Access to credit and investment capital is essential for creating and retaining jobs, developing affordable housing, revitalizing neighborhoods, and promoting the development and growth of small businesses. Over the past three decades, community-based financial institutions have demonstrated that strategic lending and investment activities tailored to the unique characteristics of underserved communities can be effective in improving the economic well-being of these communities and of the people who live in them. To help create new and expand existing financial institutions that specialize in serving distressed communities, the Congress, in the Community Development Banking and Financial Institutions Act of 1994, established the Community Development Financial Institutions (CDFI) Fund. In creating the Fund, the Congress recognized that the number of CDFIs was limited, most were small, and many were having difficulty raising capital needed to meet the demands for their products and services. The CDFI Fund currently provides needed capital primarily through two programs—the CDFI program, which makes awards directly to qualifying CDFIs, and the Bank Enterprise Award (BEA) program, which provides awards to insured depository institutions for investing in CDFIs and/or distressed communities. This report responds to a requirement in the 1994 legislation that we report on the Fund’s structure, governance, and performance 30 months after the appointment of an Administrator for the Fund. However, as agreed with your offices, the report does not discuss the structure and governance of the Fund because the Department of the Treasury’s Inspector General is conducting an audit addressing these issues. Our report evaluates how well the Fund is meeting its performance goals and objectives through the CDFI and BEA programs and considers opportunities for improving their implementation. In addition, because this report focuses on the Fund’s performance, it reviews the strategic plan developed under the Government Performance and Results Act of 1993 (Results Act) to guide the Fund’s other activities. The 1994 act established the CDFI Fund as a wholly owned government corporation. Subsequent legislation placed the Fund within the Department of the Treasury and gave the Secretary of the Treasury all of the powers and rights to manage the Fund, as set forth in the authorizing legislation. Figure 1.1 displays the Fund’s organization. The 1994 legislation also created an Advisory Board to advise the Fund on policy issues. The Fund’s Advisory Board consists of 15 members, including representatives from the departments of Agriculture, Commerce, Housing and Urban Development, the Interior, and the Treasury and from the Small Business Administration, as well as nine private citizens appointed by the President. From fiscal year 1995 through fiscal year 1998, the Fund received appropriations totaling $225 million. The Fund’s appropriations can be obligated over 2 years; therefore, the total budget authority available to the Fund in any given year is the current year’s appropriation plus any unspent funding from the previous year’s appropriation. Figure 1.2 shows the Fund’s appropriations by fiscal year. Of the amounts appropriated to the Fund, not more than $5.5 million may be used in a single fiscal year to pay the Fund’s administrative costs and expenses. The remaining appropriations have been committed primarily to the CDFI and BEA programs. Under the act, one-third of the amounts appropriated for programs in any fiscal year must be made available to the BEA program. The fiscal year 1995 budget proposed an estimated 30 full-time-equivalent staff positions for the Fund. However, the 1995 Rescissions Act limited the Fund to 10 full-time-equivalent positions in fiscal year 1995. During fiscal year 1997, the Fund’s staffing increased to 14 full-time-equivalent positions. For fiscal year 1998, the Fund is authorized 35 full-time-equivalent positions, and the Fund’s management intends to fill all of the vacant positions by the end of the fiscal year. The Fund’s administrative budget remains capped at $5.5 million. Under the CDFI program, the Fund invests in CDFIs to promote their long-term ability to serve economically distressed communities. Specifically, the Fund provides financial and technical assistance to CDFIs to enhance their ability to make loans and investments and to provide services for economically distressed communities, targeted populations, or both. CDFIs are private profit-making and nonprofit financial institutions that focus on providing financial services to distressed geographic areas and populations that are underserved by conventional lenders and investors. The following are among the types of organizations that qualify for funding under the program: Community Development Bank: A community development organization centered around a bank or savings and loan that combines the structure and expertise of a profit-making financial institution with a commitment to a distressed place or population. Community Development Credit Union: A financial cooperative owned and operated by lower-income persons. It provides financial services to its members, including savings and checking accounts and loans for homes, cars, or other personal needs. Nonprofit Community Development Loan Fund: A financial intermediary that raises capital from individuals and institutional