Upping investments.

Federal funding for community and economic development continues to dwindle with changing policies and regulations. In response, many city and county officials are exploring the secondary market for community development finance as an alternative funding source.

The secondary market connects community-based and economic development lenders with Wall Street's capital resources. In simplest terms, a secondary market financial intermediary buys loans, such as economic development, affordable housing and community facility loans, from nonprofit and governmental community development lenders, including cities and counties. The lenders then receive virtually all of the repayment owed immediately, allowing them to offer more loans. The financial intermediary then pools the loans together into asset-backed debt securities, which are sold to institutional investors.

Minneapolis recently has used the secondary market for community development finance to provide more than 60 loans worth $12 million. The city's Capital Acquisition Loan (CAL) Program helps small businesses purchase and rehabilitate commercial and industrial properties by providing financing in conjunction with private banks for projects of up to approximately $700,000. The city funds CAL through a loan purchase agreement with a non-profit financial intermediary organization, which buys the city's share of each loan.

The secondary market for community development finance recently caught the attention of Scranton, Pa., Mayor Chris Doherty. The mayor has proposed that the city use the secondary market to drive more than $5 million into economic development loans. Doing so would free up federal Community Development Block Grants for other housing, neighborhood projects and social service programs.

Under the mayor's plan, which must be approved by Scranton's City Council, the same financial intermediary that participates in Minneapolis' CAL program would pay $5.2 million for $5.8 million in loans, giving the city a large pool for new loans as opposed to the $200,000 it normally collects from annual loan payments. The city also would eliminate the administrative burden of tracking loan payments.

Until recently, note offerings from the secondary market for community development finance were non-rated, which limited the number and types of investors. Last year, however, the first note offering rated by New York-based Standard & Poor's to be backed by community development loans was closed. The $51 million loan pool consisted of 128 loans made by 37 community-based lenders.

In addition, a tax credit to investors who make qualified equity investments in privately managed investment vehicles recently has been developed. Known as the New Markets Tax Credit program, it allows investors to receive tax credits worth more than 30 percent of the amount invested when they make an equity investment in an eligible "community development entity."

The secondary market for community development finance continues to develop, providing a number of benefits to cities and counties. It can help provide capital to fund revitalization projects and increase investment in underserved communities.

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By Frank Altman

The author is president and CEO of Community Reinvestment Fund, USA.