Revolving Loan Fund Report

Transcription

1 Revolving Loan Fund Report PREPARED BY THE AGENCY OF COMMERCE & COMMUNITY DEVELOPMENT

2 REVOLVING LOAN FUND REPORT EXECUTIVE SUMMARY Pursuant to the following section of the 2008 budget bill, Act 192, this report has been prepared by the Agency of Commerce and Community Development for the Vermont Legislature. (c) No less than 50 percent of CDBG-generated loan repayments shall remain available to municipalities awarded community development block grant funds. By January 15, 2009, the department of housing and community affairs shall report to the senate and house committees on appropriations, the senate committee on economic development, housing and general affairs and the house committee on general, housing and military affairs on the past performance of the revolving loan funds supported by CDBG appropriations. Such report shall include recommended changes for improvement if deemed necessary; and shall address standards for best practices, criteria for evaluating outcomes, and a process for recapture by the state of funds that are unused for five years by grantees for the activities for which the funds were granted. This section of the Act was in response to the Department of Housing and Community Affairs, Consolidated Plan proposal to require all future CDBG grants for economic development be sub granted to the Vermont Economic Development Authority for underwriting, servicing and collection and similarly all housing grants would be sub granted to the Vermont Housing and Finance Authority in order to provide similar services. The proposal to use Vermont s premier, statewide, and professional lending authorities to make and service large and sometimes complicated investments was somehow seen as a threat to non profits and communities when in fact this proposal could only lead to more funding for projects around the state. FINDINGS This is the fourth report on the past performance of revolving loan funds since All four reports contain essentially the same findings: o Some RLF s do a good job of providing alternative capital to businesses, homeowners and housing developers, many do not. 1

3 o Some RLF s report their assets in town reports, in selectboard updates, and to the Commissioner of Economic Development (as required by law), some make no such reports, apparently to anyone. o Some communities honor their pledge to use income from revolved funds for purposes consistent with the federal community development act and some use the funds for town projects and expenses which are not consistent with the act. o Some RLF s report a relatively low, loan loss rate others do not report their losses at all. o Some loan fund managers have had some loan fund management training and use software to manage the funds, many do not. Since some RLF s report to no one, the total amount of assets in RLF s is unknown but conservatively, the total is in excess of $64,000,000. If this money was pooled, its potential for leveraging would be substantial. At least 17 different institutions are currently used for these deposits. The amount of money that could currently be considered idle is likely about $15,000,000. Some communities were apparently not aware they had large, non amortizing housing loans that would balloon at some date in the future. (Total value of not reported loans: about $6.6 million.) RECAPTURE When and where the Department of Housing and Community Affairs can recapture unused funds through lawful action pursuant to grant agreements, it does that now vigorously and effectively and will continue to do so. However, the Department has no lawful way to recapture much of the RLF funding that currently exists regardless of whether or how it is used due to the nature of that funding, the agreements in use at the time or changes in regulations. 2

4 RECOMMENDATIONS EXISTING RLFs We do not recommend interfering with existing RLFs. It is possible to pass legislation to regulate these entities but the Department does not make that recommendation as it does not have the resources to provide such oversight and in any event, BISHCA would be better equipped to provide that regulatory role. However, we do not recommend creating any new RLF s or reinvesting in any existing RLFs through loan repayments. While there is currently no shortage of RLF capital, recapitalization of existing RLFs can be done in a number of ways: USDA RD intermediary relending loans. EDA and earmark grants. By selling seasoned loans to the alternative secondary market. GOING FORWARD Establish the program proposed in the consolidated plan process last year. More than half the states use their finance agencies to administer CDBG capitalized loans now and of the remaining states, more than half of those are moving toward that model. No community will ever be as well equipped to analyze, underwrite, make, service and collect loans as well as our finance authorities. And no community has the ability to arbitrage CDBG funds with these agency s existing loan products for maximum impact and cost savings. The efficiencies realized and the losses averted would result in a reliable stream of income back to the Community Development Fund that would be used for new projects throughout the state. Additionally, we would achieve accurate reporting, real transparency, and standardization of loan terms. The benefits are undeniably, compelling. End of Executive Summary 3

