Introduction

Federal community development programs are intended to empower states, local governments, and other entities to carry out a range of activities and initiatives tailored to local conditions. Congress has established and funded a variety of programs and initiatives that have supported the creation and expansion of many current local approaches to neighborhood revitalization, affordable housