Community Development Corporations

Community development corporations (CDCs) are locally based nonprofit organizations that work to help the residents of impoverished areas to improve their quality of life. Such organizations exist in virtually every major urban area of the United States today. CDCs provide residents with a variety of different benefits, including housing, day care for children, nursing home care for the elderly, employment opportunities, job training, and health care facilities. Some CDCs act as part-owners of vital businesses within their neighborhoods, like supermarkets and shopping centers, while others assist residents in starting their own small businesses.

"Community development corporations function somewhat like private developers but are governed by the community," Gustav Spohn explained in an article for the San Diego Business Journal. "Their boards of directors are typically composed of community residents together with experts who advise them on the technical aspects of fund-raising and development projects. They depend heavily on government and private philanthropic funds, which in turn leverage financing from banks and other investors. Their goal is not to turn a profit but to generate economic renewal in poor communities."

As recently as the early 1990s, CDCs were being dismissed as small-time players unable to make a real contribution to solving urban problems. Banks were rarely willing to provide them with financing or any other assistance. But today CDCs are viewed as "key components of public strategies to fight poverty in cities across the country," according to Spohn. Nearly every major bank in the country is now actively involved in community development in at least one city. According to the National Congress for Community Economic Development, there were more than 2,200 CDCs operating in the United States in 2005. CDCs are a driving force in many reviving poor places because they refurbish housing, restore enterprise to ruined commercial districts, and work to make life difficult for those standing in the way of progress, from junkies to zoning bureaucrats.

Although CDCs have had an increasing impact on the fight to reclaim urban neighborhoods, they are still the subject of some skepticism. Critics believe that CDCs cannot operate on a large-enough scale to overcome a 40-year lack of investment in many inner cities. Others believe that community improvement efforts in impoverished neighborhoods are pointless, claiming that residents will simply choose to leave as soon as they are able to raise their incomes to a certain level. Finally, some people worry that CDCs—which receive major funding from the federal government through the Community Development Block Grant and other programs—will not be able to remain effective in the face of inevitable budget cuts.

In his article, Spohn outlined some of the functions of a successful CDC. First, it must make local residents feel that they have an investment in the neighborhood. Second, it must serve a mediating role between the differing interests of various neighborhood groups. Third, it must not polarize the interests of the community and the interests of government and outside private-sector institutions. Finally, it must continually battle the forces that act to return the inner cities to a state of disorder. Overall, CDCs can have a significant impact on the communities they serve. "Nationally there's a feeling that nothing can work in the cities—they have no hope—that there's nothing the society can do," Roland Anglin of the Ford Foundation told Spohn. "It's not true. There is a movement there. There is a structure there in inner cities. There is a strategy that can help."

OTHER COMMUNITY INITIATIVES TO ATTRACT SMALL BUSINESSES

In the late 1990s, as Internet technology made location less important for many small businesses, a number of communities began enacting programs designed to attract entrepreneurs to their areas. These cities and towns "are appealing directly to a new breed of 'lone eagles,' self-employed professionals who can do their work any time, any place, and who don't need the security of a regular paycheck," David Stamps wrote in Training. For instance, some communities chose to upgrade their telephone systems to offer high-speed connections for computer modems, while others began providing inexpensive Internet access and hosting services for small business Web sites.

In a study for Business Horizons, William M. Shanklin and John K. Rayns, Jr. found that "economic development initiatives designed to invigorate entrepreneurial growth have become centerpieces of state and community efforts. Indeed, political entities spend billions of dollars and untold hours on stimulating their economies." Numerous communities have begun offering a wide variety of assistance programs for entrepreneurs and small businesses. In the course of their research, Shanklin and Rayns found that such programs were most successful when the communities first conducted a realistic self-assessment to uncover the unique benefits they had to offer developing businesses. "Neglecting to complete this strategic first step is precisely why some communities set missions that are unrealistic," the authors noted. "Concisely stated, without a strategic compass there is no way a community can design programs and policies that are effective in boosting entrepreneurship."

Shanklin and Rayns also surveyed small business owners and entrepreneurs to see what components of community assistance programs they found most helpful. The respondents particularly valued community assistance in obtaining loans to begin operations, developing pro-forma financial statements, conducting market research, obtaining equity capital, and finding a suitable location for their businesses. Communities that provide assistance in these areas—for example, by creating enterprise development boards staffed by knowledgeable local business people—were most likely to boost entrepreneurship in their areas. "Results from states and communities throughout the United States show that economic development efforts can and do boost entrepreneurial performance," Shanklin and Rayns wrote. "By creating a climate that encourages small business and by offering competent managerial and technical assistance to aspiring and growth-oriented entrepreneurs, economic development officials can make a difference."

