housing, and emergency services. The building is located in a predominantly African-American community and was financed with a $4.8 million investment made possible through the New Markets Tax Credit Program. The new community center will significantly increase the number of local residents the Project Hope can serve. This was a great example of the type of story and community impact that is often undetected among the statistics and data program evaluations, but are the most important aspect of what we're trying to accomplish with programs like the New Markets Tax Credit program.

Since 2002 the year of our first New Markets Tax Credit program round, the CDFI fund has allocated $21 billion in tax credit authority to community development entities, or CDEs. Since September of 2008, investors have invested close to $2 billion into CDEs demonstrating the resiliency of program in even the most difficult of economic times. These investments have financed a variety of projects, including charter schools, health care facilities, performing arts centers, manufacturing companies, alternative energy companies, business incubators, grocery anchored shopping centers, substance abuse treatment facilities, and facilities for the homeless.

The New Markets Tax Credit program is highly competitive and any given application round, only about one in four applicants are selected to receive an award and request for tax credit authority have been between six and nine times greater than what's available to award.

The CDFI fund agrees with the GAO's conclusion that within this highly competitive application environment, organizations that have identified themselves as minority owned CDEs have not received allocation awards in proportion to their representation in the application pool. CDFI fund does not believe that this lower rate of success for minority CDEs or for that matter the success rate of any category of CDE is attributable to biases in the application review, or selection process.

Despite the challenges that are faced by minority CDEs in the application process, the CDFI fund believes that the New Markets Tax Credit program has been extremely successful in bringing benefits to communities with large minority populations. Since the track for New Markets Tax Credit investments have been made, have minority populations totaling 47 percent, almost double the overall national average of 26 percent. Furthermore, over 45 percent of the dollars invested under the New Markets Tax Credit programs have been invested in communities where the majority of the population is comprised of minorities.

New Markets Tax Credit projects are benefiting minority communities all over the country. Even in our own backyard. Here in Washington, DC, New Markets Tax Credit investments have been used to finance charter schools with populations that are 100 percent minority, minority owned businesses, a community and cultural center in a neighborhood where 93 percent of the residents are African- American. And in that same neighborhood, a shopping center anchored by a Giant's supermarket, the first grocery store located in that community in over a decade.

Notwithstanding the great successes we've seen benefiting minority communities, we do need to work together to increase participation by minority owned CDEs in the New Markets Tax Credit program.

To this end, the CDFI fund will focus on the following initiatives:

One, continued outreach to minority owned CDEs. The CDFI fund will continue to vigorously pursue outreach and training opportunities that will ensure minority owned institutions are aware of the benefits of the New Markets Tax Credit program and are given every opportunity to apply for allocation rounds.

Two, solicitation of public comments. Next month, the CDFI Fund will be soliciting comments pertaining to the New Markets Tax Credit application procedures and will request comments on how it can expand the participation of minority-owned and controlled CDEs. And, three, continued dialogue with Congress. The CDFI Fund has always been responsive to instructions from Congress regarding the New Markets Tax Credit program priorities. The CDFI Fund very much looks forward to continued dialogue with Congress on these matters.

In closing, I hope that through these initiatives, specifically the outreach efforts, the CDFI Fund will be better able to reach a greater audience of potential awardees and also encourage greater collaboration with organizations and federal agencies that serve minority populations. The New Markets Tax Credit Program has been a tremendous success in low-income and minority communities throughout the country, and I am confident that it will continue to be so in the future. Thank you for inviting me here today and I look forward to answering your questions.

REP. RICHARD E. NEAL (D-MA): Thank you. Mr. Brostek, will you proceed?

MR. MICHAEL BROSTEK: Mr. Chairman, Ranking Members, and other subcommittee members, thank you for inviting me today to discuss our work done at your request on minority Community Development Entities' participation in the New Markets Tax Credit.

During the period we reviewed, allocation rounds from 2005 to 2008, minority CDEs were successful with about nine percent of their applications and received about four percent of the allocation dollars they applied for. Non-minority CDEs were at least three times as successful with their applications and in obtaining allocation dollars.

