United States General Accounting Office 

GAO Report to Congressional Requesters 

October 2003 COMMUNITY AND 

ECONOMIC 

DEVELOPMENT 

LOANS 

Securitization Faces 


Significant Barriers


GAO-04-21


a
Highlights of GAO-04-21, a report to 

congressional requesters 

Community economic development 

(CED) lenders serve the credit 

needs of nonconventional 

borrowers and economically 

distressed areas across the nation. 

However, little is known about this 

industry, its ability to tap private 

sources of capital, and loan 

performance and volume in the 

industry. To provide information 

that would be helpful in 

considering the role that the 

federal government might play in 

facilitating the creation of a 

secondary market for CED loans, 

GAO was asked among other items 

to (1) determine the barriers to 

more widely securitizing CED loans 

and (2) identify options for 

overcoming these barriers and the 

likely implications of these options. 

October 2003 

COMMUNITY AND ECONOMIC 

DEVELOPMENT LOANS 

Securitization Faces Significant Barriers 

CED lenders rely on multiple federal programs that offer grants, loans, 

guarantees, and other support to help fund lending activities. Some of these 

lenders have expressed an interest in finding alternative sources of funding, 

including securitizing the loans that they make. However, the volume of 

CED loans potentially available for securitization is not known. In addition, 

the community economic development industry is characterized by 

nonstandard underwriting, loan documentation and loan performance 

information, and limited mechanisms for securitizing loans. Without greater 

understanding of available loan volume, the capital markets have little 

interest in developing standards or mechanisms for securitizing CED loans. 

CED lenders also face barriers to securitizing their loans. Some of these 

barriers are unique to CED lending, including: limited lender capacity to 

manage a securitized portfolio of loans; the external legal and regulatory 

limitations and requirements governing the use of the funds that these 

lenders receive; and the high cost of originating and servicing CED loans. 

This report describes options that the federal government might exercise to 

address the identified barriers. This report also describes the implications 

that implementing each option might have, including the potential for 

increased federal costs and changes in lenders’ missions. Ultimately, 

securitization may not be a significant alternative for CED lenders until the 

volume of loans available for securitization is better known and lenders are 

convinced of the benefits of participating. 

Wall Street and Main Street Face Barriers to Securitizing Economic Development Loans 

www.gao.gov/cgi-bin/getrpt?GAO-04-21. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William Shear 

at (202) 512-4325 or shearw@gao.gov. 
Contents


Letter


Results in Brief 


Background 


CED Lenders Share Similar Missions, but Markets Targeted and 


Loan Information Vary 

As with the Lenders They Serve, Federal Programs Share Similar 

Missions, but Differ in How They Operate 

Selected Securitization Models for Small Business and CED Loans 

Have Similarities and Differences 

We Identified Barriers to Securitizing CED Loans 

Potential Options Exist to Overcome Barriers, but Most Imply Costs 

or Changes to Federal Programs 

Observations 

Agency Comments and Our Evaluation 

1 

2 

6 

9 

16 

26 

35 

43 

54 

56 

Appendixes 

Appendix I: Objectives, Scope, and Methodology 59 

CED Lender Characteristics and the Performance of Their Loans 59 

Selected Federal CED Programs 60 

Selected Securitization Efforts for CED Loans 62 

Barriers to CED Loan Securitization 63 

Options for Securitization and Their Implications 63 

Appendix II: Model Descriptions 65 

Tables	 Table 1: 

Table 2: 

Table 3: 

Table 4: 

Table 5: 

Table 6: 

Table 7: 

Table 8: 

Table 9: 

Sources of Lender Funding 12


Federal Programs and Type of Assistance Provided to CED 


Lenders 18


Summary of Programs and Their Target Market Criteria 21


Appropriations for CED Lending Have Declined in


Selected Federal Programs (Fiscal Years 1998–2003) 22


Number of Lenders and Dollar Volume of Federal Support 


(Fiscal Years 1998–2002) 23


Securitization Models and Lenders and Borrowers 


Involved 27


Types of Loans Pooled Varies by Model 28


Credit Enhancements Used to Distribute Credit Risks Vary


by Model 32


Federal CED Lending Programs, Lender Types, and 


Sponsoring Agencies Included in Our Review 61


Page i GAO-04-21 Community and Economic Development Loans 
Contents 

Figures Figure 1: 

Figure 2: 

Role of Participants in a Common Securitization Model 

Business and CED Loan Performance Measures 

7 

Collected about Each Lender Type 14 

Figure 3: Levels of Outstanding Securitized Loans Have Not 

Reached the Levels of More Well-Established Models 34 

Abbreviations 

ARC Appalachian Regional Commission


BRV bankruptcy-remote vehicle


CED Community and Economic Development


CDA Commonwealth Development Associates


CDBG Community Development Block Grant


CDC Community Development Corporation


CDFI Community Development Financial Institution


Commerce U.S. Department of Commerce


CRF Community Reinvestment Fund


CSBG Community Services Block Grant


EC/EZ Enterprise Community/Empowerment Zone grant


EDA Economic Development Administration


EDI Economic Development Initiative


HUD U. S. Department of Housing and Urban Development


HHS U. S. Department of Health and Human Services


IRP Intermediary Relender or Intermediary Relending Program


RBEG Rural Business Enterprise Grant


RLF Revolving Loan Fund


SBA U.S. Small Business Administration


SEC U.S. Securities and Exchange Commission


Treasury U.S. Department of the Treasury


USDA U.S. Department of Agriculture


504 CDC Section 504 Certified Development Companies


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Page ii GAO-04-21 Community and Economic Development Loans 
Page 1 GAO-04-21 Community and Economic Development Loans 

A

United States General Accounting Office 

Washington, D.C. 20548 

October 17, 2003 

Congressional Requesters: 

Community and economic development (CED) lenders make loans to 

qualified businesses that are generally unable to obtain suitable financing 

from conventional private-sector lenders. CED lenders rely on a variety of 

funding sources including the federal government, but tend not to rely on 

securitization as a funding source.1 If properly structured, securitization 

represents an option that could offer lenders increased liquidity for 

additional lending and offer borrowers greater availability of loanable 

funds.2 Some of the federal programs that support CED lending have 

considered using securitization to provide lenders greater access to capital. 

This report responds to your July 11, 2002, request for information on CED 

lending. Based on the potential benefits that securitization may offer 

lenders and borrowers, you asked us to describe the characteristics of (1) 

selected federally sponsored CED lenders, (2) the federal programs that 

sponsor them, and (3) selected existing and proposed models for 

securitizing CED loans. You also asked that we (4) determine the barriers 

to more widely securitizing CED loans, and (5) identify options for 

overcoming these barriers and the implications of these options. 

To address the first two objectives, we reviewed studies and other 

documents obtained from lender trade associations, program regulations, 

procedures, and guidance and spoke with program and industry officials 

representing seven federally sponsored CED lenders we were requested to 

review and the federal programs that support them.3 To describe efforts to 

securitize CED loans, we reviewed agency and trade association 

documents and spoke with representatives of organizations undertaking 

securitization efforts. To determine the barriers to securitizing CED loans 

1

Broadly, securitization is a process whereby lenders and others create pools of loans and 

sell to investors securities that are backed by cash flows from these loan pools—thereby 

replenishing funds available for lending. 

2

Lender liquidity is a measure of a lender’s ability to meet its current financial obligations. It 

implies that the quality of the lender’s assets are such that they can be readily converted into 

cash with minimal loss in market value. 

3

Our review does not include lenders identified as Community Development Enterprises 

financed through the Department of Treasury’s New Markets Tax Credit because these 

entities were only recently established. 

Page 1 GAO-04-21 Community and Economic Development Loans 
and potential options for overcoming them, we synthesized information 

from our literature search, as well as information gathered from interviews 

with program officials, CED lender representatives, capital market 

participants, researchers, and others knowledgeable about CED lending 

and securitization. Finally, we developed additional options the federal 

government might exercise for potentially overcoming identified barriers 

and explored the implications of these options, as well as those proposed 

by others. The options for overcoming the barriers often entail additional 

federal costs and, given the scope of this review, we were unable to 

determine whether the benefits would exceed the costs that could result 

from such efforts. Therefore, we do not endorse these options. Also, our 

work focused on access to capital through securitization, not through other 

means. We conducted our work in Washington, D.C.; Philadelphia, 

Pennsylvania; and Manchester, New Hampshire, between October 2002 and 

July 2003 in accordance with generally accepted government auditing 

standards. 

Results in Brief	 While the seven groups of CED lenders we reviewed have similar missions, 

available data show variation in the types of borrowers they serve, the 

investments they make, and how they are capitalized.4 However, little is 

known about the industry as a whole. CED lenders vary in the types of 

loans they make. For example, some lenders tend to focus on operating 

loans, while others may focus on real estate loans. Lenders are funded by 

federal, as well as state, local, private, and philanthropic funding sources. 

Federal funding sources, however, are important for all of the lenders 

included in our review because they provide lenders engaged in high-risk 

lending with low-cost funding. Data on the amounts the lenders invest in 

communities were not current or complete for lenders in our review. In 

addition, because data on lender activity are reported through multiple 

channels, data on the total number of lenders and the amount they invest— 

as a group—in communities are not available. Loan performance data 

were not available or current on all lenders. Finally, because of the various 

4

The seven groups of lenders reviewed are (1) Community Development Financial 

Institutions (CDFIs); (2) Revolving Loan Funds (RLFs); (3) Intermediary Relenders funded 

by the Department of Agriculture’s (USDA’s) Intermediary Relending Program (IRPs); (4) 

Community Development Corporations (CDCs); (5) Small Business Administration (SBA) 

504 Certified Development Companies (504 CDCs); (6) microlenders; and (7) lenders 

supported by Community Development Block Grant (CDBG) entitlement and state grantees. 

Page 2 GAO-04-21 Community and Economic Development Loans 
sources of data on CED lenders, loan performance is not consistently 

defined. Therefore, it is difficult to describe the performance of CED loans. 

The federal programs that support CED lenders have similar missions—to 

improve economic conditions in communities considered to be distressed 

or underserved. However, the type of federal support they provide and the 

targeted lending criteria they use differ. These programs also differ in 

terms of the number and type of lenders they support and awards made. In 

fiscal years 1998—2002 these federal programs provided billions to support 

CED lending in the form of grants, loans, loan guarantees, and equity 

investments. However, federal funding for some of these programs has 

declined in recent years. Some programs use securitization, or have 

considered using securitization, to help lenders in accessing capital 

markets to maintain or expand lending activity. Finally, these programs 

collect and maintain data to oversee lender’s activities using various 

methods and have different reporting requirements. 

The five existing and three proposed securitization models that we 

reviewed illustrate a variety of structures to securitize small business and 

CED loans and vary in the amount of CED loans that they securitize.

5 Each 

of the existing and proposed models varies in terms of the types of loans 

pooled and the method for pooling the loans. All of the models we 

reviewed utilize or propose differing forms of credit enhancements, funded 

by the federal government, participating lenders, or others to limit credit 

risk to investors.6 Accordingly, each of the models distributes the risks and 

benefits associated with securitization differently among participants— 

borrowers, lenders, poolers, investors, and government(s). The structure 

of these models can affect participants’ willingness to engage in 

securitization and cost incurred by the federal government. 

5

The five existing models include those for securitizing SBA 504 program loans, 

unguaranteed SBA 7(a) loans, guaranteed SBA 7(a) loans, and HUD Section 108 guaranteed 

loans, and the securitization model used by the Community Reinvestment Fund—a 

nonprofit secondary market maker for CED-based lenders nationwide. We also reviewed 

three models proposed by various sources—Commonwealth Development Associates' 

(CDA) model proposed under the EDA 2001 securitization demonstration, HUD’s proposed 

CDBG /Section 108 model, and Capital Access Group's proposed Capital Access Program 

securitization model. 

6

A credit enhancement is a payment support feature that covers defaults and losses up to a 

specific amount, thereby reducing investor need for loan-specific information. It acts to 

increase the likelihood that investors will receive interest and principal payments in the 

event that full payment is not received on the underlying loans. 

Page 3 GAO-04-21 Community and Economic Development Loans 
We identified six key barriers to securitization, all of which keep lenders 

from working with capital markets. 

•	 First, borrower demand is not known across targeted markets, and CED 

lenders generally lack incentives—both market-based and federally 

driven—to participate in securitization. As a result, the volume of loans 

that could be securitized is not well understood. 

•	 Second, many CED lenders lack the capacity to securitize their loans. 

For instance, their reliance on small, less-diversified portfolios that 

require intensive servicing results in higher per loan costs. Also many 

lenders do not have financial information—such as their cost to 

originate and service these loans and the expected income from these 

loans—that is needed to assess whether securitization is a viable option. 

Nor can they readily obtain the staffing resources or skills needed to 

expand lending activity that might be required when securitizing their 

loans. 

•	 Third, external requirements—statutory or programmatic—attached to 

funding sources may directly or indirectly inhibit the securitization of 

loans. 

•	 Fourth, CED lenders believe that selling their below-market-rate loans 

would require them to absorb too high a discount to benefit from a 

securitization. 

•	 Fifth, lack of lender standardization and performance information 

impedes securitization by increasing the cost of securitizing these loans. 

•	 Finally, mechanisms available to support securitization for CED loans, 

such as information links between capital markets and lenders and loan 

pool assemblers, are limited in number and capacity. 

We identified a range of options the federal government could use to 

address each of the barriers to securitization. Undertaking any of these 

options could have important implications in terms of cost to the federal 

government, mission of CED lenders, and lender and program 

management. For instance, to address lack of lender participation, 

incentives could be built into existing federal programs for lenders who are 

willing and capable of securitizing their loans. However, such incentives 

might require federal funds, and the extent to which this might result in 

sufficient loan volume to make securitization viable is not clear. To 

Page 4 GAO-04-21 Community and Economic Development Loans 
improve lender capacity, the government could allow for set–asides within 

existing programs for training and technical assistance to lenders designed 

to help lenders improve portfolio management, staff skills, and their 

financial information. This option, however, might reduce the funds 

available to support lending. The government could also remove program 

restrictions that inhibit or prohibit securitization such as restrictions on the 

use of loan repayments, which could affect lender missions. To improve 

standardization and performance information, the government could 

provide incentives for lenders and capital market participants to develop a 

useful level of standardization and performance information tailored to 

CED loans—which could lower the cost of underwriting loans, but could 

also result in lenders moving away from target markets. Such incentives 

could include funding set-asides, changes in program award selection 

criteria, or even increased program funding to those lenders—all of which 

may entail added program costs that should be assessed. Improved 

information on lending activity and loan performance could also help 

managers make better program decisions. To overcome the limited 

mechanisms to securitize CED loans, the federal government could provide 

a variety of different credit enhancements that would improve the 

investment quality of these securities and minimize standardization 

requirements for lenders, but which might also have a negative financial 

impact on the federal budget. 

While we do describe the likely implications of many of the options we 

identified, we did not measure the extent to which each may affect lenders’ 

mission, federal costs, program oversight, and other potential implications. 

Likewise, we did not determine whether the benefits would exceed the 

costs that could result from such efforts. We, therefore, did not endorse 

these options, and this report contains no recommendations. The 

information we present provides a framework for understanding the 

challenges, benefits, and costs of securitization. Based on our findings and 

this framework, the final section in this letter presents some observations 

on the nature of barriers CED lenders face in securitizing loans. 

We provided a draft of this report to the U.S. Department of Agriculture 

(USDA); U.S. Department of Commerce (Commerce); U.S. Department of 

Housing and Urban Development (HUD); U.S. Department of Treasury 

(Treasury); U.S. Small Business Administration (SBA); U.S. Department of 

Health and Human Services (HHS); and the Appalachian Regional 

Commission (ARC). Officials in all agencies provided technical comments 

that we incorporated into the report, where appropriate. The technical 

comments from HHS were from officials in HHS’s Administration for 

Page 5 GAO-04-21 Community and Economic Development Loans 
Children and Families. Generally the agencies did not indicate whether 

they agreed or disagreed with the report’s findings. 

Background	 The federal government funds CED lending through a variety of 

mechanisms, including grants, loans, loan guarantees, and tax 

expenditures. Many government officials, academics, CED lenders, and 

nonprofits have recognized the value of identifying ways to maximize the 

impact of CED dollars. These efforts have resulted in alternative 

mechanisms CED lenders can use to access private, rather than 

governmental, funding for CED purposes. For example, CED lenders have 

worked with local banks by providing subordinate financing.7 Lenders 

have also received equity-like investments from banks. In addition, lenders 

have sold CED loans to replenish loan funds. Many have studied 

securitization of CED loans as a potential option to access additional 

private capital. 

Securitization is a process that packages relatively illiquid individual 

financial assets, such as loans, leases, or receivables with common 

features, and converts them into interest-bearing, asset-backed securities 

with characteristics marketable to capital market investors.

8 As outlined in 

figure 1, the participants in securitization—borrowers, originating lenders, 

pool assemblers, credit raters, investors, and sometimes third-party credit 

enhancers—each assume specific roles during the transaction. 

