CAPITAL ACCESS PROGRAMS:

A Summary of Nationwide Performance

Department of the Treasury

January 2001

This report is available on-line at http://www.ustreas.gov/reports/cap.pdf.

January 10, 2001

Dear Friend:

Since 1986, when Michigan first developed the Capital Access Program (CAP) as a method to

increase the availability of credit to small businesses, many states have gradually enacted CAPs

of their own. In fact, by June 2000, nationwide cumulative CAP lending totaled over $1.5 billion.

Under the leadership of former Secretary Robert E. Rubin and now of Secretary Lawrence H.

Summers, the Treasury Department has undertaken a series of initiatives to expand access to

capital and to encourage business investment in economically distressed communities. These

initiatives include a strong Community Reinvestment Act, the Community Development

Financial Institutions Fund, BusinessLINC, and the New Markets Initiative.

As part of that capital access agenda, we compiled this third annual report in order to assess the

reach of state-run CAPs and to explore the features that contribute to their success.

This report, Capital Access Programs: A Summary of Nationwide Performance, reviews:

• nationwide CAP lending trends through June 2000 from the 20 states and 2 municipalities

that operate CAPs;

• CAP lending performance to underserved borrowers and communities;

• lessons learned from state-run CAPs.

I hope that this report will contribute to greater understanding of the performance of CAPs and

their future potential as a tool to foster a vibrant small business financing market.

I would like to thank Alan Berube, author of this year’s report, and to acknowledge the research

assistance he received from Felton Booker and the earlier work of Clifton Kellogg, who authored

the first two editions of this annual study for this office. If you have any questions or comments,

please contact the Office of Community Development Policy at (202) 622-0016.

Sincerely,

Michael S. Barr

Deputy Assistant Secretary

Community Development Policy

Table of Contents

Executive Summary ........................................................................................................................ 1

1. Introduction ................................................................................................................................ 3

1.1 How CAPs Work: Program Mechanics ...................................................................... 3

1.2 How CAPs Work: Public Policy................................................................................. 4

2. CAP Performance....................................................................................................................... 5

2.1 General Financial Performance.................................................................................... 5

2.2 Performance in Lending to Specific Groups.............................................................. 14

3. Key Program Features of Large CAPs..................................................................................... 18

List of Tables and Figures.................................................................................................................

Figure 1: Nationwide Cumulative Loan Volume and Cumulative Number of Loans ........ 6

Figure 2: New CAP Loan Volume and Number New CAP Loans 1997-June 2000 .......... 7

Figure 3: Distribution of State Cumulative Volume Growth Rates 1998-99...................... 8

Figure 4a: Cumulative CAP Loan Volume by State through 6/30/00 ................................ 9

Figure 4b: Cumulative CAP Loan Volume per Capita through 6/30/00............................. 9

Figure 5a: Loan Volume by State 1999 ............................................................................ 10

Figure 5b: Loan Volume per Capita 1999......................................................................... 10

Figure 6: Distribution of Cumulative Average Loan Size Across States.......................... 11

Table 1: Percentage of CAP Loans Made to Start-Up Businesses by State...................... 12

Table 2: Targeted State Programs ..................................................................................... 15

Table 3: CAP Lending to Minority-Owned Businesses.................................................... 16

Table 4: CAP Lending to Women-Owned Businesses ..................................................... 17

Appendix I

CAP Data Summary..........................................................................................................I-1

Appendix II

Capital Access Program State Laws................................................................................ II-1

Capital Access Programs Page 1

Executive Summary

In August 2000, the Treasury Department’s Community Development Policy Office compiled

this report summarizing the performance of Capital Access Programs (CAPs) based on a survey

of the states and municipalities with such programs. This report is the third national review1 to

compile and assess:

• nationwide CAP lending statistics through June 2000 from the 20 states and 2

municipalities that operate CAPs;

• CAP lending performance through 1999 to targeted groups of borrowers such as those

in low- and moderate-income communities;

• lessons learned from states’ CAPs.

In addition to annual data on CAP lending in 1999, this report offers statistics on cumulative

CAP performance through June 30, 2000.

The 14-year track record of state-run CAPs suggests that these programs encourage small

business lending in a cost-efficient and simple way. Under CAPs, the bank and the borrower pay

an up-front insurance premium, typically between 3% and 7% of the loan amount at the bank’s

discretion, which goes into a reserve fund held at the originating bank. The state matches the

combined bank and borrower contribution with a deposit into the same reserve fund. The CAP

reserve fund allows a lending bank to make slightly higher risk loans than conventional

underwriting, with the protection of the reserve fund for its entire pool of CAP loans.

CAPs allow banks to use their own underwriting standards for eligible loans, without

governmental approval of the loan-making decision. Compared with the staff intensiveness of

other credit enhancement programs, CAPs require little administrative cost for banks, borrowers

or the government. States consistently report that CAPs are staffed by 1 to 1.5 full-time

equivalents. In most states, almost all small businesses are eligible for the CAP, though some

states limit maximum loan sizes and eligible industries. A state’s up-front payment of 3%-7% of

the loan amount into a bank’s CAP reserve fund supports a bank loan that is 14 to 33 times larger

than that amount.

The August 2000 survey offers evidence on several aspects of CAPs performance:

• Currently, 20 states and 2 cities operate CAPs, with total lending since 1986 of more than

$1.5 billion and a cumulative average loan size of $60,624.

• New CAP dollar volume in 1999 totaled $212 million, down somewhat from $246 million in

1998. However, during the first half of 2000, CAP dollar volume was on pace to exceed

$263 million for the year, a projected increase of 25 percent over lending in 1999.

 

1

 The Treasury Department published the first report, Capital Access Programs: A Summary of Nationwide

Performance, in October, 1998, and an update of that report in November 1999.
Capital Access Programs Page 2

• Nearly 400 banks nationwide were actively originating CAP loans in June 2000.

