Filling the Lending Vacuum

As credit tightens and higher and higher numbers of commercial real estate loans enter default, CDCs are stepping up to fill the financing gap in economic development deals from which conventional lenders have been retreating.

Looking Forward

With unemployment rates expected to be daunting as the recovery proceeds at a deliberate pace, capitalizing small, neighborhood businesses and reducing commercial defaults will be critical to job growth in areas of high unemployment. As federal dollars for economic development continue to be cut, more and more states and localities will be increasingly dependent upon leveraging private sector capital to foster local business growth and economic development innovations.

Unfortunately, less-than-flexible reviews of bank underwriting approaches taken by some federal regulatory agencies mean that federal policy enforcement personnel may continue to be uncomfortable with deals structured by models like WHEDA, the Massachusetts Community Development Finance Corporation, and others designed to catalyze additional private sector financing. Advocates should increase their voice in Washington and at the state level to support the use of recycled TARP dollars (which may no longer be available after September) to encourage states to create innovative finance programs.

Supporting the ability of CDCs to retain a mature staff that understands the nuances of development and entrepreneurship will be essential for allowing them to continue bridging these gaps, addressing unemployment, keeping commercial spaces occupied, and helping restore local economies. The funding for such quality personnel was a key part of the original Title VII CDC Program that was nurtured legislatively by bipartisan efforts of the late senators Jacob Javits and Bobby Kennedy. However, in light of new funding constraints at the federal and philanthropic level, the ability of CDCs to function as they did in the past with respect to economic development and finance is uncertain. Given the enhanced role CDCs have been playing, if foundation and federal funding for CDCs diminishes substantially, it may dramatically exacerbate the credit crunch for small business.

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