Volume 11; No. 1; Winter/Spring
Responding to NAFTA
North American Development Bank Helps Hardest Hit COMMUNITIES
By Hugh Loftus, Director, North American Development Bank
and losers are the inevitable outcome of government policy that effects
change in the marketplace. The North American Free Trade Agreement (NAFTA),
enacted in 1994, offers little exception to this principle, though it
has not had the devastating impact feared by so many in the early 90s.
NAFTA has, however, had a significant impact on a number of American communities
and the business and employment conditions within them. Thousands of low-skilled
jobs have been moved offshore to cheaper labor markets, exacerbating a
labor trend that has existed since the end of World War II. Unfortunately,
not many of the displaced workers were in the right place or had the necessary
skills to take advantage of new job opportunities created by increased
trade with Mexico. Although NAFTA proponents had hoped for a significant
gain in employment opportunity, experts now estimate that there has been
no net change in the number of U.S.-based jobs due to NAFTA. What has
occurred is a shift in the type and location of jobs which has created
substantial economic hardship in some communities.
When the consequences of a particular policy can be anticipated, governments
are able to take steps to reduce negative impacts. Following the passage
of NAFTA, the North American Development Bank (NADBank) was created by
the U.S. and Mexican governments in response to concerns about the environment
and the potential for employment loss in both countries. While similar
in mission and structure to other international development banks (e.g.
the World Bank and Inter-American Development Bank), the NADBank has several
unique elements. One key difference is that NADBank can finance projects
located in the United States. Furthermore, it can provide financing to
private as well as public-sector entities.
The Environmental Window
The banks total capitalization of $3 billion in cash and pledges (jointly
funded by the U.S. and Mexican governments) allows it to focus its financing
efforts in two areas. The first, referred to as the Environmental Window,
addresses environmental needs along the United States and Mexican border.
Since 1994, $105.5 million in financial support has been made available
to public agencies and private companies to address environmental infrastructure
needs along the border. For loans originated through the Environmental
Window, the NADBank is restricted to activities located within 100 kilometers
(62 miles) of the U.S./Mexican border, running from the Pacific Ocean
to the Gulf of Mexico. Although direct loans have been made for environmental
projects, NADBank prefers to participate as a co-lender or guarantor.
Border-state lenders who are interested in the Environmental Window program
should contact Annie Alvarado in NADBanks San Antonio office, (210) 231-8000.
The Domestic Window
NADBanks other principal product, the Community Adjustment and Investment
Program (CAIP) is sometimes referred to as the Domestic Window, primarily
because it serves the business-credit needs of U.S. communities. Ten percent
of the U.S. governments $1.5 billion investment in NADBank was set aside
to fund the CAIP, for a total capitalization of $150 million. The programs
mission is to support U.S. communities that have suffered significant
job losses as a result of NAFTA. It also seeks to preserve existing jobs
in businesses at risk due to adjusted trade patterns with Canada and Mexico.
CAIP Eligibility Guidelines
The programs current eligibility standards call for an area unemployment
rate greater than 6.5 percent for the 12-months preceding the application
date, and job losses exceeding 500 in urban areas and 300 in rural areas.
Using these guidelines, there are currently 136 counties in 26 states
that are eligible for the program. The first table shows specific areas
within states that are currently eligible, as well as the CAIP loan activity
for the first year.
Eligible States in the 12th District
||CAIP Loan Activity
||Ketchikan Gateway Borough
Pacoima - Los Angeles County
Santa Ana - Orange County
Watsonville - San Benito and
portions of Santa Cruz Counties
||Benewah, Bonner, Kootenai,
Minidoka and Shoshone Counties
||Benton, Franklin, Thurston,
Walla Walla, and portions of
Cowlitz and Lewis Counties
Note: Areas are reviewed for eligibility each quarter or whenever a
specific request for consideration is received.
