LOAN GUARANTEE INITIATIVE
Using CDBG and HOME Funds to Better Leverage Bank
Miami Capital Development Corporation (now defunct) had been funded for a number of years by the
City of Miami's CDBG program. Its purpose has been to make loans to small and minority
owned businesses unable to meet traditional bank lending criteria
Miami Capital Development Corporation came under criticism because of its perceived
high default. While some of the criticism is undoubtedly justified, others, perhaps,
is not given the inherent risk of lending to these types of businesses. As a result,
the City ceased funding the organization.
Beyond these types of criticisms there are inherent drawbacks to the strategy employed
by Miami Capital.
* Bank financing is not effectively leveraged.
* Large amounts of scarce CDBG dollars are disbursed to the loan recipients only
to be slowly paid back over a number of years (thus the funds are not available
for other purposes).
* Unlike a typical bank, Miami Capital is not set up to effectively administer loans
that have already been made (including enforcement action against defaulting borrowers).
A spects of the Miami Capital approach, however, are advantageous vis a vie the
way a bank does business.
* Banks have difficulty in doing out reach to the target market of minority owned
* Banks are typically not equipped to process applications from potential borrowers
whom may have excellent business instincts but who have spotty credit histories,
unsophisticated loan packages, and poor record keeping.
The purpose of the Concept Paper is to present an alternate model for using CDBG
to meet the credit needs to these types of small businesses that have difficulty
in accessing traditional bank lending.
It is proposed that the City of Miami establish a guarantee program to encourage
banks to provide loans to minority and small inner city neighborhood businesses.
The concept is loosely modeled on the Small Business Administrations 7A loan guarantee
program. The idea is to develop a system for establishing a certification or certificate
program that borrowers can take to the lenders for qualification to the loan guarantee.
The concept being proposed also involves the development of a marketing system to
encourage bank participation using the City's deposits as a motivation. Offering
the banks a guarantee on qualifying loans will secure favorable lending criteria
from the lenders and will buy down the interest rates on their loans.
The proposed program would provide an initial guarantee of the first 10, 20 or 30%
of a loan request (these are suggested figures for purposes of this presentation).
Banks would make and service the loans but Miami Capital would do the initial intake
and do the processing of the loan applications.
Upon completion of the application process Miami Capital would issue a voucher to
the qualified borrowers. The vouchers would be redeemed at the participating bank
of their choice.
The advantage of this approach is that Miami Capital would be doing what it does
best (marketing loan to the inner city businesses) and the banks would be doing
what they do best (safeguard money and collection).
* Leverage the City's capital investment.
* Using bank funds will decrease the amount CDBG funds expended.
* Increase the number of loans.
* Introduce banks back into the community.
* more effective loan administration
* more effective enforcement in the event of defaults
* Allows the City to further buy down interest rates by keeping its funds in participating
* Takes the political process out of lending process.
* Reduce the default rate by taking politics out of the collection process.
* Retains Miami Capital as a source for referring loans to the banks.
* Banks can better cooperate in marketing to the inner city businesses.
* Cuts the waiting time for process loans bank can make loan decisions in hours
* Reduce losses from making poor loan decisions
Banks have an obligation to meet the credit needs to the business in these low income
neighborhoods but their are legitimate barriers that inhibit them. The concept being
proposed addresses those barriers and should free the banks to make significantly
more such loans.
A lower cost of operating capital will be require as several functions current
being performed by Miami Capital would be undertaken by the lenders in the program.
The reduced administration cost could add additional dollars to the lending pool.
Greater collection efforts and successes would return additional funds for administration