Comments to USDA on Rural Microentrepreneur Assistance Program

November 4, 2008

Mr. William F. Hagy III
Deputy Administrator
Rural Business and Cooperative Programs
U.S. Department of Agriculture
1400 Independence Ave., SW
Room 5811, South Agriculture Building
Washington, D.C. 20250

Re: Rural Microentrepreneur Assistance Program

Dear Mr. Hagy:

I am writing on behalf of the Center for Rural Affairs to express support for the Rural Microentrepreneur Assistance Program (RMAP) recently authorized in the Food, Conservation, and Energy Act of 2008 (PL 110-246). We urge the United States Department of Agriculture (USDA) to issue program guidance on the RMAP in a timely manner to ensure that the $4 million in mandatory funding provided for the RMAP in FY 2009 can be obligated next year.

The Center for Rural Affairs has extensive experience in the area of rural microenterprise. The Center for Rural Affairs was established in 1973 by rural Nebraskans concerned about the loss of economic opportunities in their communities. Our Rural Enterprise Assistance Project (REAP) is the largest statewide rural microenterprise program in the nation,
providing loans, training and technical assistance throughout Nebraska. REAP features a Rural Women's Business Center and a Rural Hispanic Business Center, and also administers microloans and provides technical assistance funded through the Small Business Administration (SBA) Microloan Program. We also participated with many organizations and members of Congress in developing concepts and statutory language for RMAP, including the ultimate version contained in the Farm Bill. The recommendations in this letter, therefore, are based on our experience in providing loans and technical assistance to rural entrepreneurs.

1. Section 6022(b)(2)(B)

This section outlines the general purpose of the Rural Microentrepreneur Assistance Program. Subsection B of paragraph 2 states that a purpose of the Program is to provide microentrepreneurs with “continuing technical and financial assistance related to the successful operation of rural microenterprises.” We would suggest that USDA program rules and regulations further clarify this paragraph by stating that this purpose applies to both existing and expanding rural microenterprises.

2. Section 6022(b)(3)(C)(i)
This paragraph requires the establishment of a loan loss reserve fund by those microenterprise development organizations receiving a loan under the program. We would suggest that USDA program rules and regulations further define the term “loan loss reserve fund,” and would suggest that such definition be comparable to the Small Business Administration; Loan Loss Reserve Fund Final Rule found at Federal Register, April 3, 2000, Vol. 65, No. 64, page 17439. This Final Rule defined “loan loss reserve fund” as “an interest-bearing deposit account at a bank which an intermediary must establish to pay any shortage in its day-to-day revolving account caused by delinquencies or losses on microloans it makes to qualified small business borrowers.” This definition should be conformed to terms used in the RMAP, for instance substituting “rural microentrepreneurs” for “small business borrowers.”

3. Section 6022(b)(4)(A)(ii)(I)
This paragraph outlines the qualifications for grants to microenterprise development organizations to support rural microenterprise development. In this subparagraph USDA is to place an emphasis in making these grants on “microenterprise development organizations that serve microentrepreneurs that are located in rural areas that have suffered significant outward migration, as determined by the secretary.” We would suggest that USDA program rules and regulations further define the term “significant outward migration.”

We would offer two suggestions for a definition of “significant outward migration.” Section 223 of the American Jobs Creation Act of 2004 (P.L. 108-352, 118 Stat. 1418) defines “high migration rural county” for purposes of eligibility for New Market Tax Credit investments. For this purpose, “high migration rural county” is defined as any county which has experienced net out-migration of inhabitants from the county of at least 10 percent during a 20-year period ending with the year in which the most recent census was conducted. The Community Development Financial Institutions Fund of the U.S. Department of the Treasury has identified 371 counties in 36 states that meet this definition based on the 2000 census.

Section 101(3) of the New Homestead Act of 2007 (S. 1093) employees a similar definition of “qualifying county” for eligibility of the various provisions proposed in that legislation. Based on the 2000 census, the Economic Research Service of USDA has identified 698 counties in 38 states meet the bill’s definition of a county outside a metropolitan statistical area (defined as such by the Office of Management and Budget) experiencing in a 20-year period a net out-migration of inhabitants from the county of at least 10 percent of the population of the county.

We encourage USDA to ensure that all three components (as outlined in comment number 10 below) of the RMAP are targeted to communities suffering significant outward migration in order to encourage and support entrepreneurship in those areas.