• Nationally, cumulative CAP loan losses total $58.1 million, or 3.7% of all loan volume. Net

of these losses, remaining CAP loan loss reserves amount to $64.2 million, equal to 4.1% of

cumulative volume.

A few CAP programs started in 1999 and 2000, while two existing programs did not operate at

all. Florida began its CAP in 1999; CAPs in Louisiana and Maryland started in late 2000, and a

Hawaii CAP will begin in early 2001. No new loans were made under the Massachusetts CAP in

1999 because its appropriation was exhausted, but the program was recapitalized in late 1999

and new loans were made in 2000. Utah’s program was dormant in 1999, and was terminated by

the legislature in 2000. Delaware’s program, not reflected in previous editions of this report, was

also dormant in 2000 but is being redesigned for a new rollout next year.

Data on CAPs show that CAP loans reach some groups of borrowers not as well-served by other

credit enhancement programs:

• CAPs reach minority-owned businesses and low- and moderate-income communities in

substantial numbers.

• CAP lending retains and creates a significant number of jobs.

• CAPs reach types of businesses, such as building contractors and wholesale trade

companies, that are not typically reached by other small business lending programs.

• In some states, CAPs are used significantly for start-up businesses and for working

capital, both of which are often cited as needs unsatisfied by the private market without

public support.

The survey also revealed key aspects of the largest CAPs. Active marketing to banks appears to

be a central feature of large CAPs. Assuring adequate funding for states’ CAPs may also

increase the volume of lending; even when funding limits are not hit, states that provide

insufficient appropriations may discourage both bank participation and full engagement by the

state agency administering the program. Similarly, restrictions on maximum loan size or eligible

industries may hinder overall program development without demonstrable advantage.
Capital Access Programs Page 3

1. Introduction

The expansion of private sector small business lending under CAPs in the 20 states and 2

municipalities currently operating such programs suggests that CAPs provide an innovative way

to encourage banks to make loans to a portfolio of individually risky but cumulatively profitable

small business loans. CAPs provide financial backing for a bank to make slightly more risky

loans than through conventional methods, while still preserving a bank’s motivation to

underwrite applications rigorously and avoid high losses. CAPs help banks overcome the risks

of small business lending by funding a reserve account to cover losses from loans that have

defaulted. The risk of the loan is partially subsidized by the state and spread over the portfolio of

all CAP loans. CAP loans are not guaranteed, and therefore lenders still bear the ultimate

financial risk. However, CAPs have proven helpful in encouraging banks prudently to extend

smaller business loans to new customers and, for existing customers, to offer CAP loans in

addition to conventional financing.

This report is an update of reports by the Department of the Treasury that summarized financial

statistics on nationwide CAP lending and distilled some of the states’ best practices. Many of

the findings from the initial 1998 report and 1999 update still hold true. This report includes the

most up-to-date information on the key CAP statistics. Policymakers and lenders would benefit

from a more comprehensive study of CAP job creation impact and the reach of CAP to

communities and individuals outside of the credit mainstream as well as to particular industries.

This report offers a nationwide overview of CAP lending, and we hope it will stimulate further

research and discussion.

1.1 How CAPs Work: Program Mechanics

In a CAP, the borrower obtains a loan and loan approval directly from the bank. There is no

governmental role in approving or reviewing the application. When making a CAP loan, the

bank and borrower pay an up-front insurance premium that, combined, generally ranges from

3% to 7% of the loan amount. The exact percentage is at the discretion of the individual bank,

and in practice, the bank may pass most of its portion of the premium on to the borrower by

financing the premium in the loan proceeds. Banks have the discretion to set interest rates on

CAP loans as they see fit. In most states, all small businesses are eligible, although some states

restrict maximum loan sizes and eligible industries (discussed in more detail later in this report).

The bank holds all of the CAP premiums in a single, pooled reserve account. The bank enrolls

the loan by faxing a one- or two-page form to the state, providing the particulars and certifying

that it meets program eligibility requirements. The state then deposits a matching amount, most

often a one-to-one match, into the originating bank’s CAP reserve account. In this way, each

bank creates its own funded loan loss reserve to cover a loss on any of its CAP loans. The bank

recovers any CAP loan losses by offsetting against the CAP reserve fund it holds. The bank

itself must absorb any losses over its accumulated CAP reserve fund.

The state government provides only the up-front matching premium. A few states do provide a

start-up credit line or higher initial match rates to give banks, in effect, an advance of future CAP

premiums. This helps a bank in the event the bank experiences an early CAP loss before the
Capital Access Programs Page 4

reserve fund has built up enough to absorb the full loss. A bank would then repay the credit line

from future CAP premiums. Some states also increase their match rate for loans to targeted

borrowers or areas, such as state-designated Enterprise Zones.

CAPs are designed to encourage banks to underwrite loans to a higher risk threshold than

conventional lending criteria. Whereas most banks experience loan losses on their traditional

loan portfolio of under 0.5% of loan principal outstanding annually, CAPs allow banks to absorb

greater losses with its CAP-funded reserve. CAPs thus serve the risk category just slightly

outside the scope of traditional bank lending.

1.2 How CAPs Work: Public Policy

The innovative feature of CAPs is the reserve fund that accumulates at each bank. This fund

helps the bank to hold and pool its risk, thereby enabling the bank to make profitable loans to

small business owners that would otherwise, on an individual basis, be viewed as too risky.

Capital Access Programs have five notable properties as public policy:

• First, CAP loans generally do not appear to “crowd out” loans that the private sector would

otherwise make. Borrowers are always able to shop around to see whether another bank

would make the loan without requiring the CAP premium. In choosing a CAP loan,

borrowers signal that they are unable to find comparable funding elsewhere. Thus, CAPs do

not supplant unsubsidized loans made by the private sector but rather make capital available

to otherwise sidelined entrepreneurs.2

• Second, individual loan decisions in CAPs are made by those with the best information

available – the private parties involved.

• Third, CAPs align the incentives of the borrower, the bank, and the state in the lending

process. Private incentives work to encourage CAP loans up to the loss level provided by the

reserve fund. Banks may not use the CAP reserve for any purpose other than backing CAP

loans. Banks would be disinclined to set the CAP premium too high and thereby miss the

opportunity to approve a greater number of profitable loans. At the same time, banks will

underwrite CAP loans rigorously, because they must absorb any losses that exceed the CAP

reserve account.

• Fourth, the leveraging effect of public funds is large, and the state’s investment is certain at

the outset. For example, if the state matches a borrower and bank contribution of 5% of the

loan amount, its contribution is backing the bank to make a loan that is 20 times larger than

the state investment (5% premium x 20 = 100% loan amount) . Moreover, the state does not

carry any contingent liability for potential future losses on CAP loans, as it would for a loan

guarantee program.

 

2

An in-depth 1998 study of the Michigan CAP by Roger Hamlin of Michigan State University estimated that only

12% of CAP loans would have occurred in the absence of the program.
Capital Access Programs Page 5

• Fifth, program administration is straightforward, according to the participating states and

banks. Once the CAP is designed and enacted, the daily administration involves sending the

matching premiums to each bank’s reserve fund as new loans are enrolled, marketing the

program to banks, and keeping accounts. In contrast, government guarantee programs may

require staffing of loan review officers, recordkeeping staff, workout officers, legal staff and

supervisory staff. States with CAPs reported an average administrative staffing level of 1.3

full time equivalents.

The states with CAPs as well as the most active CAP lenders report that CAPs provide a

comparatively simple tool for banks to increase marginally their risk tolerance and, in so doing,

to bring capital to an expanded population of viable small businesses.

2. CAP Performance

The data presented here are the results of a nationwide survey conducted by the Treasury

Department during August of 2000. The survey collected CAP data through the end of calendar

year 1999, as well as through June 30, 2000. The data are presented as follows:

• Cumulative totals and averages based on those totals are calculated using the most up-todate data through June 2000. Of the 22 CAPs surveyed, 20 were able to provide these

data. Cumulative figures are based on totals through 1999 in Florida and Pennsylvania.

• Data on an annual basis is presented through calendar year 1999, and is compared to

1998 data collected by the Department of Treasury in its November 1999 CAP Report.

The complete data set is presented in the Appendix.

2.1 General Financial Performance

Developments in New and Existing CAPs

This survey covered 20 states and 2 municipalities with operating CAPs in June 2000, including

Florida, which launched its CAP in 1999.

• This report includes results from Delaware’s CAP, enacted in 1994, that were not included in

previous editions.

• Louisiana’s and Maryland’s CAPs began in late 2000. Hawaii’s newly enacted CAP will be

launched in early 2001. Results from these CAPs will be reflected in next year’s report.

• In 1999, Massachusetts, which operates one of the largest CAPs, exhausted its initial 1993

appropriation of $5 million. No loans were made under the Massachusetts CAP in 1999. In

September of 1999, the program was recapitalized with a state appropriation, and new CAP

loans were originated in Massachusetts in 2000.

• Utah’s CAP, under which no loans had been originated since 1998, was repealed by the state

of Utah effective May 1, 2000, and historical data from that CAP are not reflected here.
Capital Access Programs Page 6

Loan Volume and Growth

CAP lending continued at a strong pace through 1999 and the first half of 2000. The figures in

the Appendix present some of the survey’s major findings on loan volume and growth. Figure 1

shows the rise in both total lending volume and the total number of loans, and Figure 2 shows

new loan volume and new number of loans in 1997, 1998, 1999 and the first half of 2000.

• By June 30, 2000, total CAP lending volume had increased to $1.56 billion, from $1.42

billion at the end of 1999, and $1.21 billion at the end of 1998 (9.2 percent growth 1998-99).

• In 1999, $212 million in new CAP loans were originated, down somewhat (14 percent) from

$246 million in 1998. A considerable portion of the decrease in CAP lending in 1999 may be

attributable to the dormancy of the Massachusetts CAP in that year. Lending under the

Massachusetts CAP averaged $34 million annually in 1997 and 1998. The first half of 2000

alone, however, saw nearly $132 million in new CAP volume, putting new volume for

calendar year 2000 on pace to exceed $263 million (a projected 24 percent increase over

1999 lending).

Figure 1: Nationwide Cumulative Loan Volume and 

Cumulative Number of Loans

$1,560

$1,424

$1,212

$967

25,725

16,837

20,494

23,587

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1997 1998 1999 30-Jun-00

millions

-

5,000

10,000

15,000

20,000

25,000

30,000

Loan Volume ($millions) Number of loans
Capital Access Programs Page 7

Figure 3 shows the distribution of CAP growth rates in 1999 across states.

• CAP growth rates are strong across the country. Only three of the programs surveyed grew

at less than a 10 percent rate in 1999, while the growth rates in five states were in excess of

40 percent.3 Volume in Texas grew by an astounding 365 percent, the Illinois CAP grew by

96 percent, and programs in Colorado and Minnesota achieved growth rates of 57 percent

and 46 percent respectively. Nine of the 19 CAPs displayed in Figure 3 grew at a 10-20

percent rate from 1998 to 1999.

 

3 These figures exclude the Massachusetts CAP, which was dormant in 1999, the Delaware CAP, for which no 1998-

99 information is available, and the Florida CAP, which started in 1999.

Figure 2: New CAP Loan Volume and Number New CAP Loans 

1997 through 1st half 2000

$212

$132

$210

$246

2,138

3,093

3,663

3,415

$0

$50

$100

$150

$200

$250

$300

1997 1998 1999 Jan-Jun 2000

millions

-

1,000

2,000

3,000

4,000

5,000

6,000

New Loan Volume ($millions) Number of new loans
Capital Access Programs Page 8

Figures 4a and 4b show cumulative CAP lending in the states on share and per capita terms.

• CAP lending remains especially pronounced in three states: California, Michigan, and

Massachusetts (despite its CAP’s dormancy in 1999) are responsible for nearly 66% of

cumulative lending volume.

• CAP lending per capita provides another measure of the relative magnitude of states’ CAPs.

By this measure, New Hampshire continues to operate the largest program in the country,

with a cumulative CAP loan volume of $67.82 per resident. The fact that some small states –

New Hampshire and Oregon in particular – have large CAPs on a per capita basis indicates

much greater market penetration. 4

Figures 5a and 5b show 1999 CAP lending in the states on share and per capita terms.

• In 1999, California accounted for the largest annual volume with $56 million, followed by

Michigan with $48 million and Texas with $35 million.

• As with cumulative lending, New Hampshire operated the largest program in 1999 measured

on a per capita basis. It had a 1999 loan volume of $7.65 per resident, compared to the

average CAP’s 1999 loan volume of $1.28 per resident.

 

4 Akron,Ohio reports cumulative CAP lending of $43.43 per resident.

Figure 3: Distribution of State Cumulative Volume

Growth Rates 1998-99

0

1

2

3

4

5

6

7

8

9

10

0-10% 10-20% 20-30% 30-40% 40-50% 50-60% 60% +

Number of states
Capital Access Programs Page 9

Figure 4a: Cumulative Loan Volume by State through 06/30/00

($millions)

Massachusetts

$149m

Indiana

$99m

New Hampshire

$81m

Oregon

$72m

All Others

$271m

Michigan

$481m

California

$392m

Total Volume = $1.56 billion

$67.82

$48.78

$24.10

$21.79 $20.12

$9.42

0

10

20

30

40

50

60

70

New Hampshire Michigan Massachusetts Oregon Pennsylvania* Program Average

Figure 4b: Cumulative Loan Volume per Capita

through 06/30/00

$/person
Capital Access Programs Page 10

$7.65

$4.84

$3.15

$2.33

$1.70 $1.69

$1.28

0

1

2

3

4

5

6

7

8

9

10

New Hampshire Michigan Oregon Indiana Illinois California Program Average

Figure 5b: Loan Volume per Capita 1999

$/person

Figure 5a: Loan Volume by State 1999

($millions)

California $55.9m

Michigan $47.7m 

Texas 

$29.5 m

Illinois $20.7m

Indiana $13.8m

Oregon $10.4m

All Others $34.0m

Total New Volume = $212 million
Capital Access Programs Page 11

Another benchmark of CAPs’ relative size is CAP lending per firm in a state. Using the 1997

Economic Census to calculate CAP lending per firm produces results nearly identical to those for

the per capita measure since, at the state level, the number of businesses closely correlates with

the total population. Cumulatively, New Hampshire’s CAP lending per firm is the largest at

$2,573 per firm, followed by Michigan at $2,482 and Massachusetts at $1,063. Looking at CAP

lending in 1999 only, New Hampshire is the largest at $290.15 per firm, followed by Michigan at

$246.14 per firm, and Oregon at $124.48 per firm.5

The collected data show no evidence that CAP demand is saturated. Michigan and California,

the largest programs on a cumulative basis – those perhaps most likely to tap-out demand –

continued through 1999 and mid-year 2000 to be among the leaders in new loan volume on

absolute and per capita terms (see Figures 5a and 5b).

Average Loan Size

While the cumulative nationwide average size of a CAP loan is $60,624, there is considerable

variance across states (see Figure 6). Banks in California and Texas originate the largest average

loans, at $153,264 and $88,765 respectively.6

 Wisconsin and Vermont banks originate the

smallest, at $25,566 and $17,497 respectively. However, analysis of the data for all CAPs shows

no strong correlation between loan size and any simple measure of CAPs’ performance, such as

loan volume per capita or loan losses as a percentage of cumulative lending.7

 

5 CAP lending figures per firm are higher than those reported in previous editions of the report due to a change in

the Census statistics used for number of firms per state.

6 The eight loans extended under the Florida CAP in 1999 averaged $218,313.

7 California, however, is an exception, producing both the largest average loan size and loan loss percentage,

Figure 6: Distribution of Cumulative Average

Loan Size Across States

0

1

2

3

4

5

6

$10K - 20K $20K - 30K $30K - 40K $40K - 50K $50K - 60K $60K - 70K $70K - 80K $80K - 90K Over $90K

Number of states
Capital Access Programs Page 12

Financial Products

Different banks use CAPs to make different types of loans. Under CAPs, banks decide how to

deploy the risk-protection afforded by the loan loss reserve. For example, some banks use CAPs

to target a new customer base of small businesses. Other banks use CAPs for the unsecured

portion of a financing package in which the bank will also provide some conventional secured

financing.

The small business community often cites the financing of start-up businesses as an important

funding need not fully satisfied by the private market. The available data appears to show that

CAPs can address some of this need. Oregon reports that through 1999, 30% of its CAP loans

went to start-up businesses. Similarly, Illinois and Arkansas report that in 1999-2000, 27 percent

and 17 percent of CAP loans, respectively, went to start-ups. Table 1 presents statistics from six

states that reported data on CAP lending to start-ups, suggesting that start-ups are a market niche

suitable to the CAP product. 

Table 1. Percentage of CAP Loans Made to Start-Up Businesses by State

State Time Period % of CAP Loans

to Start-up Firms

Arkansas cumulative 17%

Illinois 1999-2000 27%

Massachusetts cumulative 17%

Michigan cumulative 18%

Oregon cumulative 30%

Texas 1999 20%

Loan Losses and Reserve Funds

In June 2000, 691 banks were enrolled in CAPs nationwide and 394 of these were actively

originating CAP loans. Many of these banks have large branch networks.

Cumulative CAP loan losses nationwide totaled approximately $58.5 million through June 2000,

or 3.8% of all loan volume extended. Net of these losses, banks nationwide held over $64

million in their CAP reserve funds in June 2000, equal to 4.1% of the total loan volume

extended.8

 CAP reserves as a percentage of loans currently outstanding would, of course, be a

much higher percentage, since much of the cumulative loan volume ($1.56 billion) has been

repaid.9

 Adding the cumulative losses and remaining loss reserve indicates that public and

private CAP contributions to bank reserve funds have totaled 7.9% of cumulative lending, with

 

although well within the limits of its CAP reserve fund.

8

 Florida, Oregon and Pennsylvania were only able to report losses and reserves through December 31, 1999.

Those December 1999 figures for these states are incorporated into the totals presented here.

9

Data on CAP loans outstanding are unavailable for most states, and therefore CAP reserves as a percentage of

loans outstanding -- the usual measure of the adequacy of a loan loss reserve -- cannot be calculated. One fairly

mature program – Massachusetts – reports that banks’ CAPs reserves equal nearly 10 percent of loans outstanding.
Capital Access Programs Page 13

states contributing a little over half of that amount (some states contribute more than a one-toone match under certain circumstances – see Section 2.2 below).

The data, as well as bank behavior, suggest that current CAP reserves may be adequate to meet

future losses, absent unforeseen circumstances. In some states, many CAP loans are for short

maturities. Data from Illinois, for instance, indicate that over 40 percent of enrolled loans mature

within 3 years. Since remaining reserves across all CAPs are 110 percent of historical losses and

most programs are more than a few years old, with presumably a substantial loan volume having

been repaid (“runoff”), it seems likely that the coverage available on outstanding loans is

sufficient.10 Additionally, some banks with CAP experience in one state are expanding CAP

lending where new states have enacted programs. The leading lenders in Texas’ relatively new

CAP are also leading lenders in CAPs in California and Illinois.

State Leverage

States have varying policies with regard to how much they require banks, borrowers, and the

state to contribute to the reserve fund. States typically match private contributions one-to-one

(that is, dollar-for-dollar), with many states increasing their match rate for target groups or areas,

as is discussed in the next section. All in all, state contributions to the reserve funds typically

range from 3% to 7% of the loan amount, implying public leverage of private funding in a range

from 33:1 to 14:1.

Some states have special strategies to help banks overcome a start-up dynamic in which the first

few loans do not on their own generate enough of a reserve pool to cover a default. For instance,

Pennsylvania, Vermont and Virginia provide an initial $50,000 line of credit to their

participating banks. Other programs address this issue by increasing the public match rate for

banks’ initial loans. For example, Michigan provides a 150 percent match for a bank’s initial $2

million in loans and then reduces the match to one-to-one.11 Other states do not use start-up

incentives at all.

One might expect to see a relationship between the size of a state’s contributions to the reserve

funds and the resulting size of its CAP. New Hampshire’s experience supports this expectation:

The average percentage of the loan contributed by New Hampshire to the loan loss reserve is one

of the largest in the country, nearly 9% of total loan volume, and New Hampshire has the most

far-reaching program in the nation on a per-capita basis. However, across all programs there is

only a weak relationship between public contributions and the size of a program. The fact that

there is not a stronger correlation suggests that state contributions are only one part of a larger

 

10Programs with the lowest ratio of current reserves to historical losses tend to be the largest CAPs in the country.

One explanation of this correlation is simply that larger CAPs tend to be older programs, so that there has been a

longer time frame over which existing loans can go into default. There is a slight negative correlation between the

cumulative size of a state’s program on a per capita basis and its reserve-to-cumulative loss ratio. A second

explanation for the correlation might be that CAPs are larger in states where banks lend more aggressively – and

hence coverage ratios are lower.

11 Other CAPs that report matching contributions on a bank’s initial loans at a greater than one-to-one rate are

Arkansas, California, Illinois, New York City, New Hampshire, North Carolina and Oklahoma.
Capital Access Programs Page 14

story in determining the relative magnitude of state programs. These factors are discussed in

Section 3.

Job Creation and Retention

As stated in previous reports, the data for jobs created or retained by CAP lending should be

viewed cautiously. While the field would benefit from more studies, the reported data suggest

the potential impact of CAP lending. Twelve states provided data on the number of jobs created

or retained through CAP lending, a significant increase from six in last year’s report.

Calculating the amount of CAP loan dollars per job created or retained in these six states shows

substantial variation, from $30,000 per job in one state to $3,600 per job in another. These job

retention and creation numbers are self-reported by the borrower and by the state, and these

figures are not independently reviewed.

However, with these caveats, applying the average employment effect for the twelve reporting

states across the 22 states and municipalities with operating CAPs suggests that as many as

113,000 jobs may have been created or retained as a result of CAPs. These jobs created by the

CAPs are efficiently generated at very little cost to the government. Of the twelve states that

reported this job creation data, the average state subsidy cost per job created/retained is $540.

This is a notable decrease from the $777 six-state average reported for 1998, and suggests that

the field’s ability to efficiently leverage public funds through CAPs is growing.12

2.2 Performance in Lending to Specific Groups

Of the 19 states surveyed, eight states augment their CAP contributions for targeted groups.

Table 1 shows that four states target state-designated Enterprise Zones, and four target on the

basis of other geographical areas. Four states augment their contributions for minority-owned

businesses, two for female-owned businesses and one for disabled-owned businesses.

Most states target by increasing their matching contribution to a bank’s reserve fund, usually by

1.5 or 2 times their ordinary match. For example, Illinois adds another 50% to its loan loss

reserve contribution for loans to minority-owned, women-owned and disabled-owned businesses.