Additionally, each of these participants derives specific benefits from the 

transaction. For example, borrowers gain access to loanable funds with 

favorable terms—such as longer payment terms and fixed rates—that may 

otherwise be unavailable. Securitization offers originating lenders a tool to 

improve their risk and balance sheet management, as well as potential new 

fee or income streams and the ability to put existing capital to other 

purposes. Securitization also allows the cash flows from pools of assets to 

be structured to match the appetites of investors; thus, investors can 

diversify with access to new securities that satisfy their maturity, risk, and 

return preferences. 

7

In the case of a loan default, providers of subordinate financing have a claim to borrower 

assets that is junior, or secondary, to the claims of the provider of the senior financing. 

8

Anand K. Bhattacharya and Frank J. Fabozzi, ed., Asset-Backed Securities, (New Hope, 

Pennsylvania: Frank J. Fabozzi Associates, 1996). 

Page 6 GAO-04-21 Community and Economic Development Loans 
Figure 1: Role of Participants in a Common Securitization Model 

Investors purchase securities with cash flows that have desirable risk-return and maturity 

characteristics. A single pool can often contain multiple classes, or "tranches," of 

securities. 

The pool assembler legally sells the pool of assets to a "bankruptcy-remote vehicle 

(BRV)," which holds the pool of assets in order to separate the performance and credit of 

the pool from the assembler and originating lenders. The BRV sells securities to investors. 

Occasionally, external credit enhancements are secured from third parties. Third-party 

credit enhancers provide additional assurance to investors of payment of principal and 

interest on the securities, or guarantee or insure some portion of individual loans, assuring 

loan-holders (technically, the BRV), and ultimately investors, payment of principal and 

interest on guaranteed or insured portions of loans. 

Credit raters assess the performance and expected losses (credit quality) of the pool of 

assets, including internal and external credit enhancements, and provide a credit rating on 

the securities to be sold. 

Loan pool assemblers assemble a pool of financial assets from participating lenders and 

stratify the credit and payment positions of cash flows generated from the pool into 

different classes of securities based on investor preferences; arrange for a credit rating; 

and arrange for the sale of the securities to investors through the BRV. 

Originating lenders originate loans that conform to underwriting criteria acceptable to a 

pool of loans and ultimately sell the loan into the pool. Lenders may fund credit 

enhancements to support the credit quality of a pool of loans. The originating lender often 

continues servicing the loan by collecting payments for distribution to the asset pool holder 

(technically, the BRV) and managing impaired loans. 

Borrowers provide collateral and other documented assurances to the originating lender to 

secure the loan, then provide specified payments of principal and interest. 

Investors 

Originating lenders 

Borrowers 

Bankruptcyremote 

vehiclea 

Credit 

raters 

Pool 

assemblers 

Third-party 

credit 

enhancer 

Source: GAO. 

a

Also known as a special purpose vehicle, a bankruptcy-remote vehicle is established to legally 

purchase the financial assets for the purposes of removing the assets from the credit risk associated 

with asset originators or the pool assembler. 

The degree to which participants receive these benefits depends largely on 

how well, or efficiently, the markets for securitized assets are functioning. 

With better current and historical performance data on financial assets, 

capital markets can more easily profile the risk of a pool of similar assets. 

This risk can be divided and sold to investors who are willing to purchase it 

at an acceptable risk-adjusted return (investor-required yield). As the 

markets for particular securitized assets grow more voluminous and liquid, 

and the performance of securitized assets as well as the risks associated 

with securitization become better understood, investor-required yields on 

particular asset-backed securities can decline. Additionally, the 

Page 7 GAO-04-21 Community and Economic Development Loans 
transaction costs of securitizing assets can also decline as the assets 

become better understood. Declining investor-required yields and 

transaction costs can lower the cost of financing for originating lenders and 

ultimately borrowers. Conversely, with inadequate performance data, and 

low volumes of similar financial assets, these benefits may not sufficiently 

materialize for securitization to be a viable financing arrangement for 

originating lenders and borrowers. 

Home mortgages are the most well-established securitization market in the 

United States. Private conduits, such as commercial banks, and 

governmentally sponsored conduits such as the Federal National Mortgage 

Association (Fannie Mae) and the Federal Home Loan Mortgage 

Corporation (Freddie Mac), have combined to securitize trillions of dollars 

of home mortgages over the past three decades. According to the Federal 

Reserve, as of the end of 2002, there were over $3 trillion dollars of 

securitized home mortgages outstanding. With visible and voluminous 

demand for home mortgage financings evident in the late 1960s and early 

1970s, Congress restructured Fannie Mae and created Freddie Mac and the 

Government National Mortgage Association (Ginnie Mae) to provide 

secondary market outlets for home mortgage lenders using private capital.9 

Ginnie Mae pioneered the securitization of the Federal Housing 

Administration and the Veteran’s Administration home mortgages—which 

already had standard underwriting and documentation guidelines, robust 

secondary markets, and benefited from federal guarantees—in 1970. 

Freddie Mac, and later Fannie Mae, did the same for nonfederally 

guaranteed mortgages, developing uniform guidelines for mortgage 

underwriting and documentation, and educating a diverse set of mortgage 

lenders nationwide about the benefits of securitization. 

In addition to home mortgages, financial assets such as commercial 

mortgages, consumer credit receivables, and even small business and CED 

loans have been securitized.10 Today, outstanding securitized commercial 

mortgage and consumer credit receivable volume ranges in the hundreds of 

9

Congress established and chartered Fannie Mae and Freddie Mac as governmentsponsored, privately owned and operated corporations to enhance the availability of 

mortgage credit across the nation during both good and bad economic times. Congress 

established Ginnie Mae as a government-owned corporation within HUD responsible for 

activities including guaranteeing mortgage-backed securities backed primarily by cash 

flows from Federal Housing Administration and Department of Veterans Affairs mortgages. 

10Consumer credit receivables include assets such as auto loans and credit card receivables. 

Page 8 GAO-04-21 Community and Economic Development Loans 
billions of dollars. However, despite favorable regulatory treatment, 

lending institutions have securitized less than $6.2 billion of nonfederally 

guaranteed small business loans from 1994 through 2001. 

11 During this 

same time frame, lending institutions securitized approximately $22 billion 

of SBA-guaranteed small business loans.12 As a rough point of comparison, 

in June 2001 commercial banks held an estimated $450 billion in 

outstanding small business loans.13 In a previous report, we attributed the 

lack of securitized small business loans to the wide variety of small 

business loan products, difficulty communicating the performance of small 

business loans sufficiently and cost-effectively to capital markets, and 

sporadic visible financial benefits for originating lenders and investors to 

securitize these loans.14 

CED Lenders Share 

Similar Missions, but 

Markets Targeted and 

Loan Information Vary 

The seven types of federally sponsored CED lenders reviewed have similar 

missions: to service the credit needs of small businesses and others that 

generally cannot access funding otherwise or are located in communities 

that are considered underserved. However, these lenders differ in the types 

of borrowers they serve, the types of loans they make, and their sources of 

funding. Also, the total number of lenders and the amount they invest in 

communities are not known. Finally, the performance of CED loans is 

difficult to describe because consistent performance data are not available 

for all lenders in our review. 

11Congress passed the Riegle Community Development and Regulatory Improvement Act 

(Riegle Act) in 1994 to remove several legal and regulatory impediments to small business 

and commercial mortgage securitizations, including favorable regulatory capital treatment 

for depository institutions, and preemption of state securities registration and investment 

restrictions. This data is from the Federal Reserve Board and includes pools of 

nonguaranteed portions of SBA 7(a) loans and pools of other non-federally guaranteed 

loans. 

12Federal Reserve Board. Includes pools of guaranteed portions of SBA 7(a) loans. 

13Federal Reserve Board. The board notes that their 1998 Survey of Small Business Finance 

indicates that commercial bank small business loans outstanding represents roughly 65 

percent of all small business lending. 

14U.S. General Accounting Office, Small Business Administration: Size of the SBA 7(a) 

Secondary Markets Is Driven by Benefits Provided, GAO/GGD-99-64 (Washington, D.C.: 

May 26, 1999). 

Page 9 GAO-04-21 Community and Economic Development Loans 
Lenders Have Similar 

Missions in Financing 

Underserved Markets 

All of the lenders we reviewed have similar missions to service CED credit 

needs in low- and moderate-income communities or borrowers that are 

considered to be underserved. Borrowers served by CED lenders are 

perceived by traditional sectors as high risks—that is, they have difficulty 

accessing credit either because they have poor or nonexistent credit 

histories, insufficient collateral, or are start-up businesses with no track 

record. Some lenders also help borrowers gain access to capital from 

conventional sources (for example, banks) by providing a portion of what 

the business needs and agreeing to let the bank recoup its losses first from 

the business’ collateral in the event of default. 

CED lenders employ several strategies to meet their missions. For 

instance, they work extensively with their borrowers and target loans 

rejected by banks. According to lenders with whom we talked and studies 

we reviewed, lenders must work extensively with their borrowers, 

providing loan servicing and technical assistance to help borrowers make 

consistent loan payments and sound business decisions to ensure their 

survival. In addition, lenders also devote more time to their borrowers than 

that required for conventional loans to help borrowers qualify for CED 

loans. 

Lenders Target a Range of 

Borrowers and Products 

and Receive Funding from 

Various Sources 

While overall missions of CED lenders we reviewed are similar, they differ 

somewhat in terms of the types of borrowers they serve, products they 

offer, and the targeted location of their investments. The lenders may 

support a range of borrowers, from poverty-level to moderate-income. 

Many of the lenders focus on start-up businesses. Some lenders have more 

specific targets. For example, microlenders serve businesses with five or 

fewer employees and capital of $25,000 or less. Lenders may offer loans for 

working capital, equipment, or real estate; however, some concentrate 

more on one type of loan than others. For example, 504 Certified 

Development Companies focus on commercial real estate and equipment 

loans, while microlenders concentrate on working capital and equipment 

loans. Some lenders service specific geographic areas. For instance, ARC 

Business Development Revolving Loan Fund lenders service borrowers in 

the Appalachian region. 

As shown in table 1, lenders receive funding from various sources including 

federal, state, local, private, and philanthropic sources of capital as well as 

earned income. According to lenders, trade association representatives 

and studies we reviewed, federal funding sources are important because 

Page 10 GAO-04-21 Community and Economic Development Loans 
they provide low-cost capital for high-risk loans they finance. In addition, 

federal funding makes up a significant portion of the capital available to 

some lenders. We also found that the source of federal funding for these 

lenders varies. For instance, federal funding for CDFIs comes from the 

U.S. Department of Treasury. In addition, some CDFIs—particularly those 

that finance microloans, and that are also classified as CDCs—also receive 

funding from HUD, SBA, Commerce, USDA, and HHS. 

Finally, lenders generate income from interest earned and administrative 

fees they charge borrowers for services and loans. According to lenders 

and other research, lenders rely on these earned-income sources to cover 

their operating costs. Earned income also is important to many lenders 

because other funding sources do not allow lenders to use a portion of the 

funding to cover operating costs. 

Page 11 GAO-04-21 Community and Economic Development Loans 
Table 1: Sources of Lender Funding 

Nonfederal sources Federal sources 

State Local Private 

Earned 

Income Othera Treasury Commerce HUD USDA SBA HHS ARC 

Community Development 

Financial Institutions X X X X X X X X X X X 

(CDFI) 

Microlenders X X X X X X X X 

Community Development 

Corporations (CDC) X X X X X X X X X X 

Revolving Loan Fund 

lenders (RLF)b X X X X X X X X X X X 

Intermediary Relenders 

(IRP) X X X X X 

504 Certified 

Development Companies X X X X 

(504 CDC) 

Lenders supported by 

HUD’s Section 108 and X X 

CDBG programsc 

Sources: Lender trade associations and federal programs. 

a

Other includes individual investors, philanthropic investors, and utilities. 

b

Includes EDA- and ARC-sponsored RLFs. However, RLFs may receive funding from multiple federal 

sources. 

c

HUD Section 108 and CDBG lenders are local government agencies or nonprofit intermediaries. 

Total Number of CED Loans 

and Amount of CED 

Lending Are Not Known 

Data on the number and amount of CED loans invested in communities are 

not current or complete for all lenders targeted by our review. For 

example, data on the number and amount of loans these lenders make are 

sometimes only collected for a sample of lenders. Data on the number and 

amount of loans for microlenders were collected in September 2000, but 

cover only 308 of the 554 identified microlenders. Similarly, the most 

recent reporting time frame for 504 CDC data is fiscal year 2001 but covers 

about 272 lenders. Data on the amount and number of CDFI loans covers 

389 of the 800—1000 CDFIs identified. The latest survey on Community 

Development Corporation lenders was completed in 1997 and indicated 

that there were an estimated 3,600 CDCs nationwide—as many as 776 

Page 12 GAO-04-21 Community and Economic Development Loans 
reported making CED loans. 15 Data on loan numbers and amounts for 

IRPs cover only 29 out of the 400 IRPs identified by the trade association 

that represents them. 16 Data are reported on 422 Department of Commerce 

RLFs and 1,012 lenders supported by Section 108 and CDBG programs. 

However, the total universe of these lender types is unknown.17 

In addition, it is impossible to aggregate available data to determine the 

total number of CED lenders and the number or dollar volume of loans they 

make because some lenders may be counted in more than one lender 

group. For instance, as indicated previously, both microlenders and CDCs 

may also be CDFIs. Many lender types can be supported by HUD’s Section 

108 and CDBG grant programs. Given the data limitations, the total volume 

of loans and dollars invested in communities through CED lending is also 

unknown. 

Loan Performance Data Are 

Limited, but Attempts Have 

Been Made to Improve Data 

Loan performance data, including data on loan delinquencies, defaults, and 

loss rates were not available, complete or defined consistently for both 

ongoing and one-time data collection efforts (see figure 2).18 For example, 

loan performance data are not available for CDCs at all. The CDFI Fund 

and other ongoing sources of data on CDFIs do not track default rates at 

all. Conversely, ongoing data collection on IRPs covers defaults and 

15The National Congress for Community Economic Development, a trade association for 

Community Development Corporations conducts a survey on these lenders. The next 

survey is not scheduled for completion until 2004. 

16While data on the number and amount of loans made by IRPs are limited, USDA, which 

currently funds 400 IRPs is drafting a new template to be used by IRPs requiring lenders to 

provide more detail on their lending activity. 

17Data on the total number of RLFs and HUD-supported lenders are unavailable. RLFs do 

not have a central organization that maintains data on the RLF industry as a whole. While 

an attempt to collect RLF data was made by the Corporation for Enterprise Development in 

1997, it was not successful because reliable data were not available at that time on many of 

the RLFs. Also, RLFs funded by HUD’s CDBG program were excluded from the count. 

HUD’s recent attempt to identify its grantees using Section 108 and CDBG dollars for CED 

lending resulted in the identification of 1,012 state and local entitlement grantees. However, 

because these grantees make direct loans to businesses and to nonprofit intermediaries 

(such as RLF lenders), identified grantees do not represent the universe of the lenders 

supported by the programs. 

18Delinquency refers to a situation where an entity falls behind agreed payment dates in 

making payments. Defaults occur when the lender no longer believes that the business will 

make payments. Losses are the monetary losses to the loan holder in the event of borrower 

default, less any monetary value recovered from the liquidation of loan collateral. 

Page 13 GAO-04-21 Community and Economic Development Loans 
delinquencies, but only at an aggregate level—not at a loan level. In fact, 

only EDA, SBA, and ARC collect loan-level performance information on an 

ongoing basis (for the RLF, 504 CDC, Microlenders, and ARC/RLF 

programs). 

Figure 2: Business and CED Loan Performance Measures Collected about Each Lender Type 

Lenders supported by HUD's 

Section 108 and CDBG programsb 

Community Development financial 

institutions (ABT Survey)d,e 

RLFs (EDA RLFs 

Rutgers University)a 

Data collection efforts 

unknownc 

Defaults Delinquencies Losses Recovery 

Unpaid 

principal balances 

Lenders Performance measure status 

Community Development financial 

institutions (CDFI data project)f,g 

Microlendersh 

RLFs (EDA Commerce)i,j 

RLFs (ARC)k 

IRPl 

504 Certified 

Development Companiesm 

Community 

Development Corporationsn 

Number 

of lenders 

reported 

Total 

estimated 

number 

of lenders 

One-time data collection efforts 

Ongoing data collection efforts 

422 546 

51 

54 

389 

174 

450 

35 

270 

Up to 776 

800-1,000 

800-1,000 

554 

546 

35 

29 400

270 

3,600 

Legend 

Data collected at the loan level


Data collected at the aggregate level


Data are not collected


Sources: Reports maintained by lender trade associations and federal programs. 

a

Rutgers University, “EDA RLFs—Performance Evaluation,” 2002. These data do not include non-EDA 

RLFs. 

b

Urban Institute, “Public-Sector Loans to Private-Sector Businesses: An Assessment of HUDSupported Local Economic Development Lending Activities,” 2003. 

c

While the total number of lenders is not known, loans covered by the 51 lenders in the Urban Institute 

Study account for over 50 percent of third-party lending for CED loans made, and up to 58 percent and 

Page 14 GAO-04-21 Community and Economic Development Loans 
at least 96 percent respectively, of third-party CED loan dollars tracked in HUD’s CDBG and Section 

108 state and local entitlement programs. Therefore, coverage is fairly high. 

d

Abt Associates, Inc., “CDFI Fund Secondary Market Survey of CDFIs,” 2002. 

e

Abt surveyed 108 CDFIs but received only 54 responses from the survey on loan-level performance 

data. In addition, all measurements were not reported on all loans. For instance, recovery amounts 

are available on fewer than 2 percent of the loans. Measurements for delinquencies reported 30 days 

past due are available on 44 percent of the loans included. 

f

Corporation for Enterprise Development, CDFI Data Project FY 2001. 

g

The latest CDFI Data Project survey indicates all respondents surveyed did not report on each data 

point requested. Therefore, these measures are available on only 389 of all 512 CDFIs surveyed. 