Each New Market Tax Credit application is scored by three external reviewers. They explore business strategy, community impact, management capacity, and capitalization strategy. Each of these sections includes several subcategories. Minority CDEs generally receive lower application scores overall in each of the four application sections. Overall, minority CDEs scored about 11 points lower than non-minority CDEs on applications. On average, from 2005 to 2008, minority CDE application scores did not meet the minimum threshold for advancing past the application rounds in order to eligible for allocations.

After applications are scored, those that meet the threshold, pass on to be considered by CDFI Fund staff for award of credit applications. CDFI staff generally award allocation amounts in the order of the CDEs final ranking scores. When recommending allocation amounts, staff are to consider the amount of equity investment a CDE can expect to raise within two years, the amount of investment in lower-income communities that can be deployed within three years, the quality of the financial products being offered, and the projected impact on lower-income communities or low-income persons.

Some CDEs that exceed the allocation threshold do not receive allocations because the amount of allocation authority is insufficient to fund everyone. Minority CDEs receipt of only four percent of the allocation dollars they applied for is a function both of the number of minority CDEs that failed to make the application threshold and that those exceeding the threshold, tended to have lower scores than other applicants, and thus tended not to be funded.

Recent images we had with minority and non-minority CDEs representatives, we identified characteristics, like CDE five, that are likely to affect applicants' success. To test whether minority CDEs' relative lack of success in a clients' were in receiving credit allocations was due to their minority status or these other characteristics, we performed statistical analyses to control for those characteristics, other than minority status that might be affecting outcome. We found that when controlling for characteristics like asset size, proposed project characteristics and CDE type, minority status still was associated with a lower probability of success.

Our analysis does not show why minority CDE status is associated with lower probability of receiving allocations or whether any actions taken or not taken by Treasury or the CDFI Fund contributed to this statistical relationship. Factors we could not control for or measure, such as applicant's loan loss reserves and operating costs, may affect CDE's success. We previously have found that minority- owned banks, many of which are minority CDEs, have higher loan loss reserves and operating costs than non-minority owned banks and this might contribute to their lack of success. S

Some believe that minority CDEs are better positioned to serve the communities in which they are located than other CDEs would be. If so, minority CDEs may have advantages that are not being fully utilized in the New Markets Program. The legislative history of the credit does not indicate whether Congress intended for minority CDEs to participate at any particular level in the program.

GAO is not making any recommendations for action. However, if Congress intends for minority CDE applicants to succeed at a greater rate than what we have found, it may want to consider legislative changes if the program is extended for future years. Such changes could include requiring that a certain portion of the overall amount of allocation authority be designated for minority CDEs, exploring the potential for creating a pool of New Market Tax Credit allocation authority to be dedicated specifically for community banks to compete for, offering priority points to minority CDEs in the application process, and requiring Treasury and the CDFI Fund to explore options to provide technical assistance and training to minority CDE applicants.

This concludes my statement. I'd be happy to answer questions.

REP. NEAL: Thank you very much, Mr. Brostek. What we would like to do now is to have the other witnesses join us if we could, to have an opportunity to hear from them as well.

The Chair will recognize Mr. Phillips for his testimony.

MR. RON PHILLIPS: Thank you, Representative Neal, Representative Tiberi, Representative Watt and members of the subcommittee on Select Revenue Measures. My name is Ron Phillips. I'm the current chair of the New Markets Tax Credit Coalition, a 150-member Washington, D.C.- based group that advocated for the passage of the New Markets Tax Credit Program in the late 1990's and I have the honor of having been right at the get-go of this program. So, I'm very glad to be here and express our point of view.

Since the passage of legislation in 2000, our coalition has advocated successfully to extend this program in the initial seven years and to increase the amount of credits that could be raised. As a result of our advocacy, even in the Stimulus Bill, we got a additional $5 billion so we've got a lot of capital to access out there and very excited about it.

I'm here today to respond to the GAO report on the lack of minority-owned and controlled participation in the program. I want to say right off that this report is being taken very seriously by our coalition. We discussed it earlier this week at our annual Policy Conference here in D.C. and at our board meeting. Many of our members and board members are also representatives of minority communities, so we are in good company to sort through how to increase participation.

What's more, I want to point out right off, that we're very excited about getting to the heart of the matter, reaching out through various minority trade groups, including the National Bankers Association, Latino organizations, Native American groups, such as LISTA and others. Even the American Banking Association, which attended our conference, is looking for ways to engage their members. So, we're in a good spot here. The reason is this credit program which we'd sincerely love to be made permanent, by the way, has such tremendous potential to redirect capital to worthy investments in this country that the more participation in it the better.