For loans made to borrowers in federal Enterprise Zones and Enterprise Communities, the state

doubles its ordinary contribution. For example, if a lender and borrower in an Enterprise Zone

each contribute 2% to the loan loss reserve account, Illinois will contribute 8% instead of its

usual 4%. Connecticut targets by providing a 30% supplemental loan guarantee for “adversely

affected” urban areas. This “first-loss” guarantee reduces the lender’s exposure and creates an

additional incentive for banks to invest in the targeted communities.13

While data are limited, some states reported data showing that – whether the state targets specific

groups or not – significant percentages of CAP loans are reaching low- and moderate-income

 

12 In addition to a lower average per-job subsidy among the six new states that supplied data on job

creation/retention through June 2000, each state that reported job data for 1998 saw a decrease in per-job subsidy

in 1999-2000.

13 Arkansas provides a similar supplemental guarantee to borrowers located in targeted communities.
Capital Access Programs Page 15

areas as well as minority and female borrowers. In addition, CAPs appear to reach a broad

spectrum of industries.

Table 2: Targeted State Programs

StateDesignated

Zones

Other

Geographic

Zones

Minority

Owned

Businesses

Female

Owned

Businesses

Disabled

Owned

Businesses

Industry

Targeting

Arkansas !

California ! !

Colorado !!! !

Connecticut !

Illinois ! !!!

Indiana ! !

Pennsylvania !

Texas ! !

1) Low- and Moderate-Income Areas / Geographic Targeting. Connecticut reports that

since the inception of its CAP, 174 loans totaling $15.7 million have been made to

borrowers in targeted urban communities – 56 percent of cumulative CAP lending in that

state. Wells Fargo Bank, which continues to originate 72% of all CAP loan volume in

California, reported in 1997 that 28% of its CAP loans in that state went to businesses in

census tracts with median incomes at the low to moderate level. In Connecticut, the

average loan size for borrowers located in low and moderate income areas – $90,200 – is

18% larger than the state average, while Wells Fargo loans in low- and moderate-income

California census tracts were 7% larger than the state average.

2) Minority-Owned Businesses. Nine CAPs reported data on loans extended to racial and

ethnic minority borrowers. Table 3 presents statistics on average loan size to minorityowned businesses and the percentage of CAP loans to minority borrowers in these nine

programs.14

 

14 Pennsylvania doubles its match for CAP loans to minority-owned businesses, but was not able to make available

data on lending to these businesses.
Capital Access Programs Page 16

Table 3. CAP Lending to Minority-Owned Businesses

State statewide %

MOB

% CAP Loans

to MOB

Average Loan

Size – all bus.

Average Loan

Size – MOB

CAPs that Increase Match for Minority-Owned Businesses

Colorado 7% 45% $45,178 $48,336

Illinois 9% 21% $56,982 $82,732

Indiana 4% 3% $47,011 $34,908

CAPs that Do Not Increase Match for Minority Borrowers

Arkansas 5% 19% $39,415 $20,574

Delaware 8% 28% $45,199 $31,587

New York City 21% 22% $54,162 $87,042

Texas 19% 38% $88,765 $55,907

Vermont 1% 1% $17,497 $31,667

Wisconsin 3% 29% $25,566 $26,288

9-CAP Average 16% 17% $48,907 $54,921

Across the nine programs, the average CAP loan extended to a minority borrower

exceeds the average loan size for all types of borrowers by over $6,000. In a number of

these programs, CAPs appear to represent an effective way to reach minority borrowers.

In six of the nine states, for instance, the percentage of all CAP loans extended to

minority borrowers far exceeds the percentage of firms owned by minorities in those

states.15 This is the case in Arkansas, Delaware, Texas and Wisconsin despite the fact

that these states do not target minority-owned businesses by increasing the contribution

match rate for these borrowers. This indicates that banks may find CAP loans to be

especially effective products for reaching minority borrowers with limited or

unconventional credit histories.

3) Female-Owned Businesses. Seven CAPs reported data on lending to women-owned

businesses. Table 4 presents statistics on average loan size to women-owned businesses

and the percentage of CAP loans to women borrowers in these six programs.

 

15 The average percentage of loans to minorities across all nine CAPs is lower than might be expected looking at

each individual CAP because Indiana’s CAP has generated the greatest number of loans – over 2,000 – in its eight

years of existence.
Capital Access Programs Page 17

Table 4. CAP Lending to Women-Owned Businesses

State statewide %

WOB

% CAP Loans

to WOB

Average Loan

Size – all bus.

Average Loan

Size – WOB

CAPs that Increase Match for Women-Owned Businesses

Colorado 37% 8% $45,178 $36,420

Illinois 34% 23% $56,982 $48,046

CAPs that Do Not Increase Match for Women-Owned Businesses

Delaware 35% 29% $45,199 $31,188

New York City 35% 22% $54,162 $81,194

Texas 33% 19% $88,765 $51,483

Vermont 36% 17% $17,497 $20,895

Wisconsin 33% 35% $25,566 $22,801

7-CAP Average 35% 21% $45,747 $39,081

While approximately one out of every three firms in these states in 1992 was womanowned, about one out of every five CAP loans through June 2000 was extended to a

woman-owned business. Average loan sizes for women-owned businesses were smaller

in five of the seven states, and about 86 percent the size of the average loan for all

businesses across all six states.

4) Lending by Industry. Seven states provided information on CAP lending by borrower

industry, and the data show that CAP loans are able to cover a broad spectrum of

business types. The three top industries served by CAPs were retail trade, services and

manufacturing. CAP loans also reached construction, wholesale and transportation firms

with significant frequency, industries that are often not well served by other types of

credit enhancement programs. The available data also indicate that CAP lenders adapt

the program to the needs of particular states. For example, six of the seven states

reported that agribusiness loans represented only 1-5% of total CAP loans extended, but

in Arkansas agribusiness lending comprises 37% of all CAP loans.

