Texas Community Reinvestment Update 2007

Small Business, Small Farm and Community Development Lending in the U.S. and Texas

The SBA's Office of Advocacy defines small business as an independent business having fewer than 500 employees. According to the SBA, the U.S. has approximately 26 million small businesses. Nationally, almost 6 million small businesses have employees. Small businesses with fewer than 500 employees represent about 99.7 percent of all employers and generate half of total U.S. non-farm private output and produce 52 percent of private sector output.[34] Small businesses comprise more than 93 percent of businesses in every state and create more than half of all jobs in the U.S. The SBA estimates that small businesses contribute more than 50 percent of non-farm private gross domestic product (GDP), pay 45 percent of total U.S. private payroll and comprise 97 percent of the total number of identified exporters in the U.S. economy.[35]

During the last decade, small firms generated between 60 to 80 percent of the net new jobs annually in the U.S. and employ 41 percent of high tech workers (e.g., scientists, engineers and computer workers).[36] Data from the Federal Procurement Data System - Next Generation showed that small businesses received approximately $80 billion in federal contracts in 2005.[37]

Small businesses are a critical component of the economies of both the U.S. and Texas. Research released by the SBA, Small Business and State Growth: An Econometric Investigation, found that the start of new small firms is the single most important factor in growing gross state product, state personal income and total state employment.[38] Small firms create the majority of new jobs, increase competition, fuel innovations and fill niche markets.

2005 CRA Data

Loans to Small Businesses and Small Farms in the U.S.
With Revenues of $1 Million or Less
(Lenders Reporting to the FFIEC = 1,103)
Total Dollars Loaned $272 Billion $12.7 Billion
Total Number of Loans 8,000,000 219,000
Average Loan Amount $34,200 $58,000
Percentage of Loans to Businesses with Less than $1 Million in Revenues 47% 83%
Percentage of Loans Under $100,000 94% 84%
Percentage of Loan Originations and Purchases by Large Commercial Banks & Savings Associations with Assets of $1 Billion or More 90% >50%

Across the U.S

Each year, the FFIEC collects loan data reported by CRA-regulated entities with assets of $250 million or more and institutions of any size if owned by a holding company with assets of $1 billion or more. This includes small business, small farm and community development loan data. The data include information on the number and dollar amount of loans originated or purchased and exclude applications denied by the institution or that do not result in a loan origination. The data excludes information about applicant income, sex, race or ethnicity, but indicate whether a loan is extended to a borrower with annual revenues of $1 million or less. The maximum small business loan size reported is $1 million, and the maximum small farm loan size reported is $500,000.[39]

A total of 1,103 lenders reported CRA data on small business, small farm and community development lending in 2005. This information came from 891 commercial banks and 212 savings institutions. The FFIEC found the average small business loan was approximately $34,200, and the average small farm loan was about $58,000. About 93 percent of the small business loans and 83 percent of the small farm loans were for amounts under $100,000. An estimated $279 billion was loaned through 8 million small business loans, and $17 billion was loaned through 289,000 small farm loans.[40]

Based on the number of loans, the CRA 2005 data indicate 47 percent of the reported number of small business loans and 83 percent of the number of small farm loans were made to businesses with revenues of $1 million or less.

Banks and savings institutions with assets of less than $1 billion were not required to report their 2005 small business and small farm lending due to Office of Thrift Supervision amendments to the CRA regulations in 2004 and amendments by the Office of the Comptroller of the Currency in 2005.

The FFIEC found that 47 percent of small business loans made in 2005 were to small firms, compared to 38 percent in 2004 and a high of 60 percent in 1999. Reduced lending to small businesses may be due to credit card lending to larger firms, changes in bank data collection practices and renewals with higher credit limits. Some small business loans made by banks may go unreported since a number of banks no longer ask for or collect revenue-size data from business loan customers.[41]

The distribution of small business loans for lending reported under the CRA across census tract cities, rural and suburban areas reveals that: 86 percent of the number of small business loans for the reporting period were concentrated in principal city and suburban areas and 60 percent of the small farm loans, measured by the number and dollar amount, were made in rural areas.

The number of community development loans fell from 2004 among the 1,103 reporting CRA institutions 2005. An estimated 74 percent of banks made community development loans and the number of reporting institutions dropped 36 percent to 813 in 2005 from 1,280 in 2004. The reduced loan report figures due to changed CRA rules largely because exempt institutions with assets of less than $1 billion did not have to report loan CRA loan data. Consistent with reporting for 2004, lenders with $1 billion or more in assets made the largest number of community development loans in 2005.[42]

In Texas

Small businesses are the single largest source of new employment growth nationally creating two out of every three new jobs.[43] In Texas, small businesses provide thousands of new jobs for minorities and women.