Now, I'm also President of Coastal Enterprises. It's a 501(c)3 non-profit organization based in Wiscasset, Maine and our primary market is Maine and rural communities, but we also work throughout New England and other parts of the United States.

We have had five rounds of allocation valued at $481 million and have today invested half those funds in primarily rural New England. Half of these funds area already invested in 30 projects mainly, as I said, in Maine and rural New England, western Massachusetts and upstate New York.

We have invested in community facilities such as the historic paper mill and timberland of Katahdin Forest management in the Millinocket region, a Gulf of Maine research facility supporting the 400 year-old fishing industry, the River Valley Market in North Hampton, Massachusetts, an up and running new facility supplying area residents with naturally and locally grown foods of some 50 farmers and health clinics such as the Plymouth Community Health Center in New Hampshire, connected to the Speare Memorial Hospital.

These funds have created and sustaining some 7,800 jobs, over two million acres of sustainably managed forest land, and storing private capital at ratio of three dollars for every one dollar of allocation investment in low-income communities. CEI's story is, however, only the tip of the iceberg as stories from our field abound all across the U.S. in both rural and urban areas.

As our recent report, 50 Projects 50 States -- and I hope we can get you all a copy of that -- notes there can be charter schools in Los Angeles educating young kids and minorities, a LEED standards community service center constructed on vacant ground in Chicago, an ethanol plant in Minnesota owned by a group of farmers. The list of exciting and aspiring projects is endless and even the story more convincing as it gets into the power of the New Markets Tax Credit to bring together the best of community social goals and the best of product capital and investment to help make the dreams of millions of people on the margins of our society come true.

It's because of the flexibility of the New Markets program that we can achieve these multiple objectives. The Program has been successful beyond anyone's expectations in attracting investment capital to distressed communities including many minority communities. Each year of the program so far, the competitive process has required those winning allocations to agree to target their investments to area of higher distress than minimally required by the program's statute.

Now, coming to a close here, I wanted to contribute my main points here to this session this morning. One item in the GAO report that was a great concern to us and we should emphasize is that according to the CDFI Fund, the census tracts that have received New Market investments, have on average non-white populations of 47 percent. So, I want to note that the benefit of this program has been falling much more largely to minorities we could presume than would meet the eye.

On the other hand, that does not make up the difference in terms of the emphasis one should bring to supporting minority-owned and controlled CDEs. So, that is still a challenge ahead. The credit has made a significant contribution to improving many communities across the country and that success should not be confused with the attributes of the CDEs that compete for and are awarded credits.

A second point I want to make is that according to our analysis from the coalition, there are actually 17 CDEs that have achieved the allocation of over $1 billion, far more than what the GAO report said. So, we have made some progress in that regard.

In conclusion, what I want is to offer two recommendations. The central recommendation of the New Markets Coalition is that Congress establish a technical assistance program and capacity building program aimed at helping minority CDEs better prepare themselves to participate in the New Market Tax Credit Program. We believe that the best way to build a more diverse set of New Market allocatees is to provide assistance to organizations to build the capacity of those that have not been successful in applying for the credits, rather than through any sort of set-aside priorities for any particular class of CDE or business sector.

And, the second recommendation we want to make is that H.R.268 be supported in terms of the extension that is critically important going forward to ensure that the tax credit becomes in the future a permanent credit. And also attached to the tax credit is the AMT relief, which will allow us to open up more investment and, particularly among independent and community banks at the regional level, a sorely needed new capital flow for this program.

Thank you very much. And I'm sorry I went over my time.

REP. NEAL: Thank you, Mr. Phillips.

Ms. Pinnock.

MS. PINNOCK: Thank you. Thank you.

Good morning, Chairman Watt, Chairman Neal and other distinguished committee members. My name is Blondel Pinnock, and I am a president of Carver Community Development Corporation, a minority for-profit community development entity. I also serve a senior vice president for Carver Federal Savings Bank, the largest minority-owned thrift in the United States, headquartered in Central Harlem in the 15th Congressional District, with nine branches throughout New York City. Deborah C. Wright, Chairman and CEO, extends her regards.