3. Key Program Features of Large CAPs

The varied experiences among states in the growth of CAPs suggest that a number of factors

operate together to contribute to overall CAP performance. Using the data in this report, an

informal linear regression analysis attempted to measure the independent contribution of several

factors – including average loan size, state leverage, start-up incentives for banks, and age of the

program – to cumulative loan volume per capita. It found, rather unsurprisingly, that the number

of years a CAP has been in operation was by far the most significant predictor of cumulative

performance. However, the August 2000 survey suggests that other, more qualitative elements

are potentially quite important to the growth of CAPs:

1) Active marketing of the CAP

Many of the largest programs report that regular marketing is extremely important,

particularly in the initial stages of the program. Marketing to banks through meetings
Capital Access Programs Page 18

and phone calls appears to be most important, while marketing to borrowers is less

important in developing a high-volume CAP. Beyond informing banks of the CAP’s

existence, this type of marketing provides an opportunity to answer questions about the

program.

Officials in Illinois, New Hampshire and New York City felt that marketing directly to

banks was especially effective. California and Oregon supplement direct marketing to

banks by working closely with bankers’ associations in their states to increase their

members’ participation. A number of states hold seminars and participate in lender and

economic development conferences. Illinois noted that it visited the centralized

underwriting centers for multi-state banks in order to work directly with lending decision

makers. Many states also noted that they use brochures and mail campaigns to market

the CAP to banks, although some felt that this strategy was less effective.16

 2) Adequate state appropriations for the CAP

Eight CAPs report that either one-time or annual appropriations effectively limit the

amount of loans that can be made under the program.17 In some states, the limit is far

from being reached. Texas, for instance, received a one-time appropriation in 1997 of $7

million, and had only expended $910,000 by the end of 1999. In Massachusetts,

however, the state exhausted its one-time 1993 appropriation of $5 million in early 1999,

and the program was suspended for a year. Even if a state is not hitting its funding limit,

low funding may discourage banks from joining the program, given lenders’ need to

originate a volume of loans sufficient to build an adequate loss reserve.18 Interestingly,

some of the largest programs in the country, including California, Michigan and New

Hampshire, reported that their programs faced no funding limits.

States use a variety of funding sources for their CAPs. Pennsylvania generates the funds

for its CAP contributions from bond financing programs, while Illinois’ CAP program is

supported by its economic development loan program fund. California charges a 1%

Small Business Assistance Fund fee to large companies obtaining environmental revenue

bond financing through the state’s bond issuing conduit. Michigan’s funds come from

revenues received by the state from casinos operated by Native American tribes.

 

16 Michigan, which has operates its CAP since 1986 , no longer performs any direct marketing of the CAP,

preferring to rely on lenders to market the program to borrowers.

17 Under Vermont’s CAP authorizing statute, the state’s exposure under the program is limited to $2 million. To

date, the state has only contributed a cumulative $300,000 to loan loss reserves.

18 Based on the Minnesota CAP’s average loan size, and the state’s average contribution of 8 percent of the loan

amount, the $340,000 that remains from its initial $1 million appropriation would support only 121 more loans.
Capital Access Programs Appendix I-1

 APPENDICES
CAP Data Summary

Data collected as of August 2000

Data based on self-reporting by states

State State pop'n Total # Firms (1997) Cumulative Volume ($) 06/30/00 Cumulative Volume ($) 12/31/99 Cumulative Volume ($) 12/31/98 New Vol. ($) 1/1/00- 6/30/00 New Vol. ($) 1999 Cum. # loans 06/30/00 Cum. # loans 12/31/99 Cum. # loans 12/31/98 

Arkansas 2,551,373 52,310 $10,799,809 $9,524,306 $8,128,718 1,275,503 1,395,588 274 251 205 

 

California 33,145,121 635,570 392,356,908 364,139,726 308,276,553 28,217,182 55,863,173 2560 2401 2048 

 

Colorado 4,056,133 108,833 17,031,923 14,967,201 9,549,412 2,064,722 5,417,789 377 321 250 

 

Connecticut 3,282,031 79,183 27,900,477 26,840,802 25,426,052 1,059,675 1,414,750 365 353 332 

 

Delaware 753,538 18,447 3,525,553 3,525,553 n/a n/a n/a 78 78 n/a 

 

Florida 14,908,230 346,463 1,746,500 1,746,500 -- n/a 1,746,500 14 8 -- 

 

Illinois 12,128,370 251,387 55,614,160 42,099,180 21,443,969 13,514,980 20,655,211 976 744 415 

 

Indiana 5,942,901 117,270 98,911,749 91,369,770 77,544,687 7,541,979 13,825,083 2104 1948 1693 

 

Massachusetts 6,175,169 140,026 148,844,257 135,119,329 135,119,329 13,724,928 -- 2462 2284 2284 

 

Michigan 9,863,775 193,826 481,125,371 447,430,717 399,721,976 33,694,654 47,708,741 8684 8096 7251 

 

Minnesota 4,775,508 111,366 9,043,279 7,946,464 5,437,666 1,096,815 2,508,798 238 226 199 

 

New Hampshire 1,201,134 31,664 81,465,016 77,005,603 67,818,168 4,459,413 9,187,435 2244 2096 1794 

 

New York City 7,447,047 208,911 18,685,812 17,568,913 16,368,913 1,116,899 1,200,000 345 339 308 

 

North Carolina 7,650,789 158,387 14,853,782 14,057,235 11,112,535 796,547 2,944,700 302 282 220 

 

Akron, OH 330,068 14,764 14,334,981 13,906,881 13,806,881 428,100 100,000 265 262 261 

 

Oklahoma 3,358,044 70,333 27,033,293 25,650,942 22,951,353 1,382,351 2,699,589 968 893 760 

 

Oregon 3,316,154 83,784 72,250,470 66,727,692 56,297,985 5,522,778 10,429,707 1694 1605 1479 

 

Pennsylvania 11,994,016 236,759 8,385,347 8,385,347 6,852,642 n/a 1,532,705 210 210 168 