5 METHODOLOGY OF THIS REPORT ACCD contracted with the Vermont Small Business Development Center (SBDC) to develop a comprehensive survey to be used to gather data about a region s or municipality s revolving loan fund. The surveys were completed through fairly intensive in-person interviews between an SBDC specialist and RLF administrators. These interviews were conducted last summer and fall. The list of questions and results is attached to this document. Of the eighty revolving loan funds that we knew of and were contacted, 41 responded. Of the remaining loan funds: - 12 wouldn't respond - 8 no longer exist (defunct or eliminated) - 5 combined with another loan fund - 5 are now managed by a federally regulated fund (ie. Community Capital, VCLF) - 9 surveys are outstanding The Vermont Community Development Program The Department of Housing and Community Affairs has successfully distributed funds allocated by HUD through the Vermont Community Development Program, since These funds have allowed Vermont s municipalities to receive financial assistance to create housing; create and retain jobs and make improvements to their communities. RLF s are capitalized typically by receiving a grant that is then loaned to a company and when the loan is repaid, the repaid funds capitalize the loan fund. Since 1994 the state recovers 50% of these funds that are then put back into new grants and towns receive 50% for their RLF. If an RLF is not established or not loaned to new borrowers, the Department will seek recovery of the funds and often does. Over the past several years, some important changes to the program have been made that have proven to be very successful. Applicants can now apply for CDBG funds online through its Intelligrants System. This has proven to be of huge benefit for applicants. Also, the program has an Out of Cycle process that can deliver a grant award in about 4

6 30 days from the receipt of a complete application for projects needing quick action. This a feature no one thought possible but has now been used to respond to fire disasters and fast moving economic development projects. HISTORY OF RLF CAPITALIZATION In 1983, the Agency of Commerce & Community Development was charged with the administration of CDBG funds. Communities that receive CDBG awards were, until 1994, permitted to keep all income realized through the grant. These RLFs serve a role in our economic development services network. They allow communities to assist local businesses that might not otherwise qualify for traditional funding or can participate as part of a larger financing package. But not all RLFs have been capitalized by CDBG funds. Approximately half of the communities that responded to the survey reported that their RLFs were capitalized by CDBG and in some cases were supplemented by funding from Rural Development. The remaining funds were created as a result of direct funding from HUD; solely by a USDA program or by private investors. However, based on a quick scan of the 12 that didn t respond, at least another six funds were created as a result of CDBG. Communities primarily use RLF monies to support economic development in their community, but there are a few that focus solely on housing due in part to the way that they were capitalized. Most RLF communities that have non amortizing housing development loans to nonprofits do not regard those loans as receivables even though the IRS requires those loans to be real loans and not grants that will eventually be repaid. PROCESSES AND OVERSIGHT Every municipality has a different way of administering their funds and conducting oversight of not only the fund itself, but of the borrowers. In some of the smaller 5

7 communities there is a town official who has other duties - that is often the first stop for potential borrowers. A larger committee then approves/disapproves the request. Other municipalities leave the entire process (review of application and decision to one person). And finally, there are those usually with larger staff that have a more formal process, as is the case with the regional development corporations. The extreme variation in how these funds are administered, particularly at the local level, is an area of great concern. Of the 17 respondents that have RLFs capitalized by wholly or in part CDBG funds, all of them have an application process, but the length of time varies from the time of application to a decision. Some are able to make a determination two weeks from the receipt of an application and one actually takes up to 8 weeks. Of the CDBG RLFs, approximately eleven of them can make loans in support of economic development. The majority of municipalities have a loan committee or individual approve/deny an application and in some cases, these decisions have to be endorsed by the select board. While there seems to be an application process in place for each municipality, the level of oversight and lending practices vary widely: 22% do NOT conduct a credit check of their potential borrowers 39% have no maximum loan amount 32% do not provide post loan technical assistance to borrowers 22% NEVER visit borrowers after making loan 55%do not measure the impact of their RLF (i.e. how many jobs were created/retained; increased sales of borrower; etc.) 31% use the fund for town projects, expenses 48% do not report on their fund in their town report 58% do not give regular status updates to select board. 6