BIBLIOGRAPHY

"Community Development Corporations Emerge as Major Generators of Economic Development in Urban Neighborhoods." Ford Foundation. Available from http://www.fordfound.org/news/view_news_detail.cfm?news_index=8. Retrieved on 27 January 2006.

De Paula, Matthew. "Grants to Poor Entrepreneurs Nurture Future Business." US Bank. September 2004.

Murphy, Patricia W., and James V Cunningham. Organizing for Community Controlled Development. Sage Publications, Inc., 23 January 2003.

Shanklin, William M., and John K. Rayns, Jr. "Stoking the Small Business Engine." Business Horizons. January-February 1998.

Spohn, Gustav. "Engines for Rebuilding Communities Make Headway." San Diego Business Journal. 16 June 1997.

Stamps, David. "Social Capital." Training. November 1998.

                                Hillstrom, Northern Lights

                                  updated by Magee, ECDI

Community Development Banking and Financial Institutions Act of 1994

Michael P. Malloy

The Community Development Banking and Financial Institutions Act of 1994 (CDBFIA) (108 Stat. 2163) constitutes an integral part of the Riegle Community Development and Regulatory Improvement Act of 1994 (Riegle Act). Enacted on September 23, 1994, the Riegle Act pursued a wide range of objectives. According to section 102(h), Congress's objective was "to create a Community Development Financial Institutions Fund to promote economic revitalization and community development through investment in and assistance to" so-called community development financial institutions (CDFIs). In part, this effort addressed an increasingly controversial issue in bank regulatory policy—to what extent should the law require banks to involve themselves in the economic well-being and development of local communities served by their operations?

The CDBFIA authorized financial incentives for depository institutions to participate voluntarily in community-developmentoriented banking programs and activities. CDFIs receiving incentives are expected to focus on financial activities and transactions intended to promote community development. However, such legislative efforts are relatively specialized, and they avoid, rather than resolve, the underlying controversy: If "full-service" banking enterprises enjoy a competitive advantage in aggregating credit by taking in deposits and dispensing resources in the form of loans because of their relatively exclusive government charters, should they not be required to serve their local communities?

The CFDI program is available for banks and other depository institutions, including credit unions. Periodically, regulators announce the availability of incentive funds for the program. In 2000, the National Credit Union Administration, as federal regulator of federal credit unions and federallyinsured state credit unions, published an interim final rule with respect to its Community Development Revolving Loan Program. Overall, CDFI resources seem relatively limited, and voluntary participation in community development under the CDBFIA is not pervasive among institutions.

Awarding funds for community development, however, was not the sole purpose of the Riegle Act. According to the conference report accompanying the act, a second major objective of the Riegle Act was "to reduce administrative requirements for insured depository institutions to the extent consistent with safe and sound banking practices." The Riegle Act accomplished this by requiring regulators and other depository institutions to review their rules periodically and to eliminate or modify provisions that imposed regulatory burdens on depository institutions. The task of amending federal regulations in light of this mandate is a continuing obligation for the federal bank regulatory agencies.

A third technical objective of the Riegle Act, eliminating obsolete provisions from federal banking legislation, is of related importance. Many experts viewed this effort as long overdue, and the technical amendments included in the act in this regard are extensive. Thus in February 2003 the Community Development Financial Institutions Fund revised its rules to replace semiannual reporting requirements with an annual reporting requirement. It also achieved regulatory economy and efficiency by deleting references to the required contents of CDFI applications, since these matters were addressed in various application forms themselves. In March 2003 the Federal Reserve Board amended its rules implementing the Equal Credit Opportunity Act to create an exception to its rules that prohibited a bank from inquiring about a loan applicant's national origin, race, age, or similar characteristics, so that a bank could collect such data for the purpose of conducting a self-text of its compliance with nondiscrimination requirements.

See also: Community Reinvestment Act.

BIBLIOGRAPHY

Malloy, Michael P. Banking Law and Regulation. 3 Vols. New York: Aspen Law & Business, 1994 & Cumulative Supplements.

Malloy, Michael P., ed. Banking and Financial Services Law: Cases, Materials, and Problems. Durham, NC: Carolina Academic Press, 1999 & 2002-2003 Supp.

Malloy, Michael P. Bank Regulation Hornbook 2d ed. St. Paul, MN: West Group, 2003.