As of 2005, the SBA Office of Advocacy estimated Texas had an estimated 2 million small businesses based on the U.S. Census Bureau's 2003 percentage of small business multiplied by the total number of employer businesses in 2005 from the U.S. Department of Labor. This figure included the Census Bureau's 2004 number of non-employer firms.

For 2005, the SBA identified more than 400,000 firms with one or more paid employees of which 98.7 percent (407,200) were small firms with fewer than 500 employees. Self-employment fell by 4.8 percent to 1,142,200 in 2005 from 1,200,300 in 2004.

The majority of Texas small businesses fall in the retail and services category with less than $500,000 in annual revenues. Small non-farm businesses showed progress between 2004 and 2005. According to the U.S. Department of Commerce, this sector's business income grew 7.6 percent between 2004 and 2005 to $105.2 billion from $96.2 billion.[44]

In terms of business turnover, the Community Reinvestment in Texas Work Group's research of small businesses for 2005 found that new employer businesses were up 55,858 (3.3 percent) from 2004, business bankruptcies jumped by 3,590 (16.0 percent) in 2005 and business terminations fell to 55,039 (-1.3 percent) in 2005 from 55,461 a year earlier.

Financing of Small Business in the U.S. and Texas

Research published by the SBA since the 2005 update concluded that large lending institutions dominated commercial, industrial and small business lending markets. Small businesses secure funding through combinations of financing methods, mostly small local commercial lenders, debt and equity and deferred capital or funds held until a future date for the business. More than 50 percent of the capital of small businesses in Texas comes from commercial bank loans. Small business start-ups often start with tapped equity of individuals and private firm financing, public nonprofit operations and venture capital entity funding. Generally, venture capitalists are long-term investors, often with specific industry experience, who may "take a hands-on role" with companies they support.[45]

The SBA Office of Advocacy research found that angel investment funds are the largest source for seed and startup venture capital. Generally, angel funds come from affluent individuals or a group of wealthy individuals that supply capital to one or more emerging and innovative businesses. These funds are usually part of the initial or "seed" round of financing an unproven start-up business in generally six month rounds in the range of $1 to $5 million.[46]

Measured by venture capital-backed companies headquartered in the state in 2005, Texas was second only to California in related venture-backed company revenue, in creating jobs nationally and by total venture-backed company employment. In the fourth quarter of 2006, venture capitalists in Texas invested mostly in the equipment and networking, semiconductors and telecommunications industries.[47]

For traditional bank financing of small businesses, SBA Office of Advocacy statistics for 2005 show that large banks issued 39 percent of small business loans under $1 million while small businesses were awarded $79.6 billion in federal contracts in 2005. Between June 2004 and June 2005, the total number of small business loans grew 22.6 percent. The SBA's data show a total of more than $600 billion in the form of 21 million small business loans in June 2005, compared with 17 million loans totaling $577 billion in June 2004. Loans under $100,000 increased most, leaping to $19 million in 2005 from just over $15 million in 2004. Business credit cards loans accounted for 70 percent of the loans under $100,000 in 2005.[48] In June 2005, total small business loans under $1 million amounted to $600 million out of the $1.68 trillion in total business loans issued.

Commercial banks provide more than 80 percent of credit line loans for small businesses. With the exception of the lease market, these banks supply more than 50 percent of the commercial mortgages, equipment, vehicle and other loans. In Texas, both commercial banks and savings and loan institutions make loans to small businesses.

Small business loans made by finance companies increased since 2001 across the U.S., rising 3.2 percent in 2004 alone. Between June 2004 and June 2005, venture capital financing totaled $22 billion, and angel investments grew to $23 billion. Alone, early-stage and seed financing by venture capital companies totaled $4.1 billion in 2005.[49] Because of their economic importance, banking analysts, legislative affairs groups, state and federal regulatory agencies and small business advocates continue to examine the factors affecting small business growth and access to capital and credit. A crucial component of small business funding involves community redevelopment business lending.

Community Development Lending Across the U.S. and Texas

By definition under the CRA, community development loans provide support primarily for affordable housing for low- or moderate-income persons and community services for these populations including activities that encourage economic development through small business or small farm loans. Community Development Corporations (CDCs) and Community Development Financial Institutions (CDFIs) use community development loans to revitalize low- and moderate-income communities.