8 Delving into the above points a little further, we looked at the responses from the 23 non-cdbg capitalized loan funds to look at their practices. Again, the majority have a loan committee that reviews applications and makes determinations. 13% do not conduct credit checks of potential borrowers 47% do not provide technical assistance 56% visit borrowers once or twice annually; and in most cases there is more staff capacity to do this 39% do not measure the impact of their RLF FINANCIAL STRENGTH AND USES OF FUNDS Based on the responses of this survey, there is in excess of $15 million available to loan. Of those that lend to economic development projects, most offer loans for capital equipment purchases and some will allow borrowers to access working capital. The loan terms and rates also vary among lenders. Rates range from zero to prime plus two. In all cases, the rates have been set by the loan committee or select board. Many of the RLFs around the state is to lend patient money; that is, there is a likelihood that there are other funders participating in a project that will get paid back first. Roughly half don t have set loan limits or determine them based on how much is available in the fund. The majority of the funds that responded (and many did not on this point) have loan loss ratios that range from 0-5%. Only one reported one in excess of 15%. The study conducted in 2007 found some loan loss rates as high as 40%. Economic Development Projects Of the CDBG RLFs, the loan portfolios are comprised of borrowers at various stages of growth. From start-ups to mid-stage companies, these revolving loan funds have 7

9 supported a variety of companies. Breweries, retail establishments, restaurants, manufacturers of all sizes and start-ups have benefited from RLFs. Well over half of the total surveyed allow for their funds to assist start-up companies and have loan limits and terms that vary. In our economic development network there seems to be fewer funding opportunities for seed capital/start-up funds. 73% can lend to companies for capital improvements 22% can lend to agriculture-related businesses 56% can assist start-up companies Housing Projects Of the forty-one responses, sixteen indicated that they were able to make loans in support of housing. However, when we cross referenced the town s responses with DHCA records, we found that ten communities did not know or appeared not to realize they had large loans with not for profit developers amounting to more than $6.6 million dollars. SELF IDENTIFIED STRENGTHS AND WEAKNESSES As part of our survey, we wanted to get an idea of what each respondent felt was the strongest attribute of its RLF and where they thought weaknesses are. Well over half felt that their ability to make flexible, patient loans to borrowers and provide gap financing were the strengths of their funds. These municipalities clearly see the benefit of getting the money out in to the community, but many acknowledge that they needed to do a better job marketing their funds. A few indicated that they would like more money to lend, but the majority believed that with some streamlining in application procedures and expanded marketing that they could get more funds out into the community. One common acknowledgment among many of the fund administrators is a need to better market the availability of their respective RLFs. Some of the larger ones those 8

10 run by the regional development corporations and other regional RLFs have the benefit of having larger staff and greater resources to promote the fund, but many of the smaller ones don t enjoy the same benefit. Seventy-three percent of the surveyed RLFs are promoted through a combination of: Printed brochures (14/40 actually have them and 9 of them use this in conjunction w/ website) Website to market their fund (17/40 use this) Word of Mouth Bank relationships There are five that said that they don t do any marketing of their fund at all. MOVING FORWARD - RECOMMENDATIONS EXISTING RLFS 9 The range of possibilities is from complete regulation to doing nothing and letting the existing RLF paradigm exist as it does now. Currently, existing law requires that all RLF s register with the Commissioner of Economic Development and not all do. However, there is no penalty for not registering. The study conducted in 2007 proposed a sweeping range of improvements including oversight, training and other enterprise solutions for RLFs. This would improve the effectiveness of the RLFs but would be costly and DHCA does not have the resources necessary to implement a comprehensive program. We recommend allowing the existing RLF s to operate as they do now. We also recommend against establishing any new RLFs or providing any additional capital to RLFs. While there is no shortage of RLF capital now recapitalization in the future can be achieved in several ways.

11 We recommend the following: PROPOSED POLICY FOR VCDP HOUSING FUNDS STRUCTURED AS LOANS: 1. VCDP will utilize the Vermont Housing and Finance Agency (VHFA) to complete a financial analysis of each housing application, with the exception noted below. 2. New VCDP grants for housing which will be structured as loans will be required to be sub granted from the municipality to VHFA for underwriting, origination, and where prudent and appropriate, servicing and collection. 3. All VCDP funds returned to the servicing agency (VHFA) would be deposited into a separate depository and credited to a new statewide revolving loan fund called the Vermont Development Fund (the Fund). 4. VHFA will have the authority to make new loans from the Fund for VCDP eligible purposed only 5. All new loans would be consistent with federal regulations and be subject the Secretary of the Agency of Commerce and Community Development (ACCD) approval. The Secretary would also retain the ability to redirect revolved resources within the Fund, between VEDA (for which VCDP economic development loan funds will be returned) and VHFA as may be required. 6. A VCDP application fee will be required to cover VHFA costs of underwriting, processing and servicing of the VCDP funded loans. NOTE: This new policy would not apply to special needs housing projects applying for VCDP funds to be structured as grants to the end-users. PROPOSED POLICY FOR VCDP ECONOMIC DEVELOPMENT FUNDS: 1. VCDP will utilize the Vermont Economic Development Agency (VEDA) to underwrite each economic development application. 2. New grants for economic development loans will be required to be sub granted from the municipality to the VEDA for underwriting, origination, and where prudent and appropriate, servicing and collection. 10