4. Section 6022(b)(4)(A)(i)

A goal of the RMAP was always to develop a rural network of microenterprise development organizations (MDOs) that can provide capital and financial and technical assistance to very small rural businesses that currently lack access to capital and technical assistance support. There are significant areas in rural America that are currently unserved or underserved by MDOs. Further, while there is a broad network of non-profit rural lending intermediaries, not all of these organizations serve microbusinesses or understand how to operate a loan or technical assistance program targeting microbusinesses.

Given that RMAP provides USDA with broad authority to make grants to MDOs to carry out activities that would further the purpose of the RMAP program, we recommend that USDA use this authority to grant funds to experienced MDOs for projects and activities that build the capacity of new and emerging MDOs in unserved or underserved rural areas suffering significant outward migration (per the emphasis for such grants in Section 6022(b)(4)(A)(ii)(I)). Further, we suggest that some amount or percentage of the funds provided for grants pursuant to Section 6022(b)(4)(A) (and as recommended in recommendation number 8 below) be set aside for these capacity building purposes. We further recommend that any such funds used to build the capacity of rural MDOs be directed to MDOs that either directly or through a subsidiary can demonstrate a track record as a microloender and TA provider.

5. Administer RMAP as a National Program

RMAP was designed as a national program to be administered by USDA, through the Office of Rural Business and Cooperative Programs. The national office would be responsible for funding and overseeing a network of non-profit microenterprise MDOs that would use RMAP funds to provide financial and technical assistance to qualified rural microentrepreneurs. In addition, the national office would be responsible for administering a grant program aimed at building the capacity of MDOs that can assist new and emerging businesses operating in rural communities.

As an analogy, the national office of USDA has effectively administered the Intermediary Relending Program (IRP) through a similar network of non-profit lending intermediaries. We suggest that the administration of the IRP be a model for the RMAP. As with IRP intermediaries, MDOs would apply to the national office where applications would be scored and funding decisions made.

In order to ensure that the RMAP is administered effectively, we recommend that there be a full time staff member added to the USDA Office of Rural Business and Cooperative Service designated specifically to overseeing and monitoring the RMAP loans and grants.
Further, we recommend that the USDA staff assigned to administer the RMAP program be granted oversight over all aspects on the RMAP including the loan and grant components of the program. We also recommend that one regulation be issued on the RMAP to address all aspects of the program - loans, technical assistance grants, and capacity building grants.

6. Terms of Loans

The RMAP statute includes definitions for an MDO, a microentrepreneur and a microloan. In addition, the statute defines the terms of USDA loans to an MDO, dictates how an MDO establishes a loan loss reserve and provides matching funds, and also provides the formula for determining a MDO’s annual technical assistance grant. The statute is intentionally silent on the terms of MDO loans to the microentrepreneur except to say that the loans cannot exceed $50,000. The terms and interest rates on the MDO loans to the borrowers are to be established by the MDO.

As with an IRP applicant, we recommend that an RMAP application be designed to secure detailed information from the MDO applicant on the rural market it plans to serve, how it plans to screen loan applicants and underwrite loans, and the terms, rates and conditions it plans to assign to loans.

The MDO should also be asked to provide specific information as to how it will ensure that the technical assistance and capacity services will be made available to potential and ultimate loan recipients. After the MDO is awarded funds under the RMAP, it will be bound to the criteria set forth in its plan for lending and relending as outlined in its application with regards to such things as interest rates to a borrower.

7. Issue Interim Regulations or Notice of Funding Availability by December 31, 2008

We believe there will be great demand for RMAP funds when they become available judging by the demand for IRP funds, SBA funds, and our knowledge of the growing demand for microloans in the field. Therefore, we recommend that USDA issue an interim rule for the RMAP or a NOFA before the end of the year to guarantee that the $4 million in mandatory funding provided for FY 2009 can be obligated next year.

There has been overwhelming interest and excitement surrounding the creation of RMAP at USDA since Congress started working on the Food, Conservation, and Energy Act of 2008. Over 100 national, state, and local organizations signed a letter to Congress expressing their interest and support for mandatory funds for the RMAP, and the Center for Rural Affairs organized other state and regional sign-on letters that included scores of organizations. These organizations see RMAP as a valuable tool and an additional resource to supplement the work that they already do in distressed rural communities. We fully expect many of these organizations to apply for RMAP funding once it is made available.

Over the last 17 years the SBA Microloan program has financed more than 27,500 loans worth $340 million to small entrepreneurs, and in FY 07 alone, SBA microloan intermediaries closed approximately 2,400 loans to entrepreneurs. Also worth noting as a gauge for RMAP demand, the USDA currently has 51 IRP loan applications pending totaling over $17 million for FY 08.