New Definition of Community Development Helps Rural Areas

Federal banking and thrift regulatory agencies revised CRA regulations in 2005 and 2006 following devastation of the U.S. Gulf Coast left by Hurricanes Katrina and Rita. Revitalization or stabilization activities must help one or more of the following CRA populations: distressed or underserved non-metropolitan middle-income geographies based on two criteria sets, e.g., rates of poverty and loss of employment, population and density.

Changes to the CRA's community development definition and criteria in 2005 and 2006 allow the award of CRA credit to national banks that invest in and fund rebuilding communities in and outside of their assessment areas affected by either of the two hurricanes. National banks may also receive CRA credit for supporting community reinvestment efforts in rural areas and funding bank activities that stabilize or stimulate federally-designated disaster areas. Designated disaster areas are major federal government-determined disaster areas administered by the Federal Emergency Management Agency (FEMA). Examples of CRA-related community development activities include affordable housing for low- and moderate-income persons; bank financing for a new septic line for low- and middle-income individuals; community services for low- or moderate income persons; disaster recovery to preserve existing businesses and attract new businesses and residents and financing of small business or small farm activities that stimulate designated disaster areas, defined non-metropolitan, middle-income geographies that are also underserved or distressed.[50]

The Office of Rural and Community Affairs (ORCA) and the Texas Community Development Block Grant Program (TxCDBG)

In Texas, several agencies have responsibility for community and economic development programs and initiatives. The 77th Texas Legislature created the Office of Rural Community Affairs (ORCA) in 2001 to serve as the state's central agency focusing on the state's rural health, economic development and community development programs. The agency also monitors government actions that affect rural Texas.

ORCA researches rural issues, recommends solutions and coordinates rural programs among state agencies. The agency is composed of the program compliance and audit unit; the research, policy and development unit; the community development block grant program unit; and the rural health unit.

The Texas Community Development Block Grant Program (TxCDBG), managed by ORCA, is the largest community development program in the United States. The Department of Housing and Urban Development (HUD) awarded the program $73,297,579 for program year 2006. The program serves 1,017 eligible rural communities, 245 rural counties and provides services to more than 377,000 people each year.[51]

Texas Community Development Program
2006 Funding Summary
Fund Amount
Community Development Fund $41,596,376
Community Development Supplemental $3,188,445
Non-Border Colonia (NBC) Fund $0.001
Texas Capital Fund $10,635,478
Colonia Construction Fund $5,211,458
Colonia Economically Distressed Areas Program (EDAP) Fund $1,781,131
Colonia Planning Fund $337,169
Colonia Self-Help Centers Fund $1,832,439
Disaster Relief/Urgent Need Fund $3,452,316
Planning and Capacity Building Fund $659,678
Microenterprise Loan Program1 $1,000,0002
Small Business Loan Program1 $1,000,0002
Section 108 Loan Guarantee Pilot Program2 $500.003
STEP Fund (Small Towns Env. Program) $2,316,204

Source: Office of Rural and Community Affairs, September 2006.
1All 2006 applicants were funded in 2005 using de-obligated funds (returned funds to ORCA previously awarded) and / or program income.
2Program Income of up to $1,000,000 is available.
3Up to $500,000 in loan guarantee commitments are available.

The TxCDBG Program focuses on providing basic human needs and sanitary infrastructure to small, rural communities in outlying areas. Local needs that are eligible for financial assistance include clean drinking water, sanitary sewer systems, disaster relief and urgently needed projects, housing, drainage and flood control, navigable streets, economic development, community centers and other related activities.

The primary objective of the TxCDBG Program is to develop viable communities by providing decent housing, suitable living environments and expanding economic opportunities. The table below identifies the amounts and purposes of funds administered by the TxCDBG Program.

Every biennium, eligible cities and counties may apply through a regional competition for Community Development Fund assistance. Eligible activities include infrastructure projects such as drainage, sewer and water system improvements, housing rehabilitation, and improvements to bridges and streets. Each of the 24 state planning regions receives an allocation each year based on population, poverty and unemployment levels.

Recognizing the importance of participation by local jurisdictions, ORCA and Regional Review Committees (RRC) share the process of scoring applications for these funds. Each Regional Council of Government has its own RRC composed of 12 local officials appointed by the governor for two-year staggered terms. The RRCs' role is to help determine regional priorities for projects funded through Community Development Fund and the Community Development Supplemental Fund administered by ORCA. RRCs also develop the scoring criteria for three categories: local effort, project merits and priorities. The RRCs hold meetings in each of the 24 regions to score applications. RRC scores account for 50 percent of the total score, while ORCA scores provide the other 50 percent.