Carver is very supportive of the CDFI Fund and the New Market Tax Credit program. LMI communities need our investment. We are delighted to participate in the program, and Carver has been successful.

Carver's experience in applying for New Markets Tax Credits coincides with the findings of the April 2009 GAO report. Carver CDE applied consecutively for New Markets Tax Credits from 2005 through 2008. We have been successful, however, in receiving two allocations from the CDFI Fund -- a round four allocation in 2006 for $59 million (dollars) and the most recent Recovery Act allocation in 2009 for $65 million (dollars).

Our $59 million (dollar) allocation has allowed Carver CDE to invest in 10 projects within low-income and distressed communities throughout New York City and to develop partnerships in economic projects with more flexible terms that the bank would otherwise not be able to offer. For example, one of our New Markets Tax Credit loans was to finance the renovation of the first state-of-the-art privately- owned free-standing health care facility in Central Harlem, known as Citicare. The loan also helped preserve one of Harlem's architectural landmarks, the Jazzmobile building.

Carver provided $6 million (dollars) in below-market financing for a project that serviced over 20,000 patients in the last fiscal year and is located in a census tract that had over a 19 percent unemployment rate and where nearly 50 percent of the residents lived below the poverty line.

Another project financed through our New Markets Tax Credit allocation was a $5.3 million below-market-rate pre-development loan to Abyssinian Development Corporation, a strong, committed community development corporation in Harlem. The loan was used for the renovation and redevelopment of their legendary Renaissance Ballroom. The building had been vacant, boarded up and a community eyesore for over 30 years. Abyssinian, with the aid of Carver's New Market Tax Credit loan, will be able to bring this historic building back into service, offering community cultural space and up to 150 units of affordable for-sale housing. The project will create hundreds of construction and permanent jobs, providing economic viability and much-needed services for a highly distressed area.

Through our New Markets Tax Credits, we've been able to partner with large money-centered banks who has invested $19 million (dollars) in our allocation to finance a six-story commercial and office facility known as Harlem Gateway. Given Carver's asset size of $800 million (dollars) and our loan limit of $10 million (dollars), Carver would never have been able to put a $19 million loan on our balance sheet, but, with our partners at JPMorgan Chase, we helped in providing the financing for a project that created as many as 100 construction jobs and over 90 permanent jobs, in addition to providing vital community and retail services in an LMI census tract.

Carver agrees with the recommendations outlined in the GAO report for positioning minority CDEs to maximize New Market Tax Credit.

However, we would also suggest: one, giving preference to or targeting institutions who are either headquartered or have significant facility in distressed communities or who serve these communities in an operating or programmatic basis, in other words, CDFIs and CDEs that are on the front line of LMI communities every single day; as the report recommends, providing more meaningful technical assistance in the preparation and completion of the application, specifically in the areas of data collection and impact analysis required for the CDFI funds; three, provide treatment to major financial institutions that partner -- favorable treatment -- that partner with minority CDEs and/or community banks to assist with application readiness and encourage mutually beneficial collaboration.

Minority CDEs like Carver are well-suited to identify and finance New Markets Tax Credit projects that enhance and address local under- served communities and would otherwise fly under the radar of larger commercial banks and financial institutions.

Thank you very much for allowing me the opportunity to testify. And I will gladly answer any questions you may have.

REP. NEAL: Thank you, Ms. Pinnock.

Mr. Haskins, the bells that you heard mean that we have about 15 minutes, probably closer to 13 minutes, but we'll try it from there. Thank you, Mr. Haskins.

MR. HASKINS: Thank you, Chairman Neal. I will try to speak quickly.

Good morning, Chairman Watt, Chairman Neal again, and members of this distinguished committee. I am delighted to say to you that I am the chairman, president and CEO of Harbor Bankshares Corporation, which is a bank-holding company in Maryland that currently oversees a $300 million commercial bank.

Although the scope of the GAO is very broad, I have decided to focus my attention almost exclusively as it relates to Harbor Bank and Harbor Bankshares Corporation. However, I do have a couple recommendations that I will share at the end of my comments. I do want to be on record to state that I believe that the New Markets Tax Credit program under the CDFI Fund is a very important and vital tool for stimulating economic growth and development, especially as it relates to the minority or low-income communities.

