Remarks by Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

Office of the Comptroller of the Currency

Before the

Local Initiatives Support Corporation

Annual Staff Conference

Cleveland, Ohio

April 10, 2002

Thank you very much for inviting me to address LISC's national staff
conference. I am honored to be here and I am delighted to have the
opportunity to talk about the important role of community development
corporations today, particularly the mutually beneficial relationships
being forged between banks and CDCs. LISC has been instrumental in
structuring many of these relationships, which hold great promise for
economic revitalization of communities across the country. And I
particularly want to congratulate all of you here today for the
enormously important \-- and sometimes unrecognized \-- work that each
of you do to foster community revitalization. You give hope to
individuals who have been left on the shore of our economic mainstream.

Also, before I begin, I want to again thank Michael Rubinger, Buzz
Roberts, and Oramenta Newsome for organizing a fascinating community
development tour for Comptroller of the Currency Jerry Hawke, myself,
and other OCC staff in Washington, D.C. in October 2000. On many
occasions after that, we have reflected on, and spoken about, what we
learned during that tour.

I don't have to tell you that LISC has long been a leader in the
community development field. If only for its national scope and for the
resources it brings to bear, LISC exerts much influence over the efforts
of numerous community development corporations \-- CDCs \-- operating at
the local level. But even more than these formidable assets, LISC's
professional standards, expertise, and its day-to-day operating policies
and practices, are examples that local CDCs emulate and rely upon.

I thought it would be timely to discuss three topics with you today.
First, since I am, after all, a *bank* regulator, I will review some
perspectives on the mutually beneficial relationships that *banks* have
developed with CDCs. Second, I will discuss some of the challenges we
see CDCs facing in their relationships with banks, especially with
regard to performance measures for the industry. Finally, I'll offer
some thoughts about the new initiatives that CDCs and banks may be able
to develop, such as through the New Markets Tax Credit Program.

**Bank and CDC Partnerships**

Over the past several years, we have seen a significant increase in the
level of bank involvement with CDCs. The National Community Capital
Association reports that bank investments as a proportion of
CDFI-borrowed capital dollars more than doubled from 12 percent to 25
percent between 1994 and 2000. We at the OCC have seen large increases
in bank investments under our Part 24 community development investment
authority which allows national banks to make equity investments in
CDCs, community development projects, and other public welfare
activities. National banks made more than \$5 billion of Part 24
investments since 1995, almost ten times more than the amount invested
during the previous 30 years since Part 24 was established.

Much of this growth has occurred through bank investments in Low Income
Housing Tax Credit projects with nonprofit sponsors, such as those
planned and assisted by many of you here today. LISC has an impressive
track record in this area, having raised some \$3 billion in Housing Tax
Credit investments \-- over three quarters of which has come from banks.

Banks have found that these types of investments and their relationships
with CDCs can dramatically further their own ability to provide a
presence in targeted segments of their markets, especially segments in
which banks are underrepresented. Working with CDCs, banks find lending
opportunities in these areas and bring needed capital to small business
expansion, affordable housing development, and social services
facilities. CDCs can help evaluate the repayment ability of the
borrowers and also leverage bank investments with public and
philanthropic funding in order to assemble the funding mix needed for
these projects. Because of their mission, CDCs provide the resources and
personnel to do the necessary work to make these projects work. In fact,
CDCs often bring "the deal" to the bank.

In 2000, the OCC issued the results of a survey aimed at determining the
practices that contribute to banks' community development success in the
housing and small business sectors. We found that community development
efforts are most likely to succeed when they are supported by
multi-pronged partnerships of local governments, community
organizations, philanthropic and religious groups, businesses, and other
relevant stakeholders in the community.

Driving factors for bank participation exist when a CDC partner does an
effective job of screening deals to bring good ones to the table, and
when the CDC works with potential borrowers to devise business plans and
credit proposals that meet banks' underwriting requirements. This helps
banks reduce transaction costs and allows the bank to deploy its own
personnel and resources in the most effective manner.