The Small Towns Environment Program (STEP) is a community development fund that encourages the community's residents to help themselves by committing local volunteers, donating their own money and providing available construction materials for the construction, operation and maintenance of water or sewer projects and services.

ORCA, recognizing that successful community development encompasses strategic community planning that incorporates all facets of Texas localities, offers the Planning and Capacity Building Fund. This fund provides assistance for planning activities to assess local needs, develop strategies to address local needs, build or improve local capacity or develop comprehensive plan-related elements.

ORCA offers a separate Colonia Planning Fund on an annual basis to eligible counties located within 150 miles of the Texas-Mexico border. Similar to the Planning and Capacity Building Fund, this fund also provides assistance for planning activities that assess local needs, develop strategies to address local needs and build or improve local capacity.

While the agency focuses its efforts on all eligible rural communities statewide, several funds are directed to a much narrower target audience, the colonias. These funds include the Colonia Construction Fund, Non-BORDER=1 Colonia Fund, Colonia Economically Distressed Areas Program Fund and the Colonia Self-Help Centers Fund.

The Colonia Construction Fund provides assistance to those colonias located within 150 miles of the Texas-Mexico border, while the Non-BORDER=1 Colonia Fund provides funding for colonias throughout the remainder of the eligible counties in Texas. These two funds are primarily used to construct safe, sanitary, and cost-effective water and sewer facilities for colonias that lack such infrastructure.

The Colonia Economically Distressed Areas Program Fund is used to provide assistance to colonia areas connecting to a Texas Water Development Board Economically Distressed Areas Program (TWDB EDAP)-funded water and sewer system improvement project.

The Colonia Self-Help Centers Fund is designed to assist individuals and families of low-income and very low-income to finance, refinance, construct, improve or maintain a safe, suitable home in the colonias' designated service area or in another area that has been determined is suitable.

ORCA identifies new tools and opportunities to assist rural Texas with economic development to create balanced and viable communities, such as the Microenterprise Loan Program, which awards between $50,000 and $100,000 to eligible cities and counties for loans to commercial enterprises with five or fewer employees. The Small Business Loan Program provides similar compensation to eligible cities and counties for loans to businesses with 100 or fewer employees.

ORCA also provides assistance to rural Texas through its Rural Health Division. ORCA Rural Health's mission is to facilitate and coordinate the use of available resources to help rural Texans enhance their quality of life, achieve sustained economic growth and strengthen local healthcare infrastructure and systems of care to better meet the needs, challenges and priorities of rural Texas. The Rural Health Division works closely with many local, state and federal partners to develop, support and coordinate programs and services to assist rural Texas communities in improving access to quality health services across the continuum of care that meet local needs. This division of ORCA also informs, guides and facilitates efforts in rural health policy design, service planning, resource allocation and program implementation.

ORCA approves financial support for disaster relief and to meet urgent needs if the situation addressed by the applicant was unanticipated and beyond the control of the local government. It also can approve financial support if the problem 1) occurred no more than 18 months before the submission of an application for TxCDBG Program assistance or b) when the applicant demonstrates that local funds or funds from federal sources or another state source are not available to adequately address the problem. The TxCDBG Program coordinates distribution of funds with other state agencies.

Disaster Relief funds help communities on an as-needed basis to recover from natural disasters, drought, flooding or tornadoes when the governor has proclaimed a state disaster or has requested a federal disaster declaration. TxCDBG Program funds are used to restore basic housing, water and sewer facilities.

ORCA supplies money from several funds to eligible county applicants for projects in economically depressed unincorporated residential areas along the Texas-Mexico border known as colonias. According to the Texas Secretary of State, about 400,000 Texans live in colonias, which lack electricity, adequate sewage systems and decent, safe and sanitary housing.

ORCA Activities for Hurricanes Katrina and Rita

Under the revised CRA definition of community development, disaster relief funds became eligible for non-housing related activities. Designated Councils of Governments (COGs), whose service areas contain the overlapping 29 counties eligible for the Federal Emergency Management Agency (FEMA) Public Assistance program as well as cities, counties and federally recognized Indian Tribes, may apply for funds through ORCA.[52] Individual contracts will be prepared between the State and each county and city that receives grant awards. A grantee may also have the COG arrange for local grant administration.