CFED also disclosed that they could not guarantee the reliability of the data. 

h

SBA quarterly reports for the 174 microlenders participating in SBA’s microloan program; and Aspen 

Institute, “ Directory of U.S. Microenterprise Programs,” 2002, for the estimated number of 

microlenders, totaling 554. 

i

EDA program data as of May 2003. 

j

Data are collected but are maintained in hard copy at various regional offices and, therefore, not 

useable. 

k

ARC program data as of February 2003. 

l

National Association of Development Organizations Biennial Survey data as of March 2003. 

mSBA 504 program data 2003. 

n

National Congress for Community and Economic Development 1999 Census. 

EDA and HUD recently completed one-time studies on RLF lenders, 

lenders funded by Section 108 and CDBG, respectively, that included 

analysis of loan-level performance data (see figure 2). In addition, the 

CDFI fund has received and consolidated loan-level data as part of its 

ongoing Secondary Market Feasibility Study. We attempted to obtain 

summary data from these sources on the dollar amount and number of 

loans in default in order to estimate a cumulative default rate for each 

program. Although CDFI Fund does not collect default data, they recently 

began collecting loan-level data and tracked information on loan write-offs. 

We, therefore, attempted to obtain CDFI write-off data as a proxy for 

default measures. However, we found that loan-level data from the CDFI 

Fund lacked data on the timing of write-offs. This information was 

requested from the lenders in the study’s survey; however, only 10 percent 

of the reported loans included the date of write-off. Without knowing the 

timing of defaults, it is not possible to account for differences in default 

rates attributed to the age of a loan. According to data provided by Rutgers 

University, non-real estate, loans made by EDA/RLFs between 1988—1995 

Page 15 GAO-04-21 Community and Economic Development Loans 
have, on a weighted average basis, a 4-year cumulative default rate of 4 

percent.19 The ultimate default rate cannot be calculated until loans have 

had an opportunity to reach maturity. Comparable data on HUD loans 

were not available at the time of this report. 

Where loan performance measures did exist in aggregate form, they were 

defined inconsistently across lenders. For instance, delinquencies for IRPs 

are defined as loans up to 90 days past the due date, whereas delinquencies 

are defined for CDFIs as failure to make a payment as early as 31 days and 

up to 90 days or more past the due date. Defaults for EDA RLFs are defined 

as 60 days past due, but not written off; whereas, the defaults for lenders 

supported by HUD’s Section 108 and CDBG programs are defined as more 

than 90 days delinquent with no further payments expected. 

As with the Lenders 

They Serve, Federal 

Programs Share 

Similar Missions, but 

Differ in How They 

Operate 

We reviewed 11 federal programs that fund the seven CED lenders included 

in our study. These programs are administered by EDA, Treasury, HUD, 

USDA, SBA, ARC, and HHS.20 The programs have a similar purpose in that 

each was established to improve economic conditions in communities 

considered distressed or underserved. However, the programs differed in 

how they achieved their purposes and the size and level of activity. Some 

programs in our review have experienced budget reductions. We also found 

that several programs have considered securitization as an option to 

increase access to capital. Finally, few programs regularly collect 

information on the performance of lenders and the loans they make. 

Consequently, little information is known about the dollar volume or 

number of loans that some of these federal programs have funded to 

support CED lending in communities across the country. 

19These data should be viewed carefully. Data on loan performance are derived from 

semiannual reports prepared by RLFs. According to EDA officials, use of RLF grant money 

may not be covered by RLF audits. We did not assess the reliability of these data. 

20HHS also administers the Community and Economic Development Discretionary Grant 

Program. According to HHS officials, beginning in 2000, these grants may be used for 

funding RLFs. In 2002, HHS made fewer than 10 grants to RLFs under this program. 

Page 16 GAO-04-21 Community and Economic Development Loans 
Federal Programs Have 

Similar Purpose but 

Different Requirements and 

Forms of Support 

The 11 programs we reviewed were established to improve economic 

conditions in distressed or underserved communities. However, the 

programs differed in the form of federal assistance offered to CED lenders, 

and the targeting of assistance to specific geographic areas, borrowers, or 

businesses. 

As noted in table 2, 6 of the 11 programs in our review helped fund CED 

lending through grants only; one program used loans only; two used loan 

guarantees only; one used a combination of loans and loan guarantees; and 

another used a combination of grants, loans and equity investments. The 

programs provide lenders with funds that may be loaned to borrowers and 

the proceeds from repayments on the loans may be used to make additional 

loans for community and economic development.21 All but one of the 

programs allowed lenders to establish their own rates and terms.22 In 

general, programs required that lenders’ applications include a discussion 

of how they planned to use the funds, which might include lenders’ 

targeting criteria for borrowers, interest rates, and terms. Finally, all but 

the 504 CDC program receive some level of government subsidy. 

21For the 504 CDC program, loan repayments go directly to investors and are, therefore, 

unavailable for relending. 

22SBA sets the interest rate on 504 CDC loans. 

Page 17 GAO-04-21 Community and Economic Development Loans 
Table 2: Federal Programs and Type of Assistance Provided to CED Lenders 

Loan 

Federal program Loan Grant guarantee 

Intermediary Relending Program X 

(IRP) 

Rural Business Enterprise Grant X 

(RBEG) 

Economic Adjustment Assistance X 

Program (EDA RLF) 

Business Development Program X 

Revolving Loan Fund (ARC RLF)a 

Community Development Block X 

Grant (CDBG) 

Section 108 loan guarantee X 

Community Services Block Grant X 

(CSBG) 

Empowerment Zone/Enterprise X 

Community Grant (EZ/EC) 

Financial Assistance component X X 

of CDFI Fundb 

10 504 Certified Development X 

Company (504 CDC) 

11 Microloan Direct and Loan X X 

Guarantee programs 

Source: Federal program documents. 

a

ARC is authorized to make loan guarantees but has not used this authority in the last 13 years. 

b

Also offers equity investments, deposits, and credit union shares. 

•	 The seven grant programs we reviewed permit grantees to use funds for 

operating RLFs, as well as for other economic development activity— 

for example, acquisition or development of land, or provision of public 

water and sewer facilities.23 

•	 Two loan programs—USDA’s IRP, and SBA’s Microloan program—offer 

lenders loans with low rates and relatively long repayment terms. For 

23HHS’s CSBG and EZ/EC programs are among these. According to HHS officials, Illinois is 

the only state that uses HHS CSBG funds for the purpose of economic development 

activities such as establishing RLFs. 

Page 18 GAO-04-21 Community and Economic Development Loans 

1 

2 

3 

4 

5 

6 

7 

8 

9 
example, IRPs receive loans at 1 percent interest to be repaid within 30 

years. The low cost of the federal loan could enable the lender to pass 

on low loan payments to borrowers. SBA’s Microloan program makes 

loans to lenders that lenders then use to make microloans to eligible 

borrowers. Lenders may receive loans of up to $750,000 to be repaid 

within 10 years. Each lender is limited to a maximum of $3.5 million 

outstanding at any one time. SBA looks to the lending intermediary to 

pay its loans in full, regardless of the payment history of individual 

borrowers. Borrowers, unable to obtain credit from a traditional 

lending institution, also benefit from the technical assistance to improve 

their business’ chance of success.24 

•	 The three loan guarantee programs—HUD’s Section 108 and SBA’s 504 

Certified Development Company (504 CDC) and Microloan programs— 

offset all or a part of the credit risk of loans by providing participating 

lenders with a loan guarantee on all or part of the loan payments in the 

event of a borrower default. In the Section 108 program, the principal 

security for the loan guarantee is a pledge by the applicant community 

or the state (for nonentitlement communities) of its current and future 

CDBG funds. Under the 504 CDC program, SBA guarantees loans made 

by 504 CDCs at market interest rates to be paid over 10 or 20 years.25 

The 504 CDCs provide small businesses with fixed-rate, long-term loans, 

primarily for buildings, land, equipment, and machinery (not to exceed 

40 percent of the total project cost). A private lender must provide at 

least 50 percent of the project cost. According to SBA officials, the 

lenders benefit from SBA’s guarantee because they are in a first lien 

position, which lessens their credit risk. Under the Microloan program, 

SBA guarantees loans that are made to intermediaries by private sector 

lenders. 

•	 Finally, the Financial Assistance component of the CDFI Fund offers 

grants, loans, and equity investments to CDFI lenders. However, lenders 

24SBA’s Microloan program allows grant funds to be used only for technical assistance and 

training of microborrowers and potential microborrowers. According to SBA officials, such 

technical assistance is sometimes viewed as a substitute for collateral and is intended to 

help ensure repayment of Microloans. 

25The 504 CDC makes its loans with proceeds from a guaranteed debenture. Loan payments 

owed to the 504 CDC match the payments the 504 CDC owe investors under the debenture. 

If the borrower defaults, SBA buys the debenture back from the investors. Lenders must 

reimburse SBA for 10% of the loss it incurs in connection with the 504 CDCs’s default on the 

debenture. 

Page 19 GAO-04-21 Community and Economic Development Loans 
must obtain nonfederal matching funds in a form and value similar to 

the CDFI Fund’s award. For instance, a lender receiving a grant award 

from the CDFI Fund must match the award dollar for dollar with other 

grant money. Likewise, lenders receiving loan and equity awards must 

match the loan dollar for dollar with other loan and equity money. 

The programs also varied in whether and how they target geographic areas, 

borrowers, or businesses. Table 3 illustrates the range of geographic areas 

targeted by the programs in our review. For example, both USDA programs 

target rural areas, the ARC program targets Appalachia, and other 

programs target eligible areas that they define as economically distressed.

26 

Similarly, table 3 shows that many of the programs we reviewed require 

that eligible borrowers create jobs or otherwise improve economic 

conditions in the areas that the borrower’s business or project will 

impact.27 Likewise, some programs have established target eligibility 

criteria for borrowers that include credit qualifications. For example, in 

EDA’s Economic Adjustment Assistance Program, borrowers are not 

eligible unless they are unable to obtain a loan with acceptable terms and 

conditions from a traditional lending institution. Finally, some programs 

limit eligibility to specific types of borrowers. For instance, SBA’s 

Microloan program requires that borrowers be small, for-profit 

businesses.28 

26Appalachia includes all of West Virginia and parts of 12 other states: Alabama, Georgia, 

Kentucky, Maryland, Mississippi, New York, North Carolina, Ohio, Pennsylvania, South 

Carolina, Tennessee, and Virginia. The term “economically distressed” is defined differently 

among programs. For instance, EDA defines economically distressed as urban or rural 

communities that are experiencing high unemployment, low per capita income, and other 

conditions, including sudden economic dislocations due to industrial restructuring and 

relocations or natural disasters. Other programs may use different terminology to indicate 

targeted economically distressed areas. 

27ARC’s Business Development program allows borrowers to be located outside of the 

Appalachian region; however, the business or project to be funded must provide jobs or 

other economic benefits within the region. 

28A borrower may also use Microloan proceeds to establish a nonprofit child care business. 

Page 20 GAO-04-21 Community and Economic Development Loans 
Table 3: Summary of Programs and Their Target Market Criteria 

Targeting criteria 

Job creation 

Geographic Low income and Borrower 

Federal program areas populations preservation credit Types of entities supported 

Intermediary Relending Program (USDA 

IRP) X X X Start-up, expansion of existing businesses 

Rural Business Enterprise Grant (USDA 

RBEG) X X Start-up, expansion of existing businesses 

Economic Adjustment Assistance 

Revolving Loan Fund (EDA RLF) X X X Start-up, expansion of existing businesses 

Business Development Revolving Loan 

Fund (ARC RLF) X X X X Start-up, expansion of existing businesses 

Community Development Block Grant 

(CDBG) X Various for-profit or nonprofit businesses 

Section 108 Loan Guarantee X Various for-profit or nonprofit 

businesses 

Community Services Block Grant X Xa Start-up, expansion of existing 

(CSBG) businesses 

Enterprise Community/ X X X Various 

Empowerment Zone Grant (EZ/EC) 

Financial Assistance component of X X Various 

CDFI Fund 

504 Certified Development Company X X X Small, for-profit businesses 

(504 CDC) 

Microloan Direct and Loan Guarantee X X X Small, for-profit businesses 

programs 

Sources: Federal program documents and Catalog of Federal Domestic Assistance. 

a

Illinois CSBG program requires borrowers to hire at least one new full-time equivalent CSBG eligible 

employee for each $20,000, or any portion thereof, of CSBG monies borrowed. 

Federal Programs Differ in 

Size, Level of Activity 

In general, as shown in table 4, programs ended fiscal years 1998—2003 

with lower funding levels than they began. In the most recent three years, 

the Section 108 and 504 CDC loan guarantee programs, which securitize 

CED loans, have required less funding than most other CED programs. In 

these years, the 504 CDC had no appropriations because the present value 

of the estimated cash inflows from fees and recoveries equaled the 

estimated cash outflows from claims. Table 4 illustrates the levels of 

appropriations for those programs where data were available for fiscal 

years 1998—2003. 

Page 21 GAO-04-21 Community and Economic Development Loans 
Table 4: Appropriations for CED Lending Have Declined in Selected Federal 

Programs (Fiscal Years 1998–2003) 

Dollars in millions 

2003 

Federal program 1998 1999 2000 2001 2002 (estimate) 

EDA—RLF Granta $29.9 $34.6 $34.6 $49.5 $40.9 40.6 

Treasury—CDFI (FA) b 43.0 75.8 66.8 47.1 34.3 31.8 

HUD—Section 108 Loan 

Guaranteec 9.0 10.0 29.0 29.0 14.0 

SBA—504 CDC Loan 

Guaranteec 166.0 34.0 5.0 0 0 

USDA—IRP Loan 17.0 17.0 17.0 19.0 13.0 20.0 

SBA—Microloan Direct Loand 0 2.0 2.0 3.0 1.0 

Sources: Federal Budget Appendixes for 1998 through 2004 and federal agency data. 

Note: Six programs were unable to provide information on the dollar amount of annual appropriations 

used to capitalize CED lenders. HUD CDBG (State-Administered and Entitlement Cities) and HHS 

EZ/EC programs do not allocate appropriations by type of activity (that is CED lending) funded. The 

USDA RBEG program does not receive an earmark in appropriations for RLF spending. RBEG 

recipients may use the funds for a variety of purposes, including capitalization of an RLF. 

Appropriations for the HHS CSBG program were not included because, as noted elsewhere in this 

section, according to HHS officials, Illinois is the only state known to use CSBG funds for CED lending 

purposes. ARC receives one appropriation to support all administrative and programmatic activity. 

Hence, there is no budget specifically for the Business Development Revolving Loan Fund program. 

The appropriation is allocated amongst the 13 states, and the commission decides to approve the 

funding for individual plans submitted by states based upon how the proposed project meets the 

agency’s mission strategy. 

a

Only includes funds for RLFs that help communities adjust to sudden and severe economic 

dislocation (SSED/RLFs), and long term economic deterioration (LTED/RLFs). Does not include grant 

funds used for defense and disaster assistance. Appropriated funds for these other types of economic 

adjustment grants varies from year-to-year and has declined in recent years. 

b

Includes grants, loans, and equity investments made from the CDFI Fund. 

c

Appropriations for loan and loan guarantee programs are based on assumptions regarding the 

performance of the loans. The ultimate cost to the government could be higher or lower if actual loan 

performance differs from these assumptions. 

d

Appropriations for the SBA Microloan loan guarantees were zero for all fiscal years 1998–2002 and 

the 2003 estimate, except in fiscal year 2000, when SBA did not report the budget authority for the 

program. However, fiscal year 2000 outlays for the SBA Microloan loan guarantees were $1 million. 

The federal programs we reviewed also differed in the number of lenders 

participating in the program, ranging from as few as 35 lenders in ARC’s 

Business Development program, to as many as 546 in EDA’s Economic 

Adjustment Assistance RLF program. Most of the programs were able to 

provide information on the number of lenders and the number and dollar 

volume of program awards—whether loans or grants—made to CED 

lenders. HUD CDBG and HHS EZ/EC and CED programs were the only 

Page 22 GAO-04-21 Community and Economic Development Loans 

6.0 

0 

4.0 
exceptions. The two loan guarantee programs, 504 CDC and Section 108, 

issue notes that are sold to investors. The volume of loan guarantee 

commitments is noted in table 5. We found that there was a great deal of 

variation in the level of program activity between these programs. 