The four points that I would like to make are as follows: first, that Harbor Bank has a long and distinguished record of success servicing low-income people and communities. When we look back at the past five years, the period of this analysis, we find that we have deployed over 140 million (dollars) in loans to the communities that we focus on, which is the low-income community.

The specific item that I'd like to lift here for your information is the fact that our first award, which was in round two, of $50 million in New Markets Tax Credits, $25 million (dollars) of that was allocated to one project. And one might say, why so much to one project? This one project represented 88 acres of an urban community, a city that is among one of the highest in crime, as you've heard in reports, highest in unemployment, highest in drug addiction and so forth and so on. And while the city is high in regards to these numbers, this community that we focus on doubles those statistics -- deplorable, not to say the least. This effort of 88 acres was designed to focus on creating a new science and biotech park, building out 2 million square feet of science and technology park space, and to create 2,000 new and renovated homes for this low-income community.

Our $25 million in this project resulted in $5 million going to a not-for-profit that focused on establishing drug rehabilitation programs, job training programs and educational housing programs. So when we look at the impact, we were significant. The other part of this is that we initiated the first building of that science park, a 300,000-square-foot building that employed in excess of 200 residents of that community through its various different phases of development.

But moving quickly, I want you to know that we think that our efforts have also been successful in being a stimulus as well as being an identifier of future opportunities, because we were the stimulant in a second science park on the west side tied to the University of Maryland, two very great and outstanding institutions.

I want to quickly tell you that while we were successful in the second round, we applied in every single round. And of the eight different allocation periods, we received two allocations. And that last allocation came at the end of this '08 award, which is part of the stimulus package. Our concern here is that we have a proven track record of being able to put our money out. We have evidenced that by having our money on the street in 14 months. What is interesting is that, of the allocation I've received already, the $50 million (dollars) that I've received under the 2009 period, I already have applications in excess of three times that amount, all for very relevant products and services.

I know that my colleagues have already spoke to some of the recommendations that they see as possible. I agree with some of the observations made by the GAO. What I would say to you is if you focus on lenders who have history in the communities that they've served and add that as a part of the criteria I think we'd go a long ways in helping to up the number of minority applicants in this process. And ladies and gentlemen -- or gentlemen, as I see, sitting before you -- I am available to have you witness first-hand the development of our money and the outcomes. And I'm available to answer any questions that you might have. Thank you very much for the opportunity.

REP. NEAL: Thank you, Mr. Haskins.

Mr. Cunningham.

MR. CUNNINGHAM: Thank you, Chairman Neal, Chairman Watt, Ranking Member Tiberi. I really appreciate your inviting me here.

I'm going to make this very quick. Before I get started, I'd like to introduce a member of my staff, Marie Cunningham Brown. She's also my mother. She worked for 30 years on Capitol Hill. In her last posting, she was an assistant to Congressman Claude Pepper. If I say anything intelligent, you have her to thank. If I say anything stupid, and I will, you can blame me.

Now, one of the things I want to point out is that the misallocation of economic resources kills people. Not two days ago, a homeless woman not 1.14 miles away from where we sit today was waiting for shelter at a homeless shelter close to -- close to here and she died, basically because the economic resources weren't available to help her out. These are the kinds of people that the New Market Tax Credit program was designed to assist.

In our 2008 application, we created a financial instrument designed to help and address the problem of homelessness. That application was not funded. So that's part of the problem that we have with the -- with the program. We just think that, again, the misallocation of economic resources based on racial prejudice is wrong. It kills people, markets, firms and economies. And we pointed this out in numerous comments to the Securities and Exchange Commission and to other bodies.

Now, with respect to kind of what our problem is with the program, we've applied in virtually every round of the New Market Tax Credit program. I actually gave a speech in 1994 in San Francisco, California, where I called for the creation of new market-type vehicles to get venture capital into under-served communities. So we take great pride and credit in being one of the intellectual forefathers of this program, you know, but we just have not had a lot of success in accessing those resources for a number of reasons.

Now, we concur with the statistical findings of the GAO report. That's included in Appendix A in our testimony -- a statistical analysis that was conducted by two interns that work for us.

You know, I do want to point our 2004 New Market Tax Credit application in particular, because we partnered with the city of Minneapolis to apply for $120 million in New Market Tax Credits. We had a letter of commitment from Piper Jaffray -- letter of commitment and a partnership with a city, and we were not funded. So, obviously, from our perspective, there is a problem with this program.

