Federal Decision Puts Squeeze on Local Business Loan Program
A change in the interpretation of federal regulations will severely limit a nonprofit agency’s ability to offer economic development loans to small businesses in west-central Wisconsin that want to start up, expand, add jobs, or upgrade their buildings’ façades.
The Eau Claire-based Regional Business Fund Inc. was created in 2007, and now serves businesses in an eight-county region. Since its inception, the RBF has loaned out $22.7 million to nearly 400 businesses. It does this by making low- or no-interest loans to businesses from a revolving loan pool. Money is loaned to qualifying borrowers – ranging from brewers to butchers to restaurateurs to manufacturers – who pay the money back to the fund, which loans it out to more businesses, and so on. Over the course of just seven years, this process helped businesses create or retain more than 4,100 jobs and leverage nearly $149 million in private funds.
“We’ll be able to do a mere fraction of what we were able to do in the past.”– Beth Waldhart, fund manager, on the impact of a recent federal decision on the Eau Claire-based Regional Business Fund
“It’s been very helpful,” explains Mike Schatz, the city of Eau Claire’s economic development director. “It’s allowed us to leverage more dollars than we put into the RBF.”
However, on April 1, the state Department of Administration delivered some bad news to the RBF: Grant money that had originated with the federal Department of Housing and Urban Development and which was being used by the RBF would no longer be considered “defederalized.” In other words, it could only be loaned out in ways that conformed to strict federal requirements.
Funds Set Free
Understanding why this poses a problem requires a primer on the origins of the program. The money originally came from Community Development Block Grants that originated with the U.S. Department of Housing and Urban Development. The state of Wisconsin would award these block grants to municipalities, which would in turn loan them to businesses. After the loans were repaid, some of the money could be kept by the local government to be recycled in the community through more loans. There were strings attached, however: The new loans had to adhere to the original federal requirements. This meant that, depending on the type of loan, funds could only go to low- or moderate-income borrowers, to businesses creating jobs for low-income people, or to businesses that abide by federal prevailing wage requirements on construction projects.
When the Regional Business Fund was created in 2007, this federal red tape was cut. With guidance from HUD and the state of Wisconsin, funds from 31 municipalities were consolidated into the Regional Business Fund. As a result of this “defederalization” process, the funds were officially in local hands and they no longer had to be loaned according to federal rules.
“It really, really freed these funds up to be responsive to the business needs of the region,” explained Beth Waldhart, RBF fund manager with the West Central Wisconsin Regional Planning Commission.
It’s for that reason that the city of Eau Claire – as well as Eau Claire County – put some of their own economic development funds into the RBF, Schatz said. Even though Eau Claire is a large enough city that it receives Community Development Block Grant funds directly from the feds, city leaders decided that it was worth it to buy into the RBF as well, because it would open up Eau Claire businesses to another potential loan pool, he added.
RBF programs have benefited dozens of businesses in Eau Claire County alone. The façade loan program, for example, allowed for upgrades to several downtown businesses, including the Eau Claire Fire House, Houligans Steak & Seafood Pub, and (full disclosure) Volume One.
“Funds were tight,” Fire House founder William Glass told Volume One in 2013 when asked why his business pursued an RBF loan. “We kind of started our business on a shoestring budget. We figured we would take advantage of a very cheap loan. It was financially feasible, and it made sense.”
Downtown businesses aren’t the only ones that have benefited: Recipients of revolving loans have included Choice Products USA, Coating Tech Slot Dies, and Altoona Auto Body while “microloans” (typically of $25,000) have gone to an array of local businesses, including Infinity Beverages, Karen Hurd Nutritional Practice, and Pan Asia Kitchen.
But even as formerly federal dollars were being recycled in western Wisconsin, use of HUD funds was coming under increasing scrutiny nationwide. A 2011 exposé in The Washington Post revealed that HUD had given hundreds of millions of dollars to developers nationwide who pocketed the money instead of creating the low-income housing they promised. This led to HUD audits of state programs, including Wisconsin’s. However, RBF says that as recently as last year it was told that the funds it managed would still be free from federal requirements.
That changed on April 1, when RBF was told that HUD had decided that all the local agency’s “cash on hand was to be considered federal dollars,” RBF wrote in a memo. “Any loans made from that date forward must follow all federal rules and regulations,” the memo continued.
In an April 1 letter to the RBF, state Department of Administration official Lisa Marks noted that there previously was “ambiguity from HUD regarding the specific requirements of how the defederalization process practically works in Wisconsin.” However, she added, federal officials had made clear that the original process used to free the funds from federal control was in error. In essence, this means that if RBF is to loan out the money now, it must jump through federal hoops, such as ensuring the funds only go to low- or moderate-income borrowers, etc.
The decision has caused dismay for the RBF, its board of directors, and potential borrowers. If the agency must follow the exact letter of the law as interpreted by HUD, “We’ll be able to do a mere fraction of what we were able to do in the past,” Waldhart said.
The fund and its board of directors are currently trying to determine a course of action. They’ve been in touch with state and federal lawmakers, who in turn are advocating on their behalf with HUD. In addition, the RBF has retained an attorney, has communicated with two similar funds in other parts of Wisconsin that face similar setbacks, and is participating in a workgroup organized by DOA to better understand the regulatory change. The RBF also has stopped processing loan applications until they have a more clear understanding of the rules they must operate under.
“We had several loans in the pipeline – façade loans and others – that we now won’t be able to do,” said Schatz of the city of Eau Claire.
Meanwhile, Waldhart said the RBF is also waiting on the outcome of the state budget process to see if it will receive funding that way. “If we aren’t able to regain our defederalized status, if we aren’t able to receive additional funding from the governor’s budget, then it will be a matter of seeking out other sources of capital as an economic development lending partner,” she said.
To learn more about the Regional Business Fund and its programs, visit www.rbfinc.org.