Table 5: Number of Lenders and Dollar Volume of Federal Support (Fiscal Years 

1998–2002) a 

FY 1998–2002b 

Dollar volume


Number of lenders of support


Federal program (agency) supported (in millions)


Intermediary Relending Program (USDA) 273 $167.5 

Rural Business Enterprise Grant (USDA) 364 45.6 

Economic Adjustment Assistance (EDA)

c 546 24.4 

Business development program (ARC) 35 33.7 

Section 108 loan guarantee (HUD) d N/A 1,800.7 

Community Services Block Grant (CSBGIllinois) 38 49.0 

Financial Assistance (FA) component of 

CDFI Fund (Treasury)e N/A 267.0 

504 CDC program (SBA) 272 11,524.0 

Microloan program Direct Loans (SBA)f 174 111.2 

Source: Federal agency data. 

Note: N/A data is not available. 

a

Federal support may consist of grants, loans, loan guarantee commitments, and other investments. 

For loans and loan guarantees, the amount shown is the face value of the loan. 

b

Business development program (ARC) covers FY 1977 through February 14, 2003, and the Illinois 

CSBG program covers FY 1984–2002. 

c

Data on the number of lenders supported by EDA’s Economic Adjustment Assistance program covers 

the period 1975-2002, and includes Disaster Assistance and Defense RLFs. However, dollar volume 

amounts cover the period noted in the table (1998-2002), and reflect grants made to SSED and LTED 

RLFs only. 

d

A Section 108 grantee may reloan the proceeds of a loan guarantee to fund loans to a third-party 

borrower either directly or through a nonprofit intermediary (i.e., a RLF or CDC). 

e

CDFI’s Financial Assistance includes core and intermediary component programs. These amounts 

include grants, loans, deposits, and equity investments. 

f

Amounts for SBA’s Microloan program include support for direct loans only, not loan guarantees. 

Page 23 GAO-04-21 Community and Economic Development Loans 
Several Programs Have 

Considered Securitization 

Several of the programs in our review have studied or are presently 

undertaking securitization efforts. For example, Treasury’s CDFI Fund 

recently commissioned a survey of its CDFIs to study the feasibility of 

developing the secondary market for loans made by its members. In 1999, 

EDA initiated a demonstration project that provided financial assistance to 

support RLFs wishing to securitize a portion of their loan portfolio. The 

pilot resulted in three RLFs successfully securitizing or selling loans. In 

addition to the Section 108 loans HUD currently securitizes, HUD 

sponsored a study to collect extensive information on the loans made by its 

CDBG and Section 108 awardees to third-party businesses and nonprofit 

organizations, in part to assess the potential for creating a secondary 

market for these loans. Other programs have made some efforts to 

determine the feasibility of securitizing loans made by their lenders. In 

1999, the ARC program removed language from its guidance allowing its 

RLFs to sell their loans. Officials noted that grantees were uninterested in 

securitization for several reasons, including grantees’ easy access to 

additional capital through the ARC grants. After a successful sale of IRP 

loans made in Colorado, in November 1999, USDA piloted a first attempt to 

sell IRP loans nationally. According to USDA officials, the pilot generated 

little interest because of the strict requirements for lender participation. To 

date, USDA has not established formal regulations to support 

securitization. SBA securitizes 504 CDC loans. Finally, our review also 

found that some programs have prohibitive or inhibitive program 

requirements governing the use of the funds that limit lenders’ ability to 

securitize their loans. We address this issue in more detail later in the 

report. 

Federal Programs Vary in 

Efforts to Collect and 

Maintain Information on 

Lender Activity and Loan 

Performance 

The programs differed in the type of information they collected on lender 

activity, the performance of lenders’ loan portfolios, and how the 

information was maintained. Information that lenders were required to 

report also varied widely. For example, the CDFI Fund requires lenders to 

report on the amount, number, and type of loans that CDFI lenders make. 

In contrast SBA’s Microloan program required information on account 

activity supported by bank statements, as well as an account of the status 

of each loan in the portfolio. Other items that some programs required 

lenders to report included the financial condition of the lender and impact 

information—such as the number of jobs created and retained. 

In addition, the frequency of reporting required by lenders differed by 

program. Three programs—USDA’s IRP, RBEG and SBA’s Microloan— 

Page 24 GAO-04-21 Community and Economic Development Loans 
required that lenders submit quarterly reports; two programs—EDA RLF29 

and ARC’s Business Development—required semiannual reports; and six— 

504 CDC, CDBG, EZ/EC, CSBG, CDFI, and Section 108—required annual 

reports. 

Further, our review found that regardless of how data are collected, there is 

little information about the volume of lending activity supported by and 

loan performance of some of the programs in our review. Programs in EDA, 

ARC, and Treasury required that lenders provide ongoing information on 

the loans in their portfolios, often including the loan amount, term, interest 

rate, and losses.30 However, as mentioned earlier, they are not consistently 

defined, and do not all contain information at the loan-level. Further, four 

of the programs in HUD, EDA and Treasury only recently began collecting 

loan-level information because they undertook one-time, loan-level data 

collection efforts.31 

Finally, these programs differed in whether they maintained performance 

information on paper or in a database and whether the files were kept in a 

central location or office. Only programs in Treasury maintained lender and 

loan information in a database, and only programs in ARC and Treasury 

maintained annual report information on lenders and their loans in a 

central location.32 

29However, grantees can graduate to annual reporting upon consent of the agency. 

30The only exception to this is the CSBG program. According to HHS officials, Illinois is the 

only state in the country that uses CSBG funds for economic development lending purposes. 

The program has 38 local Community Action Agencies operating RLFs. The program 

administrator told us that he is intimately familiar with the lenders and their loan portfolios. 

As indicated in figure 2, performance data for CDFIs is currently collected at the aggregate 

level. However, Treasury has recently proposed that CDFIs report performance information 

annually at the loan level. 

31In providing comments on the report, HUD officials informed us that while they do not get 

information on loan performance data targeted in our report, HUD’s Integrated 

Disbursement and Information System includes information on the type of assistance 

provided and the terms of assistance including interest rates and amortization periods. 

32The Illinois CSBG program also maintains data on lender activity in a database in a central 

office. We were unable to document the extent to which SBA maintains data on loans made 

by lenders supported in its 504 CDC program and Microloan programs. 

Page 25 GAO-04-21 Community and Economic Development Loans 
Selected Securitization 

Models for Small 

Business and CED 

Loans Have Similarities 

and Differences 

We reviewed five existing and three proposed securitization models 

designed to provide greater access to capital for small business and CED 

lenders. Each of the eight models exhibit similarities and differences in 

terms of (1) the types of lenders and borrowers served, (2) the types of 

loans pooled and methods for pooling, (3) the distribution of financial 

benefits and risks among participants, and (4) their outstanding securitized 

volumes. Less is known about the proposed securitization models since 

they do not currently engage in market transactions. 

Types of Lenders and 

Borrowers Served Vary 

As shown in table 6, these models serve, or would serve, private, nonprofit, 

and governmental lenders. For example, the two models securitizing SBA’s 

7(a) guaranteed and unguaranteed loans serve mostly depository lenders 

such as commercial banks and some nondepository lenders such as finance 

companies. The SBA 504 program serves only private nonprofit 

corporations called CDCs, while the existing and proposed Section 108 

models serve or would serve CDBG-funded state and local governments 

and development agencies. The Community Reinvestment Fund (CRF) 

may serve nonprofit, for-profit, and governmental community development 

lenders eligible to sell loans. Similarly, the proposed CDA model would 

serve those lenders eligible to sell loans. 

Table 6 also shows a wide variety of borrowers served by these models. For 

example, the SBA 504 model finances small businesses who have qualified 

for conventional loans backed by commercial real estate loans with senior 

bank participation, whereas the CRF model has provided financing to 

businesses ranging from start-up microenterprises to marginal for-profit 

and nonprofit borrowers. While all models generally loan to for-profit 

businesses, some are restricted to small businesses (SBA models) and 

others may also serve nonprofit borrowers (CRF and Capital Access 

models). 

Page 26 GAO-04-21 Community and Economic Development Loans 
Table 6: Securitization Models and Lenders and Borrowers Involved 

Model Lenders Borrowers 

SBA 504 Program Certified Development For-profit small businesses that 

guaranteed Companies have qualified for conventional 

loans 

SBA 7(a) guaranteed Commercial banks, credit For-profit small businesses that 

unions, small business lending 

companies and other nonbank 

lenders 

have demonstrated they could 

not obtain financing without the 

7(a) program 

SBA 7(a) Commercial banks, credit For-profit small businesses that 

unguaranteed	 unions, small business lending have demonstrated they could 

companies and other nonbank not obtain financing without the 

lenders 7(a) program 

HUD Section 108 CDBG grantees and their For-profit or nonprofit borrower 

guaranteed designated lenders 

Community Nonprofit, for-profit, and Local business, affordable 

Reinvestment Fund governmental CED lenders housing, and community facility 

(CRF) borrowers 

Proposed Nonprofit, for-profit, and Small business borrowers not 

Commonwealth governmental CED lenders served by local commercial 

Development financial institutions 

Associates (CDA) 

Proposed CDBG grantees and their For-profit or nonprofit borrower 

CDBG / 108 designated lenders 

unguaranteed 

Proposed CDFI lenders Minority businesses, nonprofits, 

Capital Access commercial real estate 

Program variation 

Sources: SBA, HUD, CRF, CDA, Capital Access Group. 

Types of Loans Pooled and 

Methods for Pooling Vary 

These models securitize a variety of loan products to serve the borrowers 

and lenders described above. Table 7 details similarities and differences in 

the type and characteristics of loans that may be pooled in each model, 

including loan purpose, collateral positions, loan terms, and rates. For 

example, while each of the models accepts commercial real estate and 

business equipment loans into their loan pools, the models vary in their 

acceptance of working capital and community facility loans. Additionally, 

senior or subordinate collateral positions on these loans vary by model. For 

instance, the two SBA 7(a) models prohibit subordinate loans, while the 

SBA 504 and Capital Access models allow only subordinate loans. One 

proposed model, CDA, would only purchase seasoned loans rather than 

committing in advance to securitizing loans meeting certain underwriting 

Page 27 GAO-04-21 Community and Economic Development Loans 
standards. Terms of the loans that each model may accept vary slightly; all 

of the models would purchase long-term loans between 10 and 20 years, 

but only one model—the SBA 504 model-–does not purchase loans with 

maturities less than 10 years. Variation in loan rates also exists. For 

instance, all of the models allow fixed-rate loans to be purchased, but three 

of the models prohibit variable-rate loans. Most of the loans securitized by 

the two SBA 7(a) models included variable-rate loans. Four of the models 

purchase or would purchase only market-rate loans. Two purchase or 

would purchase market and below-market-rate loans, and the remaining 

two models purchase below-market-rate loans only. While data on average 

loan size was not readily available for most models, the two models that 

provided this information demonstrated a wide divergence in average loan 

sizes: $165,000 for the SBA 7(a) loans in fiscal year 2003 compared with 

$1.5 million for the Section 108 Loan Guarantee program since 1995. 

Table 7: Types of Loans Pooled Varies by Model 

Proposed models 

Capital 

HUD Access

Section 108 

guaranteed 

Community 

Reinvestment 

Fund 

Commonwealth 

Development 

Associates 

CDBG / 

SBA 504 

Program 

SBA 7(a) 

guaranteed 

SBA 7(a) 

unguaranteed 

Section 

108 

program 

variation 

Types of loans 

Commercial Xa X X X X X X X 

real estate 

Community X 

facilities 

Business Xb X X X X X X X 

equipment 

Working capital X X X X X X 

Loan position 

Senior X X X X X X 

collateral 

position 

Junior X X X X X X 

collateral 

position 

Page 28 GAO-04-21 Community and Economic Development Loans 
(Continued From Previous Page) 

Proposed models 

Capital 

Access 

SBA 7(a) 

unguaranteed 

HUD 

Section 108 

guaranteed 

Community 

Reinvestment 

Fund 

Commonwealth 

Development 

Associates 

CDBG / 

SBA 504 

Program 

SBA 7(a) 

guaranteed 

Section 

108 

program 

variation 

Loan maturity 

Less than 10 X X X X X X X 

years 

10 to 20 years Xc X X X X X X X 

Loan interest rates 

Fixed X X X X X X X X 

Variable X X Xd X 

Market rate X X X X X X 

Below market X X X X 

rate 

Underwriting criteria 

Advance loans X X X unknown X 

Seasoned X X X X X unknown 

loans 

Sources: SBA, HUD, CRF, CDA, Capital Access Group. 

a

90 percent of all loans. 

b

10 percent of all loans. 

c

90 percent of loans are 20 years. 

d

For interim financing only. 

Only SBA’s 7(a) models and CRF hold loans on balance sheets of the pool 

assemblers until they assemble enough loans to pool and securitize. Other 

models predetermine the timing of their securities issuances, and 

sometimes their loan originations, in advance. For example, SBA’s 504 

program anticipates regular and predictable monthly issuances of its 20-

year securities backed by CDC-originated, SBA-guaranteed loans. The 

Section 108 Loan Guarantee model also issues notes to investors in a 

regular and predictable manner—each year at the beginning of August. In 

between these public offerings, HUD provides interim variable-rate 

financing to CDBG grantees through a money market fund in Pittsburgh. 

(Appendix II contains brief descriptions of the structures for each 

securitization model.) 

Distribution of Risks and As explained in the following sections, models distribute interest rate risk 

Benefits Vary among Models (the risk of financial loss due to changes in market interest rates) and 

Page 29 GAO-04-21 Community and Economic Development Loans 
Interest Rate Risks Are 

Distributed Differently 

Credit Risks Are Distributed 

Differently 

credit risks (the risk of financial loss due to borrower default) among 

various participants differently. Benefits of various securitization models 

also vary among participants. 

The models distribute interest rate risk differently among participants, 

depending on whether loans allowed in the loan pool are fixed-rate or 

variable-rate, whether or not loans are held for extensive periods of time by 

lenders and loan pool assemblers until they can be sold (warehousing) to 

investors, and how these participants fund the loans they hold. Interest 

rate risk for lenders, loan pool assemblers, and investors depends on the 

terms to maturity of their own assets and liabilities, and their interest rates. 

For example, an investor in a long-term, fixed-rate asset would not face 

interest rate risk if this asset was funded with a long-term, fixed-rate 

liability with the same term. Such asset funding would lock in an interest 

spread (interest earned on the asset or interest paid on the liability) and 

negate the impact of interest rate movements on earnings. However, an 

investor that funds long-term, fixed-rate assets with short-term liabilities 

would face interest rate risk because a future increase in interest rates 

could require the investor to roll over the short-term liability when it came 

due into a higher-rate, short-term liability and narrow or reverse the 

interest rate spread. Similarly, a variable-rate asset if funded by a variablerate liability with a lower rate would curtail interest rate risk. However, 

funding a variable-rate asset with a fixed-rate liability would create interest 

rate risk. A future increase in the variable rate on the liability above the 

fixed rate on the asset could create a negative spread. Borrowers of 

variable-rate loans could find their cost of borrowing becoming less 

affordable if interest rates increased, but could benefit from declines in 

interest rates. Borrowers of fixed-rate loans benefit when interest rates 

rise, but because business borrowers typically are penalized for prepaying 

loans, they may not benefit from declines in interest rates. 

Credit risk is also distributed differently among participants in the models 

we reviewed. Investors assume limited or no risk relative to other 

participants, depending upon the amount and type of credit enhancements 

included in each model. As shown in table 8, all models use some form of 

internal (assumed by the lender, borrower, or securitizer) or external 

(third-party) credit enhancement to determine the credit risk assumed by 

all participants. The three models where the federal government assumes 

all credit risk require no additional internal or external credit 

enhancement. The five models where the federal government takes little or 

no credit risk result in other participants (usually lenders) assuming credit 

risks through internal credit enhancements. CRF uses, and CDA proposed, 

Page 30 GAO-04-21 Community and Economic Development Loans 
multiple internal and external credit enhancements. CRF, a nonprofit, uses 

foundation grants and program-related investments to fund some of its 

credit enhancements.

33 The CDA model envisions a similar credit 

enhancement structure using public or private funding. Finally, while the 

Capital Access model does not specifically propose a publicly funded credit 

enhancement, virtually all 20 states that currently have Capital Access 

lending programs do provide state funding to loan loss reserve funds 

assigned to each participating lender, which may be used as credit 

enhancements if authorized by state law. 

Credit enhancements can take a variety of forms. External credit 

enhancements rely on third parties to provide additional assurance of 

timely payment of principal and interest to investors. These enhancements 

can be governmentally provided (for example, loan guarantees) or 

privately provided (for example, loan guarantee insurance or letters of 

credit). With external enhancements, the credit quality and expected 

performance of the asset pool is often based on the credit quality of the 

external enhancement provider. Internal credit enhancements are not 

dependent on third parties and are often funded by lenders. These 

enhancements include senior or subordinate positions, in which cash flows 

from the pool of assets are structured so that the higher credit quality 

“senior” securities would fail to receive timely cash flows only after lower 

credit quality subordinated securities fail to receive their cash flows. 