investors, churches, businesses, and foundations, at below-market rates, and relends these funds primarily to community-based organizations and businesses and nonprofit developers in low-income urban or rural communities. Microenterprise Loan Fund: An entity that receives funding from a private or nonprofit foundation, government agency, or private bank and generally provides technical assistance and loans, ranging from as little as $500 to $10,000, to start up or expand self-help business opportunities for low-income individuals. Community Development Venture Capital Fund: An entity that provides managerial support, along with equity and debt with equity features, to businesses (typically manufacturing-based) located in low-income communities. Although two types of CDFIs—community development banks and credit unions—are regulated and insured by the Federal Deposit Insurance Corporation and the National Credit Union Share Insurance Fund, respectively, the remaining types of CDFIs are generally unregulated. Each year, the Fund solicits applications for awards from CDFIs seeking assistance. An organization’s application must include a comprehensive business plan covering 5 years or more and describing how the organization plans to meet the needs of its investment area, its targeted population, or both. While an applicant is given considerable flexibility in designating an investment area, the area must meet objective criteria for economic distress developed by the Fund. An investment area may include a variety of geographic units reflecting the neighborhoods, areas, or markets that the applicant serves or proposes to serve. The Fund awards assistance competitively, using selection criteria that include the quality of an applicant’s business plan, the extent and nature of the plan’s impact on community development, and the experience and background of the applicant’s management team. This assistance may be in the form of, for instance, an equity investment, a grant, a loan, and/or technical assistance. In the CDFI program, there were 31 awardees in fiscal year 1996 and 48 awardees in fiscal year 1997. To receive any financial assistance through the CDFI program, a CDFI must be certified by the Fund, obtain matching funding from nonfederal sources, and enter into an assistance agreement with the Fund. The Fund certifies a CDFI after determining, among other things, that it has a primary mission of promoting community development, its predominant business activity is lending or investing in development, and it serves (an) economically distressed investment area(s) or targeted population(s). The Fund’s certification signifies that a CDFI is eligible to participate in the CDFI program, but it does not constitute an opinion on the CDFI’s financial viability or indicate that the CDFI will receive an award. While the program’s regulations allow an uncertified CDFI to apply and be selected for an award, the CDFI will not receive financial assistance until it has been certified. The Fund requires CDFIs to be recertified every 2 years. As of March 1998, the Fund had certified 205 CDFIs. While the total number of CDFIs nationwide that could be certified by the Fund is unknown, GAO surveyed 925 community development organizations that described their organization as a type of CDFI (see app. I). To meet the requirement for matching funds, an awardee must obtain assistance from nonfederal sources that is at least equal in form and value to the Fund’s federal assistance. The awardee must provide the Fund with written documentation that it has received either a firm commitment from the provider of the matching funds or the matching funds themselves. This provision is intended to ensure that no federal funds are released until other resources have been leveraged. After selecting the awardees for a given funding round, the Fund begins negotiating an assistance agreement with each awardee. When both parties have agreed upon all of the elements, the Fund and the awardee enter into an assistance agreement by signing the negotiated document. Each agreement is tailored to the nature of the CDFI—regulated or unregulated—and the type of assistance given to the awardee. The Fund generally disburses funds after an agreement has been signed and the awardee has met the requirements for matching funds and certification. A key negotiated element of the assistance agreement is a performance schedule for the Fund to use in evaluating the awardee’s performance. This schedule includes performance goals and measures, benchmarks, and an expected evaluation date. Each agreement also requires the CDFI to provide quarterly and annual reports on its financial condition and progress toward meeting its performance goals. In addition, the agreement allows the Fund to apply sanctions, or remedies, that range from changing the goals to requiring the awardee to repay the award if it does not achieve at least a satisfactory level of performance by the evaluation date. Each year, the Fund must evaluate each awardee’s performance using the performance goals, measures, and benchmarks in the awardee’s assistance agreement. The Fund describes performance goals as qualitative goals and measures as quantitative indicators of the extent to which the awardee has achieved the goals. Benchmarks define levels of performance, ranging from outstanding to unacceptable, which are assessed at specific dates.