Our study also found that CDCs often play a key role, not only as
project managers, but also as intermediaries and facilitators, making
them valuable partners for banks. For example, many CDCs provide basic
financial literacy education that can help the unbanked build
relationships with traditional financial institutions. CDCs have been
particularly effective at tailoring these educational programs to the
needs and interests of specific groups within their communities. CDCs
also provide pre- and post-purchase counseling for homebuyers. This
counseling may be the best way to minimize default risk, or quite
simply, keep people in their homes. CDCs provide similar counseling to
entrepreneurs who have taken out loans to start or expand a small
business.

In addition to the project management role which CDCs play in many
affordable housing developments financed by Low-Income Housing Tax
Credits, CDCs increasingly also provide a range of social services for
residents including day care, after school programs, and job training
resources. These services help enable residents of these developments to
find an affordable place to live, and provide support mechanisms to help
them find ways to increase their income. This can increase the
likelihood for success of affordable multifamily developments in certain
markets.

Of course, the ability of CDCs to pull together complex financing
packages, with funding from a number of third-party sources, is
legendary. This skill is especially appreciated by small and mid-size
banks that may have less experience with the complexities of community
development financing. And even the largest banks recognize the benefit
of the specialized expertise that CDCs can bring to structuring the
multi-part financing packages that some projects require. As a result of
this technical financing knowledge, CDCs can find new opportunities for
banks to participate in projects, either as lenders or investors, that
banks would not have been able to arrange on their own. By designing
innovative financing structures, CDCs are able to involve banks in
funding projects such as shopping centers, charter schools, small
business incubators, or commercial office space. Banks are able to
participate in capacities that make sense for them from a business and
community reinvestment perspective, local community development needs
are served, and, by improving the local environment and economy, banks
may gain new customers and new markets.

**Challenges in a Changing Economic Landscape**

Yet, today the community development industry faces important challenges
that arise from changes in the broader environment in which they
operate. Among these changes are the shrinking and consolidation of the
banking industry. Many CDCs have come to depend a great deal on banks
for operating funding as well as for loans and investments, but its
seems inevitable that in the future CDCs will have fewer banks to rely
on for funding. Moreover, in economic downturns, as profit margins are
squeezed, at least some of those remaining banks will be forced to trim
their community development grant budgets. These factors bear directly
on the future health of the CDC industry.

On the other hand, the federal government is changing its funding
strategies in ways that favor continuing support for CDCs. Federal
set-asides for nonprofits in HOME funding and Low-Income Housing Tax
Credits, for example, provide critical operating and project support to
CDCs. And the New Markets Tax Credit is likely to spur the development
of more Community Development Entities. Indeed, the authorizing
legislation calls for their creation. But none of these federal programs
is designed to be the sole source of funding for CDCs. All leverage
private money, which frequently comes from banks. This leads to some
thoughts on factors that banks are likely to view as significant as they
evaluate potential CDC relationships.

**Evaluating CDCs**

In a landscape where there may be fewer private sector investors to turn
to, the CDCs with the soundest fundamental elements are the ones most
likely to survive and to continue developing fruitful community
development partnerships. Quantifying the soundness of a particular CDC
is already an exercise many banks undertake when evaluating their CDC
partnerships. As the supervisor of national banks that lend to and
invest in these entities, we have an interest in mechanisms and
initiatives that enhance the performance of CDCs and enable banks to
evaluate CDCs' performance.

The primary mission of my agency, the OCC, is to ensure a safe, sound,
and competitive banking system that supports the *citizens, communities,
and economy* of the United States. There are many facets of what bank
supervision encompasses, but at its core, effective oversight of banks
has to rely in large measure on the ability of banks themselves to
establish effective systems for monitoring the risks and returns
associated with their various lines of business. For example, we mandate
that banks develop systems to monitor the quality of their loans. So,
regardless of the line of business \-- from traditional lending to the
most sophisticated capital markets activities \-- we make it clear to
the banks we supervise that they must have systems and controls in
place, appropriate to the size and complexity of their business, that
enable them to monitor, measure and manage their activities.

The ground rules are no different for banks' partnerships with CDCs.
Banks need information to be able to monitor, measure and manage their
loans to and investments in CDCs. Loans should be repaid, investments
should generate returns, and grants should improve conditions in the
markets in which the bank operates. We ask our banks to perform due
diligence on all their investments, including ones in CDCs, because we
want our banks to achieve successful results in their community
development activities, just as in their other endeavors.