It is important to note that CAIP is designed to work with existing programs
and resources, particularly government-sponsored loan guarantee programs
such as SBAs 7(a) Loan Guaranty or USDAs Business and Industry (B&I)
program. The table below provides a brief overview of how the credit-enhancement
feature of the CAIP works:
CAIP Enhancements to Federal Guarantee Progams
||Small Business Administrations 7(a) Loan Guarantee
||U.S. Department of Agricultures Business & Industry
|Geographic Eligibility Guidelines
||CAIP eligible community; SBA program serves both urban
and rural communities.
||CAIP eligible community; B & I program serves rural
|Government Program Guarantee Limits
||Generally 75% of loan amount or $750,000, whichever
||Will guarantee maximum loan amounts of $25 million;
percentage guaranteed declines from 80-60% as loan size increases.
|CAIP Benefits to The Lending Institution
||CAIP will cover the full amount of the loan guarantee
fee; depending on loan size, the fee ranges from 2 to 3 7/8 %
||If necessary, CAIP will cover up to 2% of the loan
guarantee fee; CAIP expands the availability of B&I funds in eligible
||Lenders should submit loan guarantee requests to their
local SBA District Office.
||Lenders should submit program requests to their states
USDA Rural Development Office.
Note: The CAIP takes no direct role in the lending process under either
of the loan guarantee programs. It merely provides the promised financial
support directly to the Agencies who handle all loan approval under their
In addition to physical location in a CAIP-eligible community, business
applicants must also demonstrate that within 24-months of the loan closing,
the loan will result in the creation of one new private-sector job for
every $70,000 of the guaranteed amount of the financing. So, for example,
if the loan amount is $1 million and 75% ($750,000) is guaranteed through
the CAIP, the demonstrable result would have to be the creation of eleven
new jobs within two years. The NADBank periodically monitors the good
faith job creation plans of the assisted businesses.
Beyond the assistance the CAIP provides for the guarantee programs, it
is also able to participate in loan transactions as a direct lender or
as a guarantor. This direct involvement is restricted to cases where conventional
credit is not available and federal loan guarantee programs cannot be
used. In such cases, the CAIP is limited to a maximum participation of
49% in any transaction; and, like many such programs, the CAIP will use
as little of its resources as necessary to make a loan work. In these
transactions, the CAIP relies on a local intermediary, typically the majority
lender, to manage the borrowing relationship.
The CAIP may also co-lend or provide loan guarantees to community-based
intermediaries serving CAIP-eligible communities. The CAIP has full flexibility
in the terms and conditions it can offer; however, the NADBank requires
the creation of one new job per $35,000 of its participation.
In addition to NADBanks financing programs under the Environmental and
Domestic Windows, last years federal budget added $10 million in funding
for technical assistance and grants within CAIP-eligible communities to
help stimulate new job creation. Details on the new program and funding
availability will be released in the near future.
For further information about the NADBank and the CAIP, you can visit
its web site at www.NADBANK-CAIP.org or contact Hugh Loftus in the Southern
California office at (562) 908-2100.
Can CAIP Work For YOU?
Ask Yourself These Questions:
DOES YOUR BANK
- Serve one of the CAIP eligible areas?
- Serve an area which you think should be eligible?
- Participate in government guaranteed loans?
- Like the idea of co-lending or risk sharing?
- Like the idea of saving your borrower money?
- Worry about your peer banks having the competitive advantage?
- Want to enhance your community reinvestment program?
About the Author
Loftus was appointed director of the Los Angeles office of the North American
Development Bank (NADBank) in June 1996. The L.A. Office is responsible
for the implementation of the Community Adjustment and Investment Program
of the NADBank, created to assist U.S. communities that have experienced
job losses since the passage of NAFTA, due to plant relocations or changing
trade patterns with Canada or Mexico. Prior to his appointment, Mr. Loftus
was senior vice president and manager of community development for First
Interstate Bank of California. He has been in banking for 30 years with
an emphasis in the fields of community and economic development lending.
Mr. Loftus has served on the board of directors for numerous local, state
and national organizations and currently serves on loan committees for
the City of Los Angeles and the State of California. He is a past president
of the California Association for Local Economic Development and vice
president of the National Council for Urban Economic Development.