12 3. All VCDP funds returned to the servicing agency (VEDA) would be deposited into separate depository and credited to a new statewide revolving loan fund called the Vermont Development Fund (the Fund). 4. VEDA will have the authority to make new loans from the Fund for VCDP eligible purposes only. 5. All new loans would be consistent with federal regulations and be subject to the approval of the Secretary of ACCD. The Secretary would also retain the ability to redirect revolved resources within the fund, between VEDA and VHFA as may be required. 6. An application fee will be required of VCDP applications for economic development projects to cover VEDA costs of underwriting, processing and servicing of the VCDP funded loans. CONCLUSION While it would be very difficult and costly to redesign the existing RLF network to make it more transparent, standardized, professional and/or responsible, it is not at all difficult to do what most other states are doing; use our existing finance agencies to the full advantage of the CDBG program. This would make more money available to towns, make all processes transparent and secure the future for CDBG program income. The logic of utilizing the existing finance authorities for this purpose is irrefutable. They have the capacity and responsibility to provide professional financial services for the state s growth and sustainability; to not use them in that capacity for purposes of the CDBG program is imprudent and wasteful. 11

13 2008 VERMONT RLF SURVEY Introduction: Name of Loan Contact Date: Interviewer: The application process 1. Who is eligible to apply? a. Individual b. Business Start-ups Existing c. Non-Profit Other (specify) 2. Is there an application? Yes No 3. Where is it submitted? 4. Who reviews the application? a. For completeness b. Accuracy 5. Who approves/disapproves the loan? Individual Loan Committee Selectboard Other 12

14 6. How long is it from application to decision? 7. Do you do credit checks as part of the process? Yes No 8. Must the business/individual or both live in area? Yes No Comments: 9. What part of town is eligible for loans? All Downtown Other 10. What activities are eligible for loan? Start-up Expansion Capital Improvement Equipment Line of Credit Housing Ag Other 11. What is your maximum loan limit? 12. What is your minimum loan limit? 13. Typical loan amount /typical loan use: 14. Do you require technical assistance? a. Pre Loan: Yes No b. Post Loan: Yes No 15. Any other criteria you use? Management of the Loan Fund 16. What is the total fund balance? 17. How much is available to loan? 18. Please describe the loans in your portfolio: 19. Have you been to loan training? Yes No If Yes, describe If No, what kind of training would you like to receive? 13

15 20. Do you use a software program to manage the fund? Yes No If yes, describe type (Could be a spreadsheet, which is ok, if done accurately) 21. Do you contract with an entity to manage your loan funds such as a bank, RDC, other? Yes No If yes describe 22. What is the source of capitalization for your fund? (Where did the money originally come from to set up the loan fund) 23. What is your loan fund s loss ratio? 24. How do you collect late payments? 25. How often do you visit borrowers? Do you refer delinquent loans for technical assistance? Yes No a. If yes to which provider (s) b. Do you pay for it? Yes No 26. Where is the deposit? (what bank do you use) 27. What are your interest rates? a. How do you determine what they should be? 28. Where are payments sent to be processed? 29. Who services the loans? 30. Are loan funds used for any town activities? Yes No If yes Describe 31. Do you have any housing loans for non-profit housing providers (such as a land trust) Yes No If yes 14

16 a. Are they performing Yes No b. What is the amount of these loans? Marketing 32. How do you advertise the availability of your loan fund? 33. Does the loan fund have a: Web page? Brochure? Newsletter? 34. Do you do reach out to potential borrowers? Yes No If yes, describe 35. What would best help you market your loan program? Impact 36. Is your loan fund reported in the town s annual report? Yes No 37. Is there a regular status report to the selectboard? Yes No If yes, how often 38. Who at the municipal level provides oversight of the financial management of the loan fund? 39. Do you regularly measure the impact of the borrowers? Yes No If yes, for which factors? Jobs created Jobs retained Sales Other Final Questions: 40. What would you say are the best features (strong points) of your RLF program? 42. What would you say are the weak points (features that could stand improvement) of your RLF program? 15

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