Banks can assess potential partnerships with CDCs more easily when the
CDCs themselves have already instituted performance standards and
measures. I recognize that measuring results is a challenge in many
industries, and this is particularly true for CDCs. The traditional
measures of dollars invested and units of housing built provide some
sense of a CDC's capacity, but further measures are needed for investors
to assess, for example, how well CDCs manage themselves and how their
work affects the quality of life in their communities. Banks need to
know that sound fundamentals back their business decisions \-- and
investments in CDCs are not an exception to that rule. When you consider
that a Housing Tax Credit investment normally remains on the bank's
books for 15 years, banks need to be confident that their CDC partners
have the staying power to manage the asset through to maturity.

It is those CDCs who have sound fundamental operating procedures, who
have proven themselves to be insightful managers of their internal
organizations as well as their external products and services, that will
be sought out by banks. So, what are some of the "sound fundamental
elements" that intermediaries such as LISC can help promote?

***Demonstrable results***. Measurable outcomes and careful tracking
allow CDC boards and management to make decisions about which programs
to pursue and what changes to make, and it allows them to assess the
success of the CDC's overall efforts. These same measures help
successful CDCs communicate their accomplishments to their financial
institution partners, funders, policymakers, and to the public at large.
This is *particularly* important to banks and thrifts which must
demonstrate to their regulators how CDC activities they have financed
serve the needs of communities within their assessment areas under CRA.
CDCs that are able to assemble geographic, income, and demographic data
regarding the beneficiaries of their activities can provide bank
partners with the information that bank regulators need to review as
part of CRA compliance examinations. To the extent that this helps banks
document their CRA performance, the more likely that CDCs that can
provide such information will be sought after by additional banking
industry partners.

***Sound financial management***. On the most basic level, CDCs must
have accurate and timely financial information and effective financial
management systems that will allow boards of directors and management to
make sound, well-informed decisions. CDCs manage important, often
scarce, resources in low-income communities. Careful stewardship of
these resources is a public trust.

***Talented staff.*** The effectiveness of CDCs depends in great part on
their staffs. Many talented people who come to the community development
field do so because they are committed to the mission of CDCs. Planning
for the succession of these talented and accomplished people ought to be
high on the priority lists of CDCs and their boards of directors.

***Watchful, thoughtful boards of directors.*** Whether it be a bank or
CDC, organizations involved with the complexities of community and real
estate development need boards of directors embodying a diversity of
talent and points of view \-- and enough relevant expertise to
effectively serve their function as overseers of the organization's
management. And while continuity among board members provides needed
stability to such an organization, continuity must be leavened with
periodic infusions of new blood to bring in new energy and new ideas.

***Operational integrity.*** CDC managers and directors owe duties of
care and loyalty to the organization they serve \-- just as do managers
and directors of banks. This means they must undertake their functions
with care and diligence and execute their duties with undivided loyalty
to the interests of their organization. In practice, CDCs should have
written policies, which are carefully monitored, covering potential
trouble areas such as conflicts of interest, board member compensation,
and hiring or contracting with relatives. These policies help to ensure
that the organization is not inappropriately used by the employees or
directors as a source of private gain. Failure to comply with duties of
care and loyalty can result in unfavorable consequences ranging from
negative news reports, to financial penalties under recently enacted tax
laws, and could even jeopardize an organization's Federal tax exemption.
The good name and reputation of any nonprofit organization is a
priceless asset, on which its future may hinge. It should be safeguarded
with the same vigor as the organization's financial assets.

A challenge facing the CDC industry is for more CDCs to systematically
incorporate the fundamentals I have just described in their planning and
operations. In this regard, the work of the National Community
Development Initiative (NCDI) to promote capacity building and
accountability within the CDC industry has advanced the industry
significantly. As you know, NCDI combines the funding of corporations,
foundations, and the Department of Housing and Urban Development and
channels these monies to LISC and the Enterprise Foundation to leverage
CDC activities at the local level. LISC makes these funds available
through its Operating Support Collaboratives, which provide financial
support for capacity building, strategy development, technical
assistance, and training. The Operating Support Collaboratives also help
the CDCs identify organizational strengths and weaknesses, and the
receipt of these monies are usually made contingent upon the CDC's
achievement of mutually agreed upon performance objectives.