Internal enhancements also include over-collateralization, in which the 

face value of the assets in the pool are greater than the face value of 

securities issued; excess spread, in which the difference between the cash 

flowing into an asset pool and the cash flowing out of a pool to security 

holders is set aside in a reserve fund to cover future, unexpected payment 

delays or losses; and loan loss reserves, in which monies are set aside to 

cover future unexpected cash flow delays or losses. Occasionally, such as 

with CRF, loan originators may be required to replace nonperforming loans 

with performing loans according to loan substitution agreements. Lender 

recourse are financial obligations of lenders to make a loan pool whole if 

the portion of the loan pool provided by that lender fails to perform. 

33Program-related investments include loans, loan guarantees, mortgage investments, and 

equity investments that are made by foundations such as the Ford Foundation or MacArthur 

Foundation for many CED purposes, to multiple CED entities. The foundation can receive 

favorable tax treatment from the IRS if the Program-related investments receive belowmarket-rates of return. Program-related investments can provide financial benefits to the 

foundation, as well as further the mission of the foundation and the receiving CED entities. 

Page 31 GAO-04-21 Community and Economic Development Loans 
Table 8: Credit Enhancements Used to Distribute Credit Risks Vary by Model 

Proposed models 

Common- Capital 

Credit 

enhancement type 

SBA 504 

Program 

SBA 7(a) 

guaranteed 

SBA 7(a) 

unguaranteed 

HUD 

Section 108 

guaranteed 

Community 

Reinvestment 

Fund 

wealth 

Development 

Associates 

CDBG / 

Section 

108 

Access 

Program 

Variation 

External 

Governmental X X X X 

Private Xa X 

Internal 

Senior / subordinate X X X X 

Overcollateralization X X 

Excess spread X 

Loan loss reserve X X X 

Recourse to lender X 

Loan substitution X X 

Private or publicly Public Public Public or Public Private Private Not Private 

placedb private specified 

Credit rating No No Yes No No Yes Yes No 

Sources: SBA, HUD, CRF, CDA, Capital Access Group. 

a

In addition to external foundation monies, CRF may attempt a rated security that will include some 

external guarantee insurance on the senior tranche securities. 

b

Public offerings of securities must meet Securities and Exchange Commission (SEC) registration and 

disclosure requirements. In a private placement, securities issuers can avoid the costs of the 

registration and reporting process required of a public offering as long as there is no solicitation of the 

public, the investors are sophisticated in business matters, and investors have access to certain 

information. 

Benefits Are Distributed These securitization models distribute benefits differently among 

Differently	 participants. Investors can diversify their portfolios with new securities 

that have desirable risk, return, and maturity characteristics. For example, 

a number of institutional investors, particularly state or local and religious 

pension funds have been investing in “socially responsible” investments for 

over two decades, provided they could achieve market-rate returns with 

sufficient loss protection to satisfy their “prudent person” investment 

Page 32 GAO-04-21 Community and Economic Development Loans 
requirements.34 As noted earlier, pension funds hold longer-term, fixed-rate 

investments for portfolio management purposes. These models provide 

lenders opportunities to better manage their risk and financial positions by 

selling certain loans they have originated from their portfolios and to 

further their missions by replenishing capital available for new loans or 

other purposes. For example, CRF’s ability to warehouse CED loans 

improves CED lenders’ ability to sell loans on occasions when the benefits 

of selling the CED loans are most clearly visible to CED lenders. SBA’s 

attempts at regular and predictable monthly issuances of its securities 

backed by SBA-guaranteed 504 loans allows a more consistent mechanism 

for 504 CDCs to sell loans, rather than hold long-term loans in their 

portfolios thereby freeing their capital for other purposes. Borrowers in 

each of the models benefit from access to capital that would otherwise be 

unavailable. 

Volume of Outstanding 

Securitized Loans Have Not 

Reached the Volume of 

More Well-Established 

Models 

Figure 3 shows the total amount of outstanding securitized loans for wellestablished securitization models versus models for securitizing CED 

loans. Models with assets such as home mortgages, commercial 

mortgages, or consumer financings show the greatest amount of 

outstanding securitized loans. These models have been in existence for 

many years. Conventional home mortgages, for example, have been 

securitized for over 30 years. These industries have developed standards 

for documents and underwriting that enable wider securitization. The 

existing CED models we reviewed have not reached the level of 

securitization of the more well-established models. Among the CED 

models, the two SBA guaranteed models have a far greater amount of 

outstanding securitized loans than the other three models—7(a) 

unguaranteed, Section 108 guaranteed, and CRF. 

34Prudent person rules allow investment managers or fiduciary trustees the flexibility to 

make financial decisions regarding asset-types and rates of return that an ordinary, 

reasonably well-informed person would exercise. Prudent person rules tend to discourage 

speculative transactions, placing the potential for higher incomes and capital gains in a 

secondary position to preservation of capital. 

Page 33 GAO-04-21 Community and Economic Development Loans 
HUD Section 108 

Figure 3: Levels of Outstanding Securitized Loans Have Not Reached the Levels of 

More Well-Established Models 

Dollars in billions 

3,064.74 

694.80 

266.78 

621.41 

0 

3 

6 

9 

12 

15 

Dollars in billions 

10.20 

12.70 

2.10 2.12 

0.06 

3,500 

3,000 

2,500 

2,000 

1,500 

1,000 

500 

0 

d

e 

Federally related

eg ga t home mor a

b

pools

Private home

eg tga mor

 pools	

cial 

e

Commer

g ga

A 7(a) SBA 7(a) SB

i Community

Consumer credits

A 504 debentures SB

f guaranteed loans

h 

Reinvestment Fund

unguaranteed loans

guaranteed loans

g

c -backed

securities

t mor

Well-established models Less-established models 

Sources: Federal Reserve Board, SBA, CRF, and HUD. 

a

Federal Reserve Bulletin, Table A33, July 2003. Outstanding principal balances of Federal National 

Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Association (Freddie Mac), and 

Government National Mortgage Association (Ginnie Mae) guaranteed or insured mortgage-backed 

securities. Includes one- to four-family mortgages. 

b

Federal Reserve Bulletin, Table A33, July 2003. Outstanding principal balances of mortgage-backed 

securities issued through private mortgage conduits. Includes one- to four-family mortgages. 

c

Federal Reserve Bulletin, Table A33, July 2003. Outstanding principal balances of nonfarm, 

nonresidential, mortgage-backed securities issued through private mortgage conduits. 

d

Federal Reserve Bulletin, Table A34, July 2003. Includes outstanding balances of all pools of 

securitized credits, including revolving and nonrevolving credit. 

e

SBA reported data as of September 30, 2002. 

f

SBA reported data as of September 30, 2002. 

g

SBA reported data as of September 30, 2002. This number represents loan balances at the time of 

securitization, not outstanding loan balances as of September 30, 2002. 

h

HUD reported data as of August 29, 2003. 

i

CRF reported data as of December 31, 2002. This number represents loan balances at the time of 

securitization, not outstanding loan balances as of December 31, 2002. This number excludes notes 

Page 34 GAO-04-21 Community and Economic Development Loans 
backed by roughly $41 million (loan balances at the time of securitization) of CED loans that were not 

issued through a special purpose vehicle. As of December 2002, these notes had an outstanding 

principal balance of about $1 million. 

We Identified Barriers 

to Securitizing CED 

Loans 

We identified six categories of barriers for either lenders or capital markets 

investors in securitizing CED loans. First, uncertain borrower demand 

exists across targeted markets, and CED lenders generally lack incentives 

to participate in securitization. Second, management capacity for 

securitizing loans is limited. Third, external requirements attached to 

funding sources may directly or indirectly inhibit the securitization of CED 

loans. Fourth, CED lenders believe that selling below-market-rate loans 

would require them to absorb too high a discount to profit from a 

securitization. Fifth, lack of lender product standardization, 

documentation, and loan performance information impedes securitization 

by increasing transaction costs. Finally, mechanisms available to support 

securitization for CED loans are limited. 

Uncertain Borrower 

Demand and Limited Lender 

Interest Limit the Ability to 

Securitize 

According to studies, lenders, programs, and their associations, current 

and future borrower demand is not understood across target markets, and 

CED lenders do not see the benefit of securitization. Borrower demand— 

borrower’s need for capital in target markets served, given the risk levels 

lenders can absorb—is not understood by lenders, programs, and capital 

market participants across target markets because it can be volatile and is 

not consistently measured. In some federal programs, for instance, 

measurements of current borrower demand are assessed through lender 

annual reports. Other programs and their lenders also use proxy 

measurements of demand.35 In addition, there are no mechanisms or 

standards for forecasting future borrower demand for such loans, making it 

difficult to determine what borrower demand might be across markets. 

Moreover, borrower demand is unpredictable, in part due to changes in 

local conditions in some markets. For some targeted communities, the 

favorable economic climate of the 1990s prompted conventional lenders to 

move down market (that is, lend to more risky borrowers), thereby pushing 

demand for CED loans into areas where CED lenders were less willing to 

take on further risk. 

35For example, CDFI ’s trade association noted a “deployment rate,” which is used as a proxy 

for the percentage of loanable funds that are actually loaned out. 

Page 35 GAO-04-21 Community and Economic Development Loans 
According to several CED lenders, securitization studies, and reviews of 

federal agency securitizations, lenders lack incentive to participate in 

securitizations. For instance, EDA’s securitization pilot study found that 

the primary barrier to securitizing RLF loans stemmed from the fact the 

lenders did not want to sell their loans.36 According to key officials 

knowledgeable about one of the four demonstration projects, lenders did 

not find the deal attractive because they had access to cheaper capital 

through the EDA grant program. Additionally, lenders would not commit 

loans for sale into the loan pool in advance because they were unsure 

whether good borrowers would be available to whom they could relend the 

sale proceeds. Also, the Department of Commerce’s Office of Inspector 

General recently found that some RLFs funded by EDA were carrying 

excessive capital reserves and required them to return these funds to the 

program, and that EDA monitor the RLF to ensure continued compliance. 

These lenders would not need the liquidity benefits from securitizing their 

loans. According to program officials in ARC, lenders funded by ARC do 

not wish to securitize their loans and are now prohibited from doing so. 

Officials explained that there were a number of reasons why ARC grantees 

did not want to securitize including loss of interest on loans they hold; 

limited yields accrued from securitizing their loans; and limited need for 

liquidity given readily available grant funding they receive through the ARC 

program. Preliminary results from the Department of Treasury’s secondary 

market feasibility study indicates that while about one-third of the 

respondents have sold at least some loans they originated, CDFI 

participation in the secondary market for loans remains small. Many of the 

markets have not traditionally worked with CDFIs because of the small 

typical size of the CDFI loans, their nonstandardized loan portfolios, and 

concerns about the lenders’ ability to meet loan-servicing requirements. 

About 23 percent of the respondents reported not knowing enough about 

the secondary market to participate. USDA piloted an effort to securitize 

IRP loans in 1998 but, according to program officials, it failed because the 

requirements for participation were too restrictive for most of the lenders 

to meet. For example, lenders who could not demonstrate an ability to 

repay the entire principal balance on their loan to USDA were ineligible to 

participate in any sale of the assets from their portfolios. HUD’s Section 

108 loan guarantee program, one of our five existing securitization models, 

is proposed for elimination in fiscal year 2004, according to the Office of 

36Kelly Robinson, “Expanding Capital Resources for Economic Development: An RLF 

Demonstration.” (Washington D.C.: Economic Development Administration, 2001). 

Page 36 GAO-04-21 Community and Economic Development Loans 
Management and Budget.37 A recent HUD study cited the program’s 

collateral requirements and lengthy approval process as the two major 

reasons for declining program usage. 38 Senior HUD program officials cited 

the elimination of the Economic Development Initiative (EDI) program as 

the principal reason for the decline in use of the Section 108 program in 

fiscal year 2001. Although the volume of lending has increased since that 

time, it has not returned to the pre-2001 loan volume level. 

We identified other reasons for the lack of lender interest in the 

securitization efforts described above. First, the benefits of securitization 

are not always clear to lenders. Second, as indicated earlier, some of the 

lenders depend on income streams generated by their portfolios, making it 

difficult for some of them to sell portions of their portfolios. CED lenders 

that do not diversify their portfolios are particularly vulnerable to 

interruptions in the stream of income coming from a smaller pool of loans. 

During favorable economic times, the market in which CED lenders 

operate is pressured by competition from conventional lenders, thereby 

diminishing the demand for CED loans. While a number of securitization 

efforts have been undertaken, given uncertain borrower demand for CED 

loans and limited lender interest in securitizing loans, it is uncertain what 

volume of CED loans might be available for securitization on a wide scale. 

Without greater certainty, capital market participants do not have a reason 

to invest in developing a market for securitizing CED loans. 

Insufficient Capacity Limits 

Lenders’ Ability to 

Participate in Securitization 

Limited lender capacity—constrained by factors such as reliance on small 

portfolios, insufficient financial information, and an insufficient number of 

staff or inadequate staff skills—limits some lenders from being able to 

participate in securitization. Many CED lenders’ portfolios contain only or 

mostly small loans. For instance, the average loan size for microlenders is 

$11,600. In addition, lenders work extensively with their borrowers to help 

them qualify for loans. This requires more time than required to make 

37A review of trends in HUD’s unexpended balance report shows expiring balances in the 

program going from $22.6 million in 1997 to $109.2 million in 2001. These were 1-year 

appropriations that were not used at the end of the period. According to HUD, for the past 

several years, the actual demand for the program has been substantially below the loan 

guarantee level requested or provided in appropriations. HUD also recognized that grantees 

have not utilized the program at higher levels in part because of their reluctance to pledge 

future grant funds as collateral. 

38These collateral requirements refer to the additional security Section 108 borrowers must 

provide beyond the pledge of future CDBG program funds. 

Page 37 GAO-04-21 Community and Economic Development Loans 
conventional loans and is often necessary to ensure borrower success. 

Although lenders operate this way to meet their mission, one study 

indicates it results in higher per loan costs, which in turn can increase the 

subsidy required on each loan financed. 

According to studies, lender trade associations, and private-sector officials, 

lenders do not have sufficient financial information to determine how 

much of a discount they could absorb. To ensure that an asset an investor 

purchases provides market yields, capital market participants require 

lenders to sell loans at a discount to at least cover the additional risk— 

including interest rate risks and credit risks—they might incur from 

securitizing loans. Lenders might benefit from securitization if they could 

sell their loans at a price that best met their current financial needs. 

However, according to trade and program officials, some lenders do not 

have adequate financial information to determine whether a given price is 

or is not in their best interest, given the discount they would have to absorb 

in the sale. For instance, some may not know how much it was costing 

them to originate and service these loans and the income they could expect 

to earn from these loans. With better information, lenders would be better 

able to determine whether the discount being requested was appropriate 

and beneficial, given their knowledge of the performance and value of the 

loans in their portfolios. 

In addition, studies and lender trade associations indicate lenders lack 

sufficient staff and staff with appropriate skills to manage the increased 

activity they believe securitization would create. According to a Ford 

Foundation study on CDFIs, many of these CED lenders offer salaries and 

benefits that are significantly lower than those attached to jobs with similar 

responsibilities and scope in the private sector.

39 As a result, these lenders 

may have a hard time competing for highly qualified and desirable 

candidates. Further, lender trade associations with whom we spoke noted 

that many CED lenders lack staff with the expertise to manage the 

increased workload lenders might incur from portfolio sales. In addition, 

some CED lenders experience difficulty originating and servicing loans, 

including working out impaired loans, in a timely manner because staff 

lack expertise and experience. The uncertainty about lender experience is 

factored into the discounts charged by the markets. The Ford Foundation 

39 Brody, Weiser, Burns Business and Organizational Consulting, Strategies to Increase 

Community Development Finance—a Ford Foundation CDFI, Study Phase II, January 

2002. 

Page 38 GAO-04-21 Community and Economic Development Loans 
study notes that while these impediments tend to be true across a range of 

CDFI lenders, the extent of these impediments vary by lender. For 

example, many of the larger loan funds have been able to increase salaries 

enough to have significant success in attracting staff from banks and other 

financial institutions, while the smaller loan funds have had much less 

success in doing so. 

External Requirements May 

Prevent or Serve as a 

Disincentive for 

Securitization 

Lenders receive funds from various sources and must comply with the 

various requirements or laws governing how the funds must be spent. 

These requirements may negatively impact CED lenders’ ability to sell their 

loans to third parties, ultimately preventing securitization. The impact 

could be direct or indirect. For example, some CED lenders receive funds 

from more than one federal source and often underwrite loans to different 

specifications, as determined by the various federal regulations governing 

the funds. Disparate external requirements indirectly impact securitization 

because they serve as a disincentive for CED lenders to develop standard 

underwriting procedures, thus increasing the difficulty and costliness of 

structuring a securitization. 