Counties Eligible for Hurricane Rita Disaster Recovery Assistance
Angelina Houston Polk
Brazoria Jasper Rusk
Chambers Jefferson Sabine
Cherokee Liberty San Augustine
Fort Bend Marion San Jacinto
Galveston Montgomery Shelby
Gregg Nacogdoches Trinity
Hardin Newton Tyler
Harris Orange Walker
Harrison Panola  

 Counties Eligible for Hurricane Rita Disaster Recovery Assistance

Estimate of Damages

According to FEMA and the Governor's Division of Emergency Management, the most current estimate of damage to Texas infrastructure caused by Hurricane Rita is $385.8 million as of November 16, 2006. Schools, hospitals, critical private nonprofit organizations, local jurisdictions and utilities are among those that sustained financially crippling damages.

Non-Housing Activities

ORCA's Non-Housing activities include, but are not limited to, the FEMA Infrastructure Grant Program match, the FEMA Hazard Mitigation Grant Program match for drainage projects, flood buyouts in which the property is converted into open, undeveloped land, and safe-room and community storm shelters, the Natural Resource and Conservation Service (NRCS-USDA) flood and drainage projects, roads and bridges, water control facilities, water and waste water facilities, buildings and equipment, hospitals and other medical facilities, utilities, parks and recreational facilities, debris removal, public/community shelters and loan funds for businesses. All of these non-housing activities must be related to addressing damages created by Hurricane Rita.

CDBG Disaster Recovery Funds

The Governor selected the Texas Department of Housing and Community Affairs (TDHCA) and the Office of Rural Community Affairs (ORCA) to administer $74,523,000 in federal Community Development Block Grant (CDBG) funding for housing, infrastructure, public service, public facility and business needs in the 29-county area directly impacted by Hurricane Rita. These funds are intended to assist with long-term recovery efforts and infrastructure restoration in the four COG areas including the East Texas Council of Governments (ETCOG), Deep East Texas Council of Governments (DETCOG), Southeast Texas Council of Governments (SETCOG), Houston-Galveston Area Council (H-GAC), with TDHCA administering approximately 56.9 percent of the funds for housing and public services and ORCA, approximately 43.1 percent of the funds for public infrastructure, public facilities and business needs.

Funds Distributed Among the Four COG Areas Based on the Greatest Documented Need and the Most Identified Distressed Areas
COG Region Housing Allocation Non-Housing Allocation Total Allocation Percent (%) of Total
3 Counties
$26,498,536 $12,468,656 $38,967,192 55%
12 Counties
$6,745,034 $12,278,209 $19,023,243 27%
8 Counties
$7,015,706 $3,690,712 $10,706,418 15%
6 Counties
$0.00 $2,099,997 $2,099,997 3%
TOTAL $40,259,276 $30,537,574 $70,796,850 100%
Disaster Funds Distributed By ORCA In 2005
Bonham $50,000 Repair portions of Bonham Civic Center roof to house evacuees.
Crockett $50,000 Install additional showers, laundry facilities and a generator.
Jasper $50,000 Rehabilitate Community Church of Jasper's kitchen facilities.
Jefferson Co. $50,000 Purchase chairs, tables and disaster supplies for Ford Park Complex.
Nacogdoches $30,000 Improvements to C.L. Simon Recreation Center's HVAC system.
West Orange $50,000 Rehabilitate and expand restrooms and kitchen at Stark ISD School.
Browndell $50,000 Rehabilitate restrooms, kitchen and repair roof at Community Center.
Subtotal 330,000 Public Shelter Improvements only (Katrina).
Browndell $50,000 Expand capacity of public shelter (Rita and Katrina).
Hemphill $50,000 Expand capacity of public shelter (Rita and Katrina).
Total $430,000 Disaster Funds Distributed by ORCA in 2005

Funding Allocation

Housing Activities - $40,259,276
Non-Housing Activities - $30,537,574
Administrative Fees (5 percent) - $3,726,150
Total Distribution = $70,796,850
Total (Including 5 percent in fees) = $74,523,000

Rural Health Disaster Relief & Recovery Grant

ORCA established through its Rural Health Division a Rural Health Disaster Relief & Recovery Grant to help rural hospitals and rural health clinics respond to a federal or state disaster declaration. The funds could only be used for relief efforts in response to or recovery from a natural disaster event.

ORCA administered another 18 Hurricane Katrina relief projects funded in Orange, Anahuac (2), Jasper (4), Kirbyville (2), Rayburn, Buna, Marshall, Henderson (2), Newton, Liberty, Hemphill and Winnie, for a total of $400,208.