In 1998, the Urban Institute studied the activities of CDCs in the 23
cities participating in the NCDI and found CDC capacity growing strongly
by a number of measures. Capacity is important to investors because it
enables CDCs to have a greater impact, thereby generating greater return
on their investments. The number of CDCs capable of producing more than
10 housing units per year grew from 104 in 1991 to 184 in 1997. The
study also found that the NCDI helped produce a 45 percent increase in
the number of "top tier" CDCs with consistent production records, strong
internal management, and diverse funding sources.

The Urban Institute cited the clear articulation of performance
standards as a key driver of the NCDI's success. Naturally, performance
standards backed by a track record of results create a degree of comfort
for banking partners and their regulators. NCDI and LISC's Operating
Support Collaboratives do not automatically fund every CDC nor allow the
funding to be seen as an entitlement. Funding is not renewed to
organizations that do not show progress in meeting standards, and
disbursement of funds can be held until CDCs are able to show progress
in key areas. Because of the program's effectiveness, LISC and
Enterprise have been able to raise more than \$350 million from
foundations, banks, corporations, and the federal government under the
National Community Development Initiative over the past 11 years.

I understand that through LISC's capacity building work with the
Operating Support Collaboratives, you have developed a new CDC
performance assessment tool ---*Cap*Map--- a capacity mapping approach
that is being rolled-out at this conference. *Cap*Map has been designed
to help CDCs create and track measures of success and also plan for
growth based on their operating capabilities. I am particularly
intrigued by the prospects for this tool that would allow for a more
consistent set of criteria to be used in assessing capacity of CDCs
across the country on critical success factors. *Cap*Map will be a true
success if it can help a CDC more clearly chart its current stage of
organizational capacity and what milestones it must achieve to
realistically undertake further growth.

**New Initiatives**

So what does the future hold for the continued relationships between
banks and CDCs? I am probably preaching to the choir when I say that I
believe the next frontier lies in the extension of the successful
partnerships we have seen in using housing tax credits to ones that will
use the New Markets Tax Credit. You can successfully build homes and
apartments in distressed communities, but if you are not able to change
the surrounding neighborhood, your efforts will have fallen short.

As the Low Income Housing Tax Credit addressed the equity gap needed to
develop affordable housing, we hope the New Markets Tax Credit will
encourage capital to flow to businesses and other ventures in low-income
areas. The New Markets Tax Credit will provide \$15 billion over the
next six years to promote investment in low-income areas, by allocating
tax credits in support of for-profit enterprise development in
low-income communities. Over the life of a seven-year investment,
investors will be able to realize a tax credit equal to 39 percent of
the amount that they have invested. To be eligible for an allocation of
tax credits, an entity must obtain certification as a Community
Development Entity (CDE) from the Department of the Treasury's CDFI
Fund. The certification process entails providing a clear explanation of
its business plan for making investments in targeted communities. By
increasing their capital base, this tax credit will enable CDEs to lend
and invest more, to attract additional outside capital, and to bring
even more private-sector engagement to their market-priming activities.

The CDFI Fund has reported that it hopes to determine the awarding of
allocations by the close of this calendar year. From our initial
discussions with banks, many intend to be investors in New Markets Tax
Credits. I hope to see LISC and its affiliates as active users of this
new investment tool.

**Conclusion**

Today I've discussed the types of productive partnerships that CDCs and
banks have established, shared some thoughts on challenges facing the
CDC industry in order to continue its effectiveness in the years ahead,
and I've described the potential that the New Markets Tax Credits
provide. While most of the work that will determine continued success
will occur at the individual CDC level, intermediaries such as LISC are
playing a crucial role in maximizing the impact of bank/CDC partnerships
in our communities. Your work is important not only through funding
CDCs, but also by your efforts providing information and promoting best
practices that are building a solid base for success for CDCs in the
future.

Thank you, and I truly look forward to seeing more of the fruits of your
good work.