Several federal programs offer illustrations of how lending requirements 

may inhibit securitization. Some CED lenders reject the idea of securitizing 

loans made with federal funds because some federal programs, such as 

EDA, require that lenders use the proceeds on the sale of a loan to make 

subsequent loans with the same purpose. For example, an EDA RLF selling 

a disaster assistance loan would have to use the proceeds on that loan sale 

to make additional loans for disaster assistance. In addition, lenders in 

HUD’s CDBG program that wish to sell their loans must ensure that the 

buyer will uphold requirements to meet HUD national objectives.40 Some 

requirements have a direct impact on lenders’ participation in 

securitization. For example, ARC prohibits CED lenders in its program 

from selling the loans they make with ARC funds. 

40These national objectives include benefiting low- and moderate-income persons, 

preventing or eliminating slums or blight, and addressing conditions that pose a serious and 

immediate threat to the heath and welfare of communities served. 

Page 39 GAO-04-21 Community and Economic Development Loans 
Lenders Believe BelowMarket-Rate Products Will 

Not Meet Market 

Requirements without 

Substantial Discounts 

CED lenders’ missions, along with the purpose behind the supporting 

federal programs largely dictate the loan products and services lenders 

offer. As such, CED lenders generally offer below-market interest rates or 

other flexible, nonconforming loan terms to small businesses that are 

generally unable to obtain reasonable credit terms from traditional lending 

institutions. Capital markets require discounts when securitizing belowmarket-rate loans so that the effort will result in investments with market 

yields, cover transaction costs associated with securitization, and offset the 

uncertain performance of the underlying asset. To cover potential credit 

concerns, capital markets may also require that lenders provide a credit 

enhancement to offset the uncertainty of loan performance. Some lenders 

believe that the discount or credit enhancement that investors would 

require for securitizing their loans would be too great. Some report that 

capital market investors would require higher discounts than they would 

for securitizing other assets because CED loans are not well understood. 

On the other hand, some federal program officials fear that should 

securitization become an option for CED lenders to obtain additional 

capital, lenders would shirk their mission in favor of lending to more 

conventional borrowers. 

Even if lenders were only required to accept a discount to offset the belowmarket interest rate, they have a disincentive to sell their loans. When 

holding loans, lenders account for the value of loans by using the unpaid 

principal balance, less any allowance for loss—called net book value. 

However, if a lender were to sell a loan, it would have to recognize as a loss 

the difference between the sales price and net book value. When 

purchasing below-market-rate loans, investors would require a sales price 

below the unpaid principal balance to obtain a market yield—requiring 

lenders to recognize a loss and creating a disincentive to sell loans. In 

effect, selling loans would require a lender to recognize the market value, 

rather than the higher book value of their loans. 

Lack of Standardization and 

Inadequate Performance 

Information Inhibit 

Securitization 

CED lenders currently operate independently of each other, resulting in 

nonstandard loan underwriting, documentation, and servicing. CED 

lenders also lack an infrastructure for consistently recording the 

performance of lenders and loans. As mentioned previously, the sources of 

capital and the missions of CED lenders encourage CED lenders to 

underwrite and service loans tailored to meet the unique needs of 

borrowers in their communities. CED lenders also use varying definitions 

and documents and utilize differing servicing policies. Additionally, CED 

Page 40 GAO-04-21 Community and Economic Development Loans 
lenders have difficulty providing sufficient and consistent performance 

information in a useable way. For example, few lender groups have a 

facility for aggregating current loan-level performance information across 

lenders. Lender reporting may or may not be automated, and the 

performance data reported are not defined consistently across lenders. 

Investors in securitized financial assets generally require reliable 

assurances that the securities will pay interest and principal fully and in a 

timely manner despite the performance of the overall economy. Credit 

ratings from agencies such as Moody’s or Standard & Poor’s can often 

provide these assurances. Additionally, securitizations require a credit 

rating in order to be considered “investment-grade” and attractive to 

institutional investors.41 Credit ratings play an important role in 

determining how the securities should be structured and priced to appeal 

to investors, including feedback on any levels of credit enhancement that 

may be necessary to achieve a desired structure. Securities raters examine 

certain characteristics of proposed securitizations in order to provide their 

assessment of the performance of a pool of assets and ultimately their 

credit rating as follows: 

•	 Rating agencies examine current and historical loan and lender 

performance data such as delinquencies, defaults, and losses to assess 

the expected performance of a pool of similar loans over time. 

•	 Rating agencies examine originator and servicer characteristics such as 

management and financial strength, servicing and collection practices, 

back-up servicing, workout and liquidation policies, and data processing 

and reporting to assess originators’ and servicers’ capability to execute 

their functions adequately and in a timely manner. 

•	 Rating agencies examine the legal structure of the transaction to, for 

example, assure investors that the pooled assets have been properly 

sold to the bankruptcy-remote vehicle. 

Generally, the larger the number of similar loans included in a loan pool 

(that is, loans with more homogeneous loan underwriting, documentation, 

41Many institutional investors, such as banks and pension funds are generally restricted to 

“investment-grade” securities (nonspeculative securities with higher credit ratings). One 

hundred percent governmental guarantees can also provide adequate assurance to 

institutional investors without a credit rating on the pool of assets. Investors willing to take 

on more risk can invest in lower-rated, or nonrated securities. 

Page 41 GAO-04-21 Community and Economic Development Loans 
and servicing) the less costly securing a rating can be.42 Additionally, better 

and consistent data can reduce the costs of securing a rating and allow for 

more precise estimates of performance, also providing for accurate 

assessments of any required internal credit enhancements.

43 The variety of 

CED lender practices and inadequate performance information prevent or 

inhibit capital markets from satisfactorily understanding the performance 

of CED loans and increase the transaction costs involved with assessing 

performance. The benefits of securitization are greatly reduced for CED 

lenders to the extent they must fund any extra transaction costs for these 

services, as well as fund credit enhancements to cover unexpected losses 

that capital markets cannot satisfactorily profile. Proposals to reduce 

these costs through standardization are viewed by many CED lenders as 

contrary to their missions. 

Limited Mechanisms 

Available to Support 

Securitization for CED 

Loans 

According to trade association representatives and other interest groups, if 

securitization is to become a viable alternative for lenders, informationsharing and securitization mechanisms are needed to provide consistent 

avenues for lenders to sell their loans, achieve the volume of loans needed 

for a securitization, and achieve quality control. That is, lenders have no 

apparent and available network or facility from which to draw if and when 

selling loans. Likewise, investors have no apparent facility or entity from 

which to purchase securities backed by CED loans. In contrast to other 

mortgage-backed and asset-backed securitizations, there is no 

comprehensive mechanism for sharing information with interested lenders, 

investors, and capital market intermediaries. Ad hoc networks, lender 

trade associations, and investor organizations do exist, but they do not 

provide updated and comprehensive data and information on a regular 

basis regarding loan volume. Neither do they provide a list of interested 

lenders, potential investors, securitization mechanisms, and credit 

enhancement providers. 

Existing securitization mechanisms are limited in two different ways. First, 

there are few mechanisms available to securitize small business and CED 

42Securities raters have traditionally required at least several hundred similar loans or assets 

in a pool in order to create a risk profile for the pool using statistical analysis. Statistical 

analysis is generally more cost-effective for securities raters on a per loan basis than other 

methods of analysis. 

43Many securitizations require originating lenders to assume first-loss positions or use other 

internal credit enhancements to provide credit support to the investment-grade securities. 

Page 42 GAO-04-21 Community and Economic Development Loans 
loans. Second, some of those that do exist have limitations. As noted 

earlier, we could only find five existing models that securitize small 

business or CED loans and three of them use 100-percent federal credit 

enhancements. CRF is the only existing securitization mechanism that 

actually purchases and securitizes CED loans without direct federal 

government support. However, as we also noted earlier, CRF has several 

important limitations. It is the only securitizer to provide a credit 

enhancement and, as a nonprofit entity, depends on the availability of 

foundation and other philanthropic sources to fund its credit 

enhancements. Since CRF’s securities depend on private placements and 

do not have credit ratings, the number of investors, particularly 

institutional investors, that are able to purchase its senior tranche 

securities is greatly limited too. The Section 108 model is limited by its 

collateral requirements and the lengthy time needed for HUD’s approval of 

each loan, according to a recent Urban Institute study. The study also 

found that collateral requirements may have particular force in cases 

where Section 108 is used to capitalize small business lending programs 

and where borrowers may have little security to offer. In addition, since 

2001, with the elimination of funding for the EDI grant program, grantees 

can no longer use EDI funds to satisfy, in part, collateral requirements. 

Finally, the administration is proposing to eliminate Section 108. Taken 

together, the limited extent of information sharing and the limitations of 

securitization mechanisms inhibit the CED lending industry’s willingness 

and ability to efficiently sell their loans on a large scale. 

Potential Options Exist 

to Overcome Barriers, 

but Most Imply Costs 

or Changes to Federal 

Programs 

CED lenders, their organizations, some federal agencies, and others have 

identified options the federal government could employ to potentially 

overcome securitization barriers. Generally, these options involve either 

providing incentives or requiring or providing direct or indirect support to 

resolve identified barriers. However, implementing these options singly or 

in combination would have ramifications—both positive and negative—for 

federal programs and the clientele served by these programs. For instance, 

some options could require additional resources, while others could cause 

lenders to focus less on CED lending. Some options could directly resolve 

or address the barrier, while still others could improve program or lender 

management. Furthermore, the options for overcoming the barriers often 

entail federal costs. However, we did not determine whether the benefits 

exceed the costs that could result from such efforts and, therefore, do not 

endorse these options. 

Page 43 GAO-04-21 Community and Economic Development Loans 
Potential Options for 

Overcoming Uncertain 

Borrower Demand and 

Limited Lender Incentives 

for Securitization and Their 

Implications 

Overcoming Uncertain Borrower 

Demand Might Begin with 

Measuring Demand 

As discussed previously, uncertain borrower demand and limited lender 

incentives for securitization could result in unpredictable or insufficient 

loan volume necessary for securitization to work efficiently. We have 

identified options that could help to better define and measure borrower 

demand across markets and promote lender understanding of borrower 

demand and the cost and benefits of securitization. We also identified 

options for providing incentives to lenders to make loans available for 

securitization. Ultimately, however, the market will largely determine what 

the underlying demand for CED loans will be. 

Some of the specific options for addressing uncertain borrower demand 

involve requiring or supporting research into how to measure borrower 

demand, helping develop and ensure application of consistent definitions 

and measures for periodically measuring borrower demand across lenders 

and programs, and aggregating this information. These actions could 

promote increased understanding of borrower demand and may have the 

added benefit of improved lender and program management—provided 

procedures and definitions are clearly defined and implemented, and that 

measures are taken systematically and frequently to track ever-changing 

markets. However, it is unclear whether increased understanding of 

borrower demand, alone, would motivate lenders to participate in 

securitization. In addition, as with any data collection effort of this 

magnitude, it would likely be costly and time-consuming to put a system in 

place. Therefore, it may be necessary to preface any efforts with a costbenefit analysis. 

The federal government could promote lender understanding of borrower 

demand through the use of forecasting tools, either across target markets 

or as part of programs. Provided these tools were defined, applied, and 

aggregated consistently, they could provide greater understanding of future 

borrower demand across target markets. Again, given the potential costs, a 

cost-benefit analysis might be warranted before pursuing such an effort. 

The federal government could require or support efforts to increase 

information exchange among lenders. For instance, incentives could be 

implemented for CED lenders and local banks to refer potential clients to 

one another. This option could help lenders gain access to better borrower 

demand information in their local markets. Another option, a peer-to-peer 

system, could inform CED lenders of potential loans available outside their 

traditional markets. This process could help CED lenders anticipate 

changes in borrower demand across target markets, perhaps nationwide. 

Page 44 GAO-04-21 Community and Economic Development Loans 
Federal Government Could 

Potentially Improve Lender 

Understanding of Securitization 

and Create Lender Incentives for 

Securitization 

The costs of implementing either of these options are not well known. 

Without a mandate, marketing tools may be necessary to promote the use 

of either of these options. Either of these options could help to make more 

transparent the demand for CED loans, provided this sort of exchanged 

information could be aggregated and analyzed in a useful way. 

As we discussed earlier in this report, while some lenders do securitize 

their loans, others lenders with securitizable loans could realize, but do not 

perceive, the benefits to securitization. These lenders, for example, may 

have existing low-cost sources of capital and rely on interest income to 

support their operations and would have difficulty sustaining expanded 

lending operations that securitization would allow. We identified options 

for identifying those lenders that might benefit from securitization, 

informing those lenders about securitization and its benefits, and building 

incentives for lenders to securitize their loans. 

The federal government could help identify lenders that could benefit from 

or are ready for securitization by financing or supporting the development 

of a study designed to establish criteria, procedures, and practices for 

identifying such lenders, or requiring that such procedures be 

implemented. However, defining and identifying lenders that could benefit 

from securitization might not directly cause these lenders to consider 

securitization. To do so, the federal government could also promote better 

understanding of the benefits to lenders of securitization so that those 

lenders that were able and would benefit from securitization would use 

securitization as a means to expand community and economic 

development lending. Such efforts would require costs to the federal 

government. 

To provide greater encouragement, the federal government could also 

provide direct incentives for lenders to securitize their loans. For example, 

the government could build incentives for lenders (such as program setasides, awards, or requirements) into existing federal programs. While 

built-in program incentives could have a direct impact on lenders’ 

willingness to securitize their loans, the impact on lenders’ missions could 

vary depending on how support for these incentives is provided. For 

instance, unless additional funding was awarded specifically for such 

incentives, providing incentives through program set-asides, or program 

awards application processes, might give qualified lenders the ability to 

securitize, but decrease, the amount of available funding for all other 

lenders awarded grants or loans decreasing the federal support to meet 

their missions. 

Page 45 GAO-04-21 Community and Economic Development Loans 
Requiring lenders to use existing program dollars allocated to them for 

securitization would not impact other lenders. However, if all lenders with 

qualifying loans were required to use program dollars for securitization, 

fewer dollars might go toward borrowers in the short-term until those 

lenders gained access to capital from the sale of those loans. On the other 

hand, the government could also eliminate disincentives to selling loans by, 

for example, reducing the use of grant funds. Again, such an option would 

have an immediate impact on lender behavior but also potentially motivate 

lenders toward less risky lending. 

Potential Options Exist to 

Overcome Limited Capacity, 

but Each Has Implications 

Limited lender capacity is an underlying reason why lenders lack incentives 

to participate in securitization. To help lenders access or analyze 

information on whether securitization would be useful, and to manage 

increased workload they would incur if they were to securitize their loans, 

some lenders need to improve their staff skills and financial information 

capabilities. Additionally, lenders’ long-term viability could be enhanced 

through greater diversification of their portfolios. 

Options the federal government could exercise include providing, 

requiring, or supporting training and technical assistance to: (1) increase 

skill levels of lenders in order to reduce the staff time spent on loans, (2) 

improve financial and accounting information needed to make decisions on 

whether benefits outweigh the costs of securitization, and (3) inform 

lenders of the benefits of diversifying their portfolios. Possible options also 

include supporting an increase in the number of lender staff needed to 

manage any potential increases in workload they might incur by 

securitizing their loans. 

These options could not only move the industry closer to securitization by 

improving lender knowledge and capacity needed to securitize their loans, 

but could also have the added benefit of increasing lender capability and, 

thus, more prudent use of federal program dollars. However, each of these 

options also has other implications. For instance: 

•	 Exercising options such as training and information sessions designed 

to inform lenders of the benefits of diversifying their portfolios could 

result in lenders investing in either larger loans or more collateralized 

assets. However, altering lender portfolios in this way could result in 

lenders making loans to less risky borrowers, moving them slightly “upmarket” (that is, to more creditworthy borrowers) and thus further away 

from their mission. On the other hand, diversifying their portfolios with 

Page 46 GAO-04-21 Community and Economic Development Loans 
more of a balance of larger and smaller loans and loans of varying risks 

could help lenders’ long-term viability. 

•	 Exercising options to increase staff skill levels through training or 

providing tools to increase staff skills, improving financial and 

accounting information, and for increasing the number of staff will have 

added costs. Costs to the federal government will vary depending on 

whether the government takes a direct or supportive role in developing 

and implementing training courses or information sessions or funding 

increased staff or tools for these lenders. However, improved lender 

management and technical skills could increase lender efficiency. 

•	 To ensure the effective use of limited federal resources, any support for 

training, technical assistance, or staffing would require appropriate 

federal oversight and evaluation. 

Options Exist to Overcome 

Restrictive External 

Requirements, but Each Has 

Implications 

Our research identified a number of requirements that either directly or 

indirectly limit lenders’ ability to participate in securitization. To allow 

lenders the ability to pool and sell loans, these requirements and others like 

them, would need to be identified and either modified or removed. 