In our last application, we partnered with an African American individual with a net worth of $150 million, who basically supported our application to create a $50 million pool of New Market Tax Credits that we were going to allocate to minority-owned banks.

In the review of our application, the reviewer said, "We're not sure that minority-owned banks either want or can use New Market Tax Credits." They turned around and then they gave two minority-owned banks New Market Tax Credits when we had applied to do exactly the same thing a year earlier. Again, from our perspective, there is a problem with this program.

Now, what we suggest you do is we suggest you look at the transaction record for New Market Tax Credit allocation. When I say "the transaction record," what I mean is we suggest you look at the commissions paid to investment banks, consultants, lawyers and accountants. Basically, we want to outline -- we want to put some sunlight on this allocation process and determine who is benefiting up front from these New Market Tax Credit allocations.

According to the data that we have, if you -- because the spreads are so large and because this is one of the most generous federal government programs in the federal government community development inventory, the fees that we've seen go to some of the investment banks can get as high as 10 percent of the allocation. So 10 percent of the allocation goes to an investment bank before a dollar goes to the community to repay that investment bank for bringing investors into the -- into the pool. We think that's unfair. We think that's unfortunate.

In Appendix C of our testimony, we've outlined further suggestions for enhancing this program. Basically, we suggest that you increase the New Market Tax Credit for equity investment in low- income businesses located in some of the more distressed areas of the country. That's the core of our recommendation.

Again, I understand the time pressure you're under. I appreciate your inviting me here to testify today. I'm available to answer any questions that you have.

Thank you.

REP. NEAL: Thank you, Mr. Cunningham. We have two minutes on the floor, Mr. Klein, if you want to give this a quick go, accept your testimony part verbally and part written testimony, if we could.

MR. KLEIN: I'll go as fast as I can.

REP. NEAL: You're on.

MR. KLEIN: Thank you for the opportunity to testify. Specifically, thank you to Congressman Tiberi for your invitation.

Finance Fund is a statewide nonprofit in Ohio that provides services to low-income communities around the state. We work exclusively in these low-income urban and rural communities doing a number of different kinds of projects -- affordable housing, child care, early learning facilities, small business community facilities and so forth. We work with for-profit and nonprofit clients around the state. We've been doing this for 22 years. We've got 15,000 units of affordable housing, 9,000 jobs, 8 million square feet of revitalized commercial space.

New Markets Tax Credit fits pretty much dead center into our mission and product mix. We provide a lot of products and services to small businesses, minority businesses. And we use a non-leveraged model. A non-leveraged model is a model which does not -- is not as complex as the primary used model in this -- in this product -- in this program, which is the leverage model. A non-leveraged model allows us to do blind pools, which are investments, commitments that are made without actually identifying a specific project.

We've gotten four allocations out of this -- out of this program. Thirty have -- thirty projects have resulted. We've got deals as small as $86,000 (dollars). Our largest investment has been $5 million (dollars).

Let me talk very briefly about the report. And, my perspective, the outcomes of this report are somewhat predictable. We are talking about highly distressed communities, here. Highly distressed communities have specific kinds of characteristics. They have limited assets. They have limited capacity to do these kinds of complex deals that go through many public programs. We have businesses that operate in a market that is limited, depressed asset values, and so forth. It is -- it is my opinion that the complexity of the finance model, it becomes a systemic barrier to minority and small CDE participation in this program, because of its complexity and its cost.

REP. NEAL: I apologize. The clock has run to zero on the House floor. I'm going to recognize a suggestion from my friend, Mr. Watt.

REP. WATT: Thank you, Mr. Chairman. I reluctantly move that we not try to come back and hold these witnesses here. It'll be two hours before we get through the votes. And I think it would be more productive for us to just submit our questions in writing to the panelists. It will be probably more productive for them and for us. So I move that we follow the rules -- I mean, they would have to answer written questions anyway -- that we do all of the questioning by written question.

REP. NEAL: And let me thank the panelists and apologize for the floor schedule today. This was not to be the case, as of yesterday. But I do want to let you know there will be some follow-up questions. And if there are no further comments, then the hearing is adjourned.

Thank you. (Strikes gavel.)

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