8. Ensure That All Components of the RMAP Are Funded

A total of $15 million is available in mandatory funding for RMAP through the Food and
Conservation Act of 2008 over the next five years. In FY 2009, $4 million is available. The statute, however, does not dictate how the funds are to be divided between the three authorized functions — loans to MDOs, technical assistance grants to accompany the MDO loans, and grants to MDOs for capacity building.

We recommend that for FY 2009, the $4 million in funding for RMAP be allocated in the following manner:

• $1 million in budget authority (BA) for loans to MDOs (Section 6022(b)(3)). We are assuming that RMAP loans will be assigned a 30 percent subsidy based on the subsidy rate assigned to IRP loans (41 percent) and the rate on SBA Microloans (10 percent). Based on the 30 percent subsidy, $1 million in BA would translate to $3 million in loan authority for MDOs;
• $1 million for technical assistance (TA) grants to MDOs using RMAP funds to
capitalize microloan funds (Section 6022(b)(4)(B)); and
• $2 million for grants to support rural microentrepreneurs and rural MDOs (Section 6022(4)(A)).

This is not necessarily the formula we would recommend using in future years to determine the percentage of the funds directed to loans, technical assistance grants and grants to support rural microentrepreneurs and rural MDOs. However, in the initial year of program funding, we believe it is necessary to place a priority on building rural microenterprise capacity, particularly in rural areas and states that are currently unserved or underserved by rural MDOs. We believe such an initial priority will fuel the development of new rural MDOs and build the capacity of existing rural MDOs.

9. Issue Guidance on the Administration of Loan Funds and TA Grants

RMAP is generally silent on the administration of loan funds and technical assistance grants to MDOs, other than stating that once an MDO borrows funds from USDA, it can make microloans of up to $50,000 to eligible rural microenterprises. Similar to the IRP program, we recommend that once a MDO receives a loan from USDA, USDA is not involved in loan review of a MDO’s lending or underwriting standards.

However, the RMAP statute does not address how funds under a technical assistance grant to MDOs receiving a loan from USDA would be obligated to an MDO when it initially borrows funds from USDA but has not yet made any loans itself. Therefore, we recommend that when an MDO signs its initial loan agreement with USDA it receives a TA advance grant from USDA. These funds would be used by the MDO to provide TA to its initial borrowers and to service its loan fund during its initial year operating the microloan fund. We recommend that $1 million of the FY 2009 funds be used to fund these initial MDO TA grants.

In subsequent years of MDO loans (Years 2 through 20), we recommend that the annual TA grant a MDO is eligible to receive should be equal to 25% of the MDO’s outstanding loans at the close of the previous fiscal year. For example, at the end of FY 2009, MDO X had $300,000 in outstanding loans to rural microbusinesses the amount of their TA grant for FY 2010 would be $75,000.

10. Recognize emerging issues in determining recipients of RMAP funds

While the statute provides guidance on geographic areas that should be emphasized in making RMAP grants and charges USDA with ensuring a diversity of organizations receive funding (by size of organization and by racial and ethnic populations served), the statute is silent on other factors that could or should influence USDA decision-making. Given the authority granted in Section 6022(b)(4)(A)(i)(I), we would suggest that USDA recognize emerging areas where rural microentrepreneurs are playing a leading role in business development and product delivery. For example, we would suggest that USDA recognize the role that rural microentreprenurs and rural microenterprises are playing in local and regional food systems and in renewable energy and energy conservation, major emerging components of rural economies. Specifically, we suggest USDA recognize the mutually supportive role other provisions of the Food, Conservation, and Energy Act of 2008 that concern local and regional food production and distribution, and energy production and conservation by small businesses can play in activities supportive by RMAP. Many of these provisions have the potential to work in concert with RMAP. We would recommend that USDA promote and encourage the mutual supportive potential that other USDA programs can have for RMAP projects and activities.

We believe the Rural Microentrepreneur Assistance Program has the potential to provide great benefits to rural entrepreneurs and rural communities. As stated above, there is a great deal of excitement in rural areas about the program. We appreciate this opportunity to submit recommendations as to how USDA can put systems and regulations in place to implement RMAP in an efficient and timely manner. We encourage you to expedite the process to ensure that the $4 million in mandatory funding for FY 2009 be obligated as quickly as possible.

Thank you for your attention to these recommendations. We are available to meet with you at your convenience to discuss these recommendations further. In the meantime, if you have questions or need additional information, please contact me.

Sincerely,


Jon M. Bailey
Director, Rural Research and Analysis Program
Center for Rural Affairs

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