The federal government could exercise several options for identifying and 

modifying or removing restrictive requirements, including requiring 

programs to work collaboratively to identify and resolve conflicting 

regulatory requirements that prohibit or inhibit securitization and develop 

proposals for resolving conflicting statutory requirements. While these 

options have the potential to expand the number of lenders that may 

consider securitizing CED loans, each option has other implications such 

as the following: 

•	 Identification of conflicting federal, state, local, and private 

requirements governing how CED funds must be spent could be costly 

and time consuming because of the need to coordinate efforts on 

several levels. 

•	 Removing some requirements may impact lenders' ability to meet the 

mission of the federal programs that support them. For example, if 

requirements that lenders use loan sale proceeds to make loans with the 

same purpose are eliminated, EDA has no assurance that the lenders it 

supports would continue to meet program goals and objectives. Before 

Page 47 GAO-04-21 Community and Economic Development Loans 
removing such restrictions, their purpose and rationale should be 

weighed against the benefits of securitization. 

Options Exist to Potentially 

Overcome Impact of BelowMarket-rate Loans on 

Securitization, but Each Has 

Implications 

Some studies we reviewed, and lenders with whom we spoke, cite the very 

nature of CED loans as a barrier to securitization because these loans often 

have below-market-rates. Discounts on below-market-rate loans are a 

consequence of the need to provide market yields on investments and to 

cover the transaction costs associated with carrying out any securitization. 

Securitization of CED loans may also require discounts to offset any 

additional transaction costs due to the lack of performance information 

and nonstandard loan underwriting. Loans made with limited collateral, 

and with riskier borrowers, will continue to need either some type of 

subsidized financing, such as the below-market-rate loans provided by 

these lenders, or other mechanisms such as offering longer loan terms that 

allow borrowers to make lower monthly payments. 

The federal government could exercise several options to enhance lenders’ 

abilities to securitize below-market-rate loans. The federal government 

could provide a direct subsidy or incentives for others to provide support 

to lenders to offset the discount charged to lenders for securitizing belowmarket-rate loans. The implementation of any one or all of the options 

discussed in other parts of this section (from measuring borrower demand 

to improving loan performance information) would diminish lender costs 

and diminish, in part, the need for lender discounts. However, as explained 

in those sections, these options have other implications as well. Provision 

of a direct federal subsidy or incentives for others to provide support 

would result in federal costs. 

Options Exist to Overcome 

Lack of Standardization and 

Insufficient Performance 

Information, but Each Has 

Implications 

The level of heterogeneity among community lenders and loans, and the 

lack of adequate performance information regarding these lenders and 

loans, results in disincentives to securitize. Capital markets cannot 

sufficiently, or cost-effectively assess the expected performance of a 

heterogeneous pool of loans and, thus, cannot accurately assure investors 

of the creditworthiness of a pool of CED loans. The benefits of 

securitization are greatly reduced for community lenders as they fund any 

extra transaction costs for these services and credit enhancements to cover 

unexpected losses that capital markets cannot adequately profile. 

Page 48 GAO-04-21 Community and Economic Development Loans 
Developing a Level of 

Standardization Would Involve 

Supporting Data and 

Underwriting Standardization 

The federal government could provide incentives (such as set-asides or 

awards) for federal programs and/or capital markets (or other financial 

institutions that securitize similar loans, such as commercial banks) to 

collaborate in order to develop standardized performance information, 

loan documentation, servicing, and underwriting criteria and procedures 

that are useable for both capital markets and CED lenders. Developing 

new criteria and procedures through this type of collaboration might 

improve CED lenders’ ability to securitize or to develop innovative 

financing arrangements other than securitization. Given the varied and 

diverse nature of community lenders nationwide, providing outreach and 

education on any information or procedural standardization could also 

facilitate the timely implementation of any new criteria or procedures. 

Developing and applying homogeneous loan and lender performance 

information—key performance data points, definitions underlying those 

data points, frequency for reporting data, and preferred format for 

collecting the data for CED lenders—has several implications. The earlier 

performance information could be developed and collected from CED 

lenders, the sooner CED lenders could communicate a useable 

performance profile to financial institutions and thus help to improve their 

overall effectiveness as CED lenders. Aggregating and maintaining 

performance information in a central facility—a “data-warehouse”— 

accessible by CED lenders, loan pool assemblers, and federal programs, 

may provide: (1) community lenders an easier way to report and monitor 

their performance, thereby reducing any administrative burdens 

accompanying repetitive federal reporting requirements; (2) loan pool 

assemblers and rating agencies more cost-effective means to assess and 

profile the risk of differing types of CED loans, helping to diminish the 

securitization transaction costs lenders currently fund; and (3) federal 

programs and Congress better data to make key programmatic decisions 

within and across programs. Federal support for efforts to develop and 

apply homogeneous loan and lender performance information would result 

in costs to the federal government, but it may improve program 

management in the long-term. Deciding where to develop, store, and 

manage this data should take in account, privacy, access, and Freedom of 

Information Act issues. 

Developing homogeneous loan underwriting, servicing, and documentation 

standards would likely require a balance between the level of 

standardization necessary for cost-effective, reliable performance 

estimates and a sufficient level of flexibility for CED lenders to meet the 

needs of their communities. The tighter the standards, the less likely CED 

Page 49 GAO-04-21 Community and Economic Development Loans 
lenders would be able to tailor their services to their communities, thus 

potentially diminishing the effectiveness and benefits of CED lenders to 

communities. Conversely, the looser the standards, the more costly 

assessing the performance of CED loans becomes, thus diminishing the 

benefits of securitization as a funding source for CED lenders. Developing 

a range of underwriting and servicing standards for a variety of loan 

products would limit lender flexibility for a particular loan product, but 

these standards may be designed to accommodate the mission of 

community lenders. Additionally, with enough available loan and lender 

information, a range of standards may allow a pool assembler to assemble 

a reasonably homogeneous pool of similar loans from a nationwide pool of 

mission-oriented CED lender portfolios. Developing standards for 

underwriting, servicing, and documentation can require substantial effort. 

To the extent that these efforts are funded through federal programs, or 

through incentives provided lenders and others, these efforts may impose 

federal costs. 

Credit Scoring Could Diminish The federal government and CED lenders could examine the use of credit 

Need for Other Information	 scoring as an indicator, for example, of the likelihood of borrower 

repayment of principal and interest. Some commercial banks now 

consider credit scores primary criteria for underwriting small business 

credit decisions. Several studies and interviews have indicated that credit 

scoring is a technique with the potential to reduce the need for 

standardized underwriting procedures. Using credit scores to estimate the 

likely performance of a pool of loans based upon borrowers with similar 

creditworthiness might be more cost-effective than estimating the 

performance of a pool of heterogeneous loans. If credit scores produce 

performance probability estimates reliable enough for rating agencies, 

investors and lenders can more accurately assess their financial incentives 

and disincentives to securitize CED loans. Additionally, credit scores may 

reduce the cost of loan origination. Whether credit scoring loans will affect 

the missions of CED lenders is somewhat dependent on the lender. Credit 

scoring may allow CED lenders to underwrite loans tailored to their target 

markets and sell occasional loans to pools accepting certain credit score 

ranges. Or, some CED lenders might only originate loans with credit scores 

acceptable for resale into pools accepting certain credit score ranges, 

thereby limiting the types of lending they would do in their communities. 

Credit scoring might limit borrowers with little or no credit history from 

accessing CED financings. Finally, questions still exist as to whether credit 

scoring disadvantages minority or other segments of the population. 

Page 50 GAO-04-21 Community and Economic Development Loans 
Use of Governmental Credit 

Enhancements Could Minimize 

the Need for Other Loan 

Performance Data 

Governmental credit enhancements could be applied in a number of ways, 

but could result in increased costs to the federal government. However, the 

level of the credit enhancement would determine the extent to which 

standardization and performance data would be needed. A security issued 

with a 100-percent federal credit enhancement could minimize the need for 

standardization and loan performance data because it is backed by the full 

faith and credit of the federal government and, therefore, would not need to 

obtain an independent credit rating. However, such a federal credit 

enhancement could expose the federal government to potentially greater 

risk and cost and would also require a minimum degree of standardization 

and review, depending upon the capabilities and loan performance record 

of the lender. For example, in FHA’s Multifamily Insurance Risk-Sharing 

Program, state and local housing finance agencies receive a 100-percent 

federal credit enhancement, and the most experienced lenders are allowed 

to use their own underwriting standards and documents in return for 

assuming 50-90 percent of the credit risk. Compared with a 100 percent 

credit enhancement, a partial federal credit enhancement reduces the 

government’s risks and potential costs, but generally subjects the loans to 

be securitized to an evaluation by the credit rating agencies or investors 

(for unrated securities). Such an evaluation would necessarily include the 

standardization and loan performance issues discussed earlier. Whether a 

100 percent or a partial federal credit enhancement, federal agencies will 

need sufficient loan performance data to estimate the credit subsidy cost of 

the credit enhancement. Given the possible increased cost and risk the 

government incurs, credit enhancements should be minimized and their 

continuing need be assessed periodically. Such assessments would require 

criteria for determining the continued need for credit enhancement. 

Options Exist to Potentially 

Overcome Limited 

Mechanisms for 

Securitizing, but Each Has 

Cost and Other Implications 

Lack of or limits in information sharing and securitization mechanisms are 

seen by many as a barrier to securitization. Currently, there is no 

comprehensive mechanism for lenders, investors, and capital market 

intermediaries to share information on loan volume with interested loan 

buyers and sellers. There are also few mechanisms available to securitize 

small business and CED loans, and there are limitations with some of the 

existing mechanisms. We have identified several options for creating a 

consistent mechanism for securitizing CED loans. These options are as 

follows: 

•	 The federal government could help establish formal networks for 

lenders and capital market participants to exchange information on 

loans available for sale and for interested loan purchasers to provide 

Page 51 GAO-04-21 Community and Economic Development Loans 
specialized origination and loan sale functions. Examples of networks 

could include a formalized group of lenders, investors, and capital 

market intermediaries or super-regional CED lenders who would be part 

of a voluntary regional network of local CED lenders. For the networks 

to be effective, they would need to provide tangible benefits to both 

lenders and capital market participants. For example, super-regional 

lenders could specialize in originating and selling larger, long-term loans 

referred to them by retail lenders, who could participate in the 

underwriting and loan servicing responsibilities and share in the loan 

fees. This may also allow local lenders more time to concentrate on 

smaller, short-term loans to be held in their portfolios. Implementing 

the networks may also require different degrees of federal funding. 

•	 Two existing securitization mechanisms that could serve as a basis for 

greater securitization of CED loans are CRF and the Section 108 

guaranteed security programs. However, these structures have certain 

limitations that would first need to be addressed. CRF depends on the 

availability of foundation and other philanthropic sources to fund its 

credit enhancements, thereby limiting its capacity to sell more 

securitized loans to investors. Since CRF’s securities have only been 

privately placed and do not have credit ratings, the number of investors, 

particularly institutional investors, who are able to purchase its senior 

tranche securities is limited. Increasing CRF’s capacity to securitize 

more loans and providing it with a large enough credit enhancement 

would allow CRF to obtain a credit rating. Addressing CRF limitations 

could include providing direct federal funding for partial credit 

enhancements or match funding to attract other funding sources such as 

state and local government and program-related investors, as well as 

assistance in developing standardized loan products. However, 

providing partial federal credit enhancements could have both positive 

and negative effects depending upon the credit risks associated with the 

lenders and loans included in each loan pool to be securitized. Such 

credit enhancements would likely impose costs on the federal 

government. In addition, these options may have a negative impact on 

lender mission if standardization reduces lender flexibility to the point 

that loan terms no longer meet borrower needs or excludes targeted 

borrowers. However, lenders may be able to target greater resources to 

serving targeted markets if they can offer new loan products such as, 

long-term, fixed-rate real estate loans. In addition, the Urban Institute 

study found that the average loan size of Section 108 loans to third 

Page 52 GAO-04-21 Community and Economic Development Loans 
parties was about $1.5 million.44 Thus, the model securitizes much 

larger loans than many of those financed by many lenders covered in 

our review. For example, the average loan size for CDFIs is $66,000 for 

business loans and $11,600 for microenterprise loans. Finally, as 

indicated previously, the administration is proposing elimination of the 

Section 108 program. If the program remains or the model is adopted 

elsewhere, the model’s current limitations could be addressed. For 

example, the government could address the collateral concerns, 

particularly by communities that capitalize loan funds, while taking into 

account risks borne by the federal government. The government could 

also assess why the Section 108 model is not used more widely to 

securitize CED loan funds. This would require a better understanding of 

the extent to which Section 108 loan guarantees are used as a funding 

source for loan funds. Such efforts would involve costs for the federal 

government, but could lead to improvements in the program’s and the 

securitization mechanism’s usage.45 

•	 The government could also opt to create new securitization mechanisms 

ranging from those with little or no credit enhancements to options with 

full credit enhancements. These structures could be supported by 

different entities such as the federal government or the private sector. 

For example, the government could create a new mechanism similar to 

the CDA securitization model with a partial federal credit enhancement. 

Another option might be a demonstration program with a 100-percent 

federal credit enhancement of the security plus sharing the credit risk of 

the underlying loans in a manner similar to the FHA Multifamily RiskSharing Program described earlier. For instance, if the risk-sharing 

demonstration with a 100-percent federal enhancement of the security 

were limited to CED lenders with high performing portfolios and high 

loan volume, standardization requirements would be minimized, thereby 

reducing lender mission impact. But this sort of federal credit 

enhancement might have negative cost consequences for the federal 

government, depending on the effectiveness of the risk-sharing 

mechanisms adopted and the quality of the lenders and loans included 

in the program. The implications for the proposed CDA model are less 

44Some of the loans securitized under the Section 108 program are used to fund smaller 

loans to individual businesses through RLFs and nonprofit intermediaries such as CDCs. 

45In providing technical comments, HUD suggested that fees could be but are currently 

prohibited from being charged to create a loan loss reserve for securitizing these loans. 

However, we did not assess the implications of this option. 

Page 53 GAO-04-21 Community and Economic Development Loans 
known since there are no current securitization models that use partial 

federal credit enhancements to securitize any loans. Since CDA 

proposes to purchase only seasoned loans and update their borrowers' 

credit scores, the need for standardization may be minimized because 

credit rating agencies would know the loans' short-term financial 

performance and their borrowers' current creditworthiness. Since the 

rating agencies would still not have the long-term loan performance data 

they need to statistically predict loan delinquencies and defaults, they 

would adjust the amount of credit enhancement upward, but by a 

smaller amount than required for pools of new loans with outdated 

credit scores. Overall, any options for providing enhancements to 

create additional mechanisms for securitization will require 

administrative effort and federal costs. 

•	 The government could also build upon existing structures that securitize 

non-CED loans by providing incentives for private sector entities to 

securitize CED loans. However, private sector securitization entities 

may not agree to securitize CED loans or may “demand” too high a cost 

to the federal government. In addition, because private securitization 

mechanisms require standardized underwriting, lenders’ mission may be 

negatively impacted. However, the impact standardization might have 

on lender mission could be mitigated if securitization could provide 

CED lenders with new kinds of loan products that they generally do not 

now originate, that is, larger, long-term, fixed-rate loans. Overall, 

providing incentives to private sector entities to securitize CED loans 

would require federal costs. To ensure the effective use of federal 

resources, any such program or incentives would also require 

appropriate federal oversight and evaluation. 

Observations	 Given the importance of volume in achieving efficiencies that could help 

securitization work effectively, uncertain borrower demand and limited 

lender incentives are critical barriers that would need to be addressed if 

CED loans are to be securitized widely. Therefore, securitization may not 

be a significant alternative for these lenders until the volume of loans 

available for securitization is known industrywide, and lenders are 

convinced of its benefits enough to participate. Further, limited lender 

management capacity, prohibitive external legal or regulatory limitations 

and requirements, and discounts due to below-market-rate financing are 

barriers consequent to the nature of CED lending. For varying reasons 

discussed in detail above, these barriers also combine to explain the lack of 

lender incentives to securitize their loans. Therefore, these barriers, along 

Page 54 GAO-04-21 Community and Economic Development Loans 
with the cost associated with their elimination, are factors to be addressed 

if CED loans are to be securitized widely. In addition, eliminating these 

barriers entail costs. 

The remaining barriers—lender heterogeneity, insufficient performance 

information, and limited mechanisms for securitizing loans—are traditional 

barriers that have been experienced to some degree in the development of 

other securitization models. Some of the actions we outline, such as 

developing homogeneous documentation and performance information, 

may help to improve lenders’ overall effectiveness in dealing with local and 

national capital markets in a range of financing transactions, including 

securitization, and could help improve program management. However, 

the costs and benefits of these actions should be assessed before they 

could be considered viable. Developing homogeneous underwriting and 

servicing policies requires recognition of the tension between the flexible 

underwriting these lenders employ to serve their communities versus the 

standardization needed to cost-effectively securitize loans. Additionally, 

any mechanisms developed to further CED loan securitizations will not 

succeed without visible financial benefits for lenders and capital market 

participants. 

In addition, some of the options we have identified to improve lender 

management practices, data on lenders and loans, and consistency in 

assessing and documenting loans could not only move the industry closer 

toward securitization, but could have the added benefit of improved 

management and oversight for lenders and the federal programs that 

support them. However, their costs and benefits need to be assessed. If 

cost/benefit analyses prove them to be cost-effective, these are steps that 

could help the industry regardless of whether securitization becomes a 

viable option. 

