Clinton's New Markets initiative, Rep. John J. LaFalce, D-N.Y., introduced legislation last week that would guarantee bonds issued by companies investing and lending in poor areas.
Under Rep. LaFalce's plan, the Department of Housing and Urban Development would guarantee debt issued by for-profit community development companies that invest in businesses located in low-income areas. The bill would require these businesses to generate half their gross income in communities where 20% of the people are living in poverty.
HUD would license the investors as "America's Private Investment Companies.'' These companies, which could be owned by banks, would have to have $25 million of equity capital and would have to be devoted to providing investment capital to low-income communities or low-income people.
"This legislation offers a practical plan that harnesses the financial muscle of the private sector to invest in communities that have been left behind,'' Rep. LaFalce said in a statement last week.
President Clinton's New Markets initiative was unveiled in early July and is designed to encourage corporate investments in domestic low-income areas rather than emerging markets overseas.
For instance, the President has called for a tax credit of 25% for corporations that invest in poor communities.
The proposed HUD program would mirror the Small Business Administration, yet be more directly helpful to lower-income areas, a community advocate said.
"In metro areas, SBA loans are more likely to show up in new, outer-fringe suburbs,'' said Malcolm Bush, president of the Woodstock Institute in Chicago. "That's really increasing the gap between the older areas and newer areas.''
"What's encouraging about the LaFalce bill is this is targeted'' on low-income areas, he said.The legislation seeks to generate $7.5 billion in new investments in large-scale businesses operating in distressed communities.
HUD could guarantee up to $1 billion of debt annually for five years. Private-sector companies would have to raise $1 of capital for every $2 of their debt guaranteed by the government.
Bankers and trade group representatives were either unfamiliar with the details of the proposal or unavailable to comment Monday.
The bill, which has 22 co-sponsors, would cost the government $37 million a year, according to Rep. LaFalce. That estimate assumes a 3.6% loan-loss rate and $1 million in administrative expenses.
"At a time when Congress seems eager to enact tax breaks and loan guarantees for a broad range of industries, it is not too much to ask for limited resources targeted to corporations which want to do business in the untried markets of our neglected communities,'' Rep. LaFalce said.