Community Development Financial Institutions and New Markets Tax Credit Programs in Metropolitan and Nonmetropolitan Areas

What GAO Found

The policies and procedures of the CDFI and NMTC Programs help ensure that awards and allocations generally are proportionate to the numbers of qualified applicants that serve metropolitan and nonmetropolitan areas. The CDFI Program’s authorizing legislation and regulations require that award recipients constitute a geographically diverse group, serving metropolitan and nonmetropolitan areas and Native communities from different U.S. regions. To meet this requirement, CDFI Program officials have used the application review process and established a goal of matching the proportion of awards to the proportion of qualified applicants that primarily serve nonmetropolitan areas. This proportion changed from year to year depending on the number of qualified applicants that served nonmetropolitan areas. According to officials, revisions to the award procedures in the fiscal year 2012 funding round will enhance the CDFI Program’s ability to achieve proportionality. In 2006, Congress, in the Tax Relief and Health Care Act of 2006, added a requirement for the NMTC Program that nonmetropolitan counties receive a proportional allocation of qualified equity investments. To meet this requirement, in 2008, the NMTC Program implemented two goals in its application review process. The first goal requires that a proportionate number of tax credits are allocated to recipients that principally serve nonmetropolitan counties. The second goal requires that at least 20 percent of all community investments resulting from the annual NMTC allocations are made in eligible nonmetropolitan counties.

The programs awarded the majority of funds and tax credits to recipients that served metropolitan areas, but both generally met their proportionality goals with regard to ensuring assistance to nonmetropolitan areas. From fiscal years 2004 through 2010, CDFI Program financial assistance awards to recipients serving primarily nonmetropolitan areas were proportional to the number of qualified applicants that served those areas in every year except 2008. For example, in 2010, 29 percent of award recipients primarily served nonmetropolitan areas, exceeding that year’s proportionality goal of 27 percent. Based on recipients’ annual reporting for fiscal years 2004 through 2010, about 18 percent of recipients’ total annual loans and investments outstanding were in nonmetropolitan areas. For the NMTC Program, since implementing the two proportionality goals in the calendar year 2008 round, program officials stated that they have been successful in helping ensure that a proportional number of tax credits went to recipients that serve nonmetropolitan areas and that 20 percent of all NMTC investments were committed to nonmetropolitan areas. From calendar years 2008 through 2011, recipients committed to deploy more than $3 billion, or 20 percent of total investments, in nonmetropolitan areas. In 2010, the proportion of the dollar amount of NMTC projects financed that went to nonmetropolitan areas increased to 21 percent, which exceeded the program goal of 20 percent.

Why GAO Did This Study

The Riegle Community Development and Regulatory Improvement Act of 1994 created the Community Development Financial Institutions (CDFI) Fund under the Department of the Treasury to help promote access to capital and credit in underserved urban and rural communities across the country. The CDFI Fund carries out this mission through two primary programs: the CDFI Program and the New Markets Tax Credit (NMTC) Program. The CDFI Program awards financial and technical assistance to CDFIs for financial and development services, cash or capital reserves, operating expenses, and capacity building. CDFIs are specialized financial institutions—including community development banks and credit unions and nonregulated institutions such as loan and venture capital funds—that operate in markets underserved by traditional financial institutions. The NMTC Program, created by the Community Renewal Tax Relief Act of 2000, allocates tax credit authority (in this report, tax credits) to community development entities (CDE), which are domestic corporations or partnerships with a primary mission of serving low-income communities or low-income persons that act as intermediaries in providing loans, investments, or financial counseling in low-income communities. CDEs can use the tax credits to attract equity investments from investors who can, in turn, claim a tax credit over 7 years totaling 39 percent of their qualifying equity investment The CDFI Program awarded a total of $443 million to CDFIs from fiscal years 2004 through 2010, while the NMTC Program allocated tax credits worth $27 billion to CDEs from fiscal years 2003 through 2010. Both programs’ statutes include provisions requiring them to ensure at least a minimum level of assistance to nonmetropolitan areas.

House Report 112-136, referenced by the Consolidated Appropriations Act of 2012, requires that we conduct a study on the concentration of CDFIs and NMTCs in urban areas and comment on the extent that program design, administration, or history contributed to the early establishment of CDFIs in urban areas. In this report, we examine (1) how the CDFI Fund awards funds and allocates tax credits to recipients and how program policies affect the amount of funding and tax credits to metropolitan and nonmetropolitan areas, and (2) the extent to which the amounts of program awards and allocations that recipients receive differ in metropolitan and nonmetropolitan areas. We used the terms “metropolitan” and “nonmetropolitan” to make geographic distinctions between areas that have urban and rural characteristics for consistency in presentation and because some of the data available in program reports use these designations.

For more information, contact Daniel Garcia-Diaz at (202) 512-8678 or garciadiazd@gao.gov.