 

Texas 20,044,141 363,791 49,886,123 37,576,062 8,081,697 12,310,061 29,494,365 562 365 76 

 

Vermont 593,740 18,904 8,048,538 7,640,552 6,673,095 407,986 967,457 460 436 366 

 

Virginia 6,872,912 136,268 7,456,851 5,731,540 3,981,982 1,725,311 1,749,558 142 104 59 

 

Wisconsin 5,250,446 33,155 10,251,823 8,961,777 7,819,172 1,290,046 1,142,605 401 363 326 

 

Totals $165,640,640 $3,411,401 $1,559,552,022 $1,427,922,092 $1,212,412,785 $131,629,930 $211,983,754 25,725 23,665 20,494 

Average $70,888,728 $67,996,290 $60,620,639 $6,927,891 $10,094,464 1169 1127 976 

n/a = not available Italicized figures indicate that state only supplied data through 12/31/99
State

Existing 

Reserves 

06/30/00

Cumulative 

Losses 

06/30/00

Total Reserves 

Contribution

Total Public 

Contribution

1999 Public 

Contribution

Total Public 

Contribution as 

% Volume

Participating 

Banks 06/30/00

Participating 

Banks 12/31/98

New Banks 

1999-2000

Active 

Banks 

06/30/00

Arkansas 455,926 245,949 701,875 399,942 50,231 3.7% 10 10 0 4California 12,274,170 26,911,291 39,185,461 16,858,115 2,225,413 4.3% 47 45 2 12Colorado 564,939 337,343 902,282 n/a n/a n/a 12 12 0 9Connecticut 2,821,198 1,293,712 4,114,910 2,784,673 1,030,883 10.0% 29 30 -1 9Delaware 105,695 115,272 220,967 n/a n/a n/a 6 6 0 2Florida n/a n/a n/a 718,250 n/a 41.1% 33 0 33 0Illinois 4,337,203 522,703 4,859,906 2,448,178 880,503 4.4% 55 51 4 25Indiana 7,499,367 3,595,771 11,095,138 4,170,822 438,413 4.2% 31 10 21 32Massachusetts 3,591,570 5,064,392 8,655,962 4,738,345 n/a 3.2% 100 100 0 65Michigan 15,095,000 9,761,195 24,856,195 18,385,000 1,982,765 3.8% 77 69 8 57Minnesota 1,193,676 306,419 1,500,095 656,915 92704 7.3% 34 34 0 34New Hampshire 7,079,444 3,174,345 10,253,789 7,055,457 662,267 8.7% 39 37 2 26New York City 1,135,996 1,096,890 2,232,886 1,137,161 43,875 6.1% 11 11 0 4North Carolina 1,111,798 289,157 1,400,955 735,102 170,031 4.9% 20 26 -6 9Akron, OH 287,070 500,210 787,280 n/a n/a n/a 8 8 0 3Oklahoma 627,516 1,197,215 1,824,731 1,075,877 86,994 4.0% 72 74 -2 28Oregon 1,901,325 2,841,549 4,742,874 2,637,458 220,860 4.0% 25 29 -4 18

Pennsylvania 353,164 128,863 482,028 n/a n/a n/a 6 6 0 4

Texas 2,449,096 421,781 2,870,877 1,262,012 562,068 2.5% 14 11 3 9Vermont 988,475 372,130 1,360,605 245,991 29,198 3.1% 25 24 1 22Virginia 292,177 148,501 440,678 220,339 137,863 3.0% 9 6 3 7Wisconsin 96,054 291,564 387,618 362,549 48,548 3.5% 28 21 7 15Totals 64,260,859 58,616,252 122,877,112 65,892,186 8,662,617 691 620 71 394Average 2,791,250 3,060,041 5,851,291 3,468,010 541,414 4.3% 33 30 3 20

n/a = not availableItalicized figures indicate that state only supplied data through 12/31/99
Capital Access Programs Appendix II-1

Capital Access Program State Laws

State State Law Date Enacted

Arkansas Arkansas Statutes Annotated 15-5-1101 et seq. 1993

California California Health & Safety Code § 44559.1 et seq. 1994

Colorado* Colorado Revised Statutes 29-4-710.5 et seq. 1993

Connecticut* Connecticut General Statutes § 8-167 et seq. 1993

Delaware* Delaware Code Unannotated 49 § 5005 et seq. 1993

Florida* Florida Statutes 19-288.901 et seq. 1996

Hawaii Hawaii Revised Statutes 13 chap. 211D 2000

Illinois* 30 Illinois Compiled Statutes 750/9 et seq. 1997

Indiana Indiana Code 4-4-26 1992

Louisiana* Louisiana Revised Statutes 51.2311 et seq. 1998

Maryland Annotated Code of Maryland Art. 83B 4-207 2000

Massachusetts General Laws of Massachusetts chap. 23A, § 57 1993

Michigan* Michigan Statutes Annotated 3.541 (201) et seq. 1986

Minnesota Minnesota Statutes chapter 116J.876 1989

New Hampshire New Hampshire Revised Statutes chap. 162-A:12 1992

New York City* New York State Consolidated Laws chap. 15 1993

North Carolina North Carolina 1993 Session Laws, chap. 769, § 28.1 (a7) 1994

Ohio (Akron)* Ohio Revised Code 1.166 1995

Oklahoma* 74 Oklahoma Statutes 5085.2 et seq. 1992

Oregon Oregon Revised Statutes 285B.126 1989

Pennsylvania* 73 Pennsylvania Statutes 376.2 1994

Texas Texas Government Code chap. 481, subchap. BB, 1997

§ 481.401 et seq.

Vermont* Vermont Statutes Title 10, chap. 12, § 279 1993

Virginia* Virginia Code 9-228.5 et seq. 1996

Wisconsin* Wisconsin Statutes chap. 560.03 1992

 

* No specific CAP legislation; generic economic development statute used.