While the options we identify have many likely implications, we did not 

measure the extent to which each may affect lenders’ mission, federal 

costs, program oversight, and other potential implications. Likewise, we 

did not determine whether the potential benefits exceed the costs that 

could result from such efforts. We, therefore, do not endorse these options. 

Nonetheless, the information we present provides a framework for 

understanding the challenges when considering the federal role in 

facilitating securitization. 

Page 55 GAO-04-21 Community and Economic Development Loans 
Agency Comments and 	 Officials in all agencies provided technical comments that we incorporated 

into the report, where appropriate. The technical comments from HHS Our Evaluation	 were from officials in HHS’s Administration for Children and Families. 

Generally, the agencies did not indicate whether they agreed or disagreed 

with the report’s findings. 

We are sending copies of this report to interested congressional parties and 


to the Secretaries of Agriculture, Commerce, Health and Human Services, 


Housing and Urban Development, and Treasury, the SBA Administrator,


and the Federal Co-Chair of the Appalachian Regional Commission. Copies


will be made available to others upon request. In addition, the report will 


be available at no charge on the GAO Web site at http://www.gao.gov.


Please contact Mathew J. Scirè, Assistant Director, or me at (202) 512-8678, 


or by e-mail (sciremj@gao.gov or shearw@gao.gov ) if you or your staff 


have any questions concerning the report. Key contributors to this report 


were Diane T. Brooks, Tiffani L. Green, Mitchell B. Rachlis, Barbara M.


Roesmann, Keith A. Slade, and James D. Vitarello.


William B. Shear


Director, Financial Markets


and Community Investment 

Page 56 GAO-04-21 Community and Economic Development Loans 
List of Congressional Requesters 

The Honorable Hillary Rodham Clinton 

United States Senate 

The Honorable Susan Collins 

United States Senate 

The Honorable Christopher J. Dodd 

United States Senate 

The Honorable Tom Harkin 

United States Senate 

The Honorable James M. Jeffords 

United States Senate 

The Honorable Edward M. Kennedy 

United States Senate 

The Honorable John F. Kerry 

United States Senate 

The Honorable Patrick J. Leahy 

United States Senate 

The Honorable Carl Levin 

United States Senate 

The Honorable Jack Reed 

United States Senate 

The Honorable Paul E. Kanjorski 

House of Representatives 

The Honorable James A. Leach 

House of Representatives 

The Honorable John M. McHugh 

House of Representatives 

Page 57 GAO-04-21 Community and Economic Development Loans 
The Honorable Jack Quinn 

House of Representatives 

Page 58 GAO-04-21 Community and Economic Development Loans 
Appendix I 

Objectives, Scope, and Methodology


Our objectives were to: (1) describe the characteristics of selected 

federally sponsored Community and Economic Development CED lenders; 

(2) describe the characteristics of selected federal programs that support 

CED lenders; (3) describe selected efforts to securitize economic 

development loans; (4) determine the barriers to securitizing economic 

development loans; and (5) identify options for overcoming these barriers, 

as well as the implications of the identified options. We limited the scope 

of our work to securitization and did not include alternative means for 

lenders to access private capital. 

CED Lender 

Characteristics and the 

Performance of Their 

Loans 

Our review focused on the seven types of federally sponsored CED lenders 

that we were specifically requested to include and identified as key CED 

lenders.1

 They are the following: 

• Community Development Financial Institutions (CDFIs), 

• Revolving Loan Funds (RLFs), 

• Intermediary Relenders (IRPs), 

• Community Development Corporations (CDCs), 

•	 Small Business Administration’s (SBA) 504 Certified Development 

Companies (504 CDCs), 

•	 lenders supported by entitlement city and state grantees under the U.S. 

Department of Housing and Urban Development’s (HUD) Community 

Development Block Grant Program and lenders supported by the 

Section 108 Loan Guarantee program, and 

• microlenders. 

To describe the characteristics of selected federally sponsored CED 

lenders, we reviewed and synthesized studies, reports, data, and 

information from industry nonprofits, trade associations, and federal 

1

Although we identified one other lender group--Community Development Entities under 

Treasury’s New Markets Tax Credit—we did not review these lenders because Treasury just 

recently (2002) established Community Development Entities, and limited information was 

available on them. 

Page 59 GAO-04-21 Community and Economic Development Loans 
Appendix I


Objectives, Scope, and Methodology


program data on selected CED lenders and lending programs. We also 

interviewed CED lenders, their trade associations, and other industry 

groups. We then used the information collected from the identified 

sources to document and describe, where available, the following: 

• purpose of (mission) and target markets served by the lender group; 

• lender’s sources of capital; 

•	 characteristics of the lender group (for example, number of loans, 

amount of loans); 

• reported impacts on target markets served; and 

• attempts to measure and define demand for liquidity and capital. 

Finally, we documented the availability of data describing the 

characteristics and performance of the loans that CED lenders make. Loan 

performance data were inconsistently available for all lender groups; 

therefore, we were unable to assess the performance of CED loans in 

general. However, we were able to document differences in how loan 

performance was measured. We also identified three current efforts to 

collect loan-level data on CED loans made by select CED lenders in EDA, 

HUD, and Treasury’s CDFI Fund. We attempted to obtain summary data 

from these sources on the dollar amount and number of loans in default in 

order to estimate a cumulative default rate for each program. However, 

Treasury’s CDFI Fund data were inconsistent and incomplete for our 

analysis. Comparable data on HUD loans were not available at the time of 

this report. We did not independently verify the data, but we corroborated 

it against various sources. 

Selected Federal CED 

Programs 

Our review focused on 11 federal programs that support the seven types of 

CED lenders targeted. 2 Programs selected for review, the lenders they 

fund, and the agencies that administer them are listed in table 9. 

2

While there are other federal programs that support economic development activity, we 

focused on those within the seven federal agencies we were requested to review that 

support seven types of CED lenders targeted. For example, HHS administers the 

Community and Economic Development Discretionary Grant program. However, the 

program could only recently be used to fund RLFs. Also, see previous footnote. 

Page 60 GAO-04-21 Community and Economic Development Loans 
Appendix I


Objectives, Scope, and Methodology


Table 9: Federal CED Lending Programs, Lender Types, and Sponsoring Agencies Included in Our Review 

Federal program Lender type Sponsoring agency 

Intermediary Relending program (IRP) IRPs U.S. Department of Agriculture 

(USDA) 

Rural Business Enterprise Grant program (RBEG) RLFs USDA 

Economic Adjustment Assistance Program RLFs U.S. Department of Commerce 

Economic Development 

Administration (EDA) 

Business Development Revolving Loan Fund program RLFs Appalachian Regional Commission 

(ARC) 

Community Development Block Grant (CDBG) (entitlement Local lenders U.S. Department of Housing and 

cities and state-administered) Urban Development (HUD) 

Section 108 loan guarantee Local lenders HUD 

Community Services Block Grant (CSBG) Local lenders U.S. Department of Health and 

Human Services (HHS) 

Financial Assistance component of CDFI Fund CDFIs U.S. Department of Treasury 

(Treasury) CDFI Fund 

504 Certified Development Company (504 CDC) Certified Development Companies Small Business Administration (SBA) 

(CDCs) 

Microloan Program Microlenders SBA 

Source: GAO. 

Enterprise Community/Empowerment Zone Grant (EZ/EC) RLFs USDA, HHS, and HUD 

For each program we analyzed the following: 

• purpose and target markets served by the program, 

• how the federal government supports the CED lending program, 

• restrictions on the use of the federal funds, 

•	 types of performance and lender activity information that the program 

collects, 

• volume of program activity, and 

• budgetary costs of funding the program’s CED lending activity. 

Page 61 GAO-04-21 Community and Economic Development Loans 
Appendix I


Objectives, Scope, and Methodology


Selected Securitization 


Efforts for CED Loans


Our review focused on eight models—five existing and three proposed— 

that are intended to serve small business and CED lenders. SBA’s 7(a) 

guaranteed and unguaranteed models and the two HUD Section 108 models 

were specifically requested. The remaining four models were identified 

through our contacts with agency officials and other parties. 

The five existing models are: 

1. SBA’s 7(a) guaranteed model, 

2. SBA’s 7(a) unguaranteed model, 

3. SBA’s 504 model, 

4. HUD’s Section 108 model, 

5. The Community Reinvestment Fund’s (CRF) model 

The three proposed models are: 

1.	 HUD’s proposed CDBG/Section 108 unguaranteed model for 

securitizing CED loans, 

2.	 Commonwealth Development Associates’ (CDA) proposed model for 

securitizing CED loans, 

3.	 Capital Access Group’s proposed securitization model, building on 

existing state-level Capital Access lending programs 

For each of the models, we then collected and summarized information 

about the following: 

• models’ structure, including lenders and borrowers served; 

• securitized volume of each model; 

• loan types included in the models’ loan pools; 

• financial benefits and risks to the participants in the models; and 

• barriers to securitization the models faced. 

Page 62 GAO-04-21 Community and Economic Development Loans 
Appendix I


Objectives, Scope, and Methodology


Barriers to CED Loan 

Securitization 

To identify barriers to securitization, their causes and proposed solutions, 

we (1) reviewed and synthesized studies and reports obtained from 

literature searches completed on securitization of economic development 

loans and selected sources we thought were most relevant to our review; 

(2) relied on relevant documents and studies identified in interviews with 

program officials, lenders, and their trade associations referred to 

previously; and (3) pinpointed barriers faced in the eight securitization 

models reviewed and the extent to which the barriers have been 

overcome. We limited our review to those documents that identified 

barriers to CED loan securitization and did not include those that discussed 

barriers to accessing capital through other means. We synthesized 

information on barriers in these documents into a single matrix uncovering 

over 264 citations of barriers to securitization, their causes, and any 

proposed solutions. We then developed logical groupings that 

characterized the barriers and assessed the reliability of these groupings by 

having teams of two independently code them and reach consensus on 

areas where original coding did not agree. The six categories that appear in 

this report are as follows: 

• uncertain borrower demand and limited lender interest, 

• insufficient lender capacity, 

• external requirements attached to capital sources, 

•	 below-market-rate loan products will not meet market requirements 

without a discount or subsidy, 

• lack of standardization and inadequate performance information, and 

• limited mechanisms available to support securitization for CED loans. 

Options for We relied upon the proposed solutions identified in the barrier analysis 

described above and our professional judgment to identify strategies for Securitization and overcoming barriers to securitizing economic development loans. We 

Their Implications considered a range of options available to the federal government to 

address the barriers developed in our analysis. Federal options generally 

include the following: 

• potential modification(s) of legal or program requirements, 

Page 63 GAO-04-21 Community and Economic Development Loans 
Appendix I


Objectives, Scope, and Methodology


•	 potential incentives within existing programs to promote participant 

interest and/or the ability to securitize, and 

• potential actions to help improve lender capacity. 

We do not endorse the options we identified and, given the scope of this 

report, note that these options are designed to address barriers to 

securitization, rather than improving access to capital through other 

means. 

We also used our professional judgment and that of experts in the field to 

determine the potential implications of each option. We developed a range 

of implications based upon our research and discussions with program and 

industry experts. The potential implications of the options generally 

considered whether the option could result in 

• conflicts with lenders’ mission, 

• need for new federal funding or resources, 

• direct and/or immediate impact on the barrier being targeted, and/or 

• improved lender or program management. 

While we recognize that options could entail additional federal costs, we do 

not determine whether the benefits exceed the costs that could result from 

such efforts. 

Our work was conducted in Manchester, New Hampshire; Philadelphia, 

Pennsylvania; and Washington, D.C., between October 2002 and July 2003 

in accordance with generally accepted government auditing standards. We 

obtained comments on a draft of this report from U.S. Department of 

Agriculture; U.S. Department of Commerce; U.S. Department of Housing 

and Urban Development; U.S. Department of Treasury; U.S. Small Business 

Administration; U.S. Department of Health and Human Services; and the 

Appalachian Regional Commission which we incorporated into the report, 

where appropriate. 

Page 64 GAO-04-21 Community and Economic Development Loans 
Appendix II 

Model Descriptions


Model Lenders Borrowers Model structures 

SBA 504 program Certified Creditworthy, for- In existence since 1986, the SBA 504 program provides creditworthy small 

Development 

Companies 

profit small 

businesses who 

have qualified for 

conventional 

loans 

businesses with fixed-rate, long-term subordinate loans, primarily for 

commercial real estate (not to exceed 40 percent of the total loan amount). 

A third-party lender must provide at least 50 percent of the project amount. 

Each 504 CDC loan is funded by a guaranteed debenture and sold by SBA’s 

designated trust agent, who pools them and issues U.S. Government 

Guaranteed Development Company Participation Certificates. These 

certificates are sold to investors through underwriters with timely payment of 

principal and interest guaranteed by SBA. 

SBA 7(a) Commercial For-profit small SBA has been authorized to securitize 7(a) guaranteed loans since 1984. 

guaranteed banks, credit businesses that The program provides a guarantee on a portion of a small business loan 

unions, small could not obtain ranging from 50 percent to 85 percent, following SBA’s review and approval 

business lending financing of each loan unless originated by a preferred lender. The lender may elect to 

companies and elsewhere sell the guaranteed portion of each loan to an SBA-approved loan pool 

other nonbank assembler, which issues SBA-guaranteed securities to investors. Working 

lenders capital, equipment, and real estate loans may be included in these loan 

pools, which normally carry a variable interest rate. 

SBA 7(a) Commercial For-profit small SBA first authorized the sale of unguaranteed portions of 7(a) loans on the 

unguaranteed banks, credit businesses that secondary market in 1992. On February 10, 1999, SBA issued a Final Rule 

unions, small could not obtain that created a new regulatory regime for all participating lenders in this 

business lending financing program. Lenders pool their loans and issue securities to investors that 

companies and elsewhere include internal credit enhancements provided by the lender. To date, each 

other nonbank security has been rated as investment-grade by credit rating agencies. 

lenders 

HUD Section 108 CDBG grantees For-profit or Operating since 1978, the Section 108 permanent financing program 

guaranteed and their nonprofit provides both the actual financing for the securities and a 100 percent 

designated borrower federal credit enhancement. Payments on the loans are passed through to 

lenders the Section 108 note holders. The principal security for the loan guarantee 

is a pledge by the applicant community or the state (for nonentitlement 

communities) of its current and future CDBG funds. Additional security will 

also be required by CDBG grantees to assure repayment of the guaranteed 

obligations. 

Community Nonprofit, for- Local business, CRF is a nonprofit secondary market maker for CED-based lenders 

Reinvestment Fund profit, and affordable nationwide. It purchases and warehouses loans from community lenders 

(CRF) governmental housing, and and uses the loans to back securities issued to private investors through 

community community private placements. These securities include a variety of credit 

development facility borrowers enhancements, including subordinated tranches that are typically financed 

lenders. with loans and grants from private foundations. 

Proposed Nonprofit, for- Small business CDA was part of the Economic Development Administration’s securitization 

Commonwealth profit, and borrowers not pilot in 1999. CDA proposed to pool economic development loans and 

Development governmental served by local acquire a rating using a credit-scoring model. Under the CDA model, loan 

Associates (CDA) community commercial originators were to hold the loans until enough loans became available for a 

development financial rating and sale as a private placement, with partial internal credit 

lenders. institutions enhancements funded by each participating lender, as well as external 

enhancements funded with public or private monies. Since CDA was unable 

to achieve the minimum loan volume required by the credit rating agency, 

the model was never implemented. 

Page 65 GAO-04-21 Community and Economic Development Loans 
Appendix II


Model Descriptions


(Continued From Previous Page) 

Model Lenders Borrowers Model structures 

Proposed CDBG-grantees For-profit or Under contract with HUD, the Urban Institute has proposed a structured 

CDBG / 108 and their nonprofit finance securitization model that includes a small senior tranche, a large 

unguaranteed designated borrower subordinated tranche, and a residual retained by the loan seller equal to 

lenders about 20 percent. This assumes that a bank has provided 35 percent of the 

project cost with a senior collateral position. The remaining 55 percent has 

been provided by the community with either Section 108 or CDBG funds in a 

junior collateral position. The senior tranche would be sold to investors as 

an investment-grade security. An alternative is to include the senior bank 

loan portion in the loan pool, thereby also increasing the size of the senior 

tranche. 

Proposed CDFI lenders Minority Proposes to purchase subordinated loans to small businesses and nonprofit 

Capital Access businesses, organizations (25–40 percent of total loan amount), that would require 100 

Program variation nonprofits, and percent financing, assuming a commercial bank agrees to provide the 

commercial real remaining 60–75 percent as a senior collateral position. Only the 

estate properties subordinate loan would be sold as securities, with primarily the borrower 

and possibly the lender, the state, or the federal government providing the 

necessary credit enhancements to investors. 

Sources: SBA, HUD, CRF, CDA, Capital Access Croup. 

(250103) Page 66 GAO-04-21 Community and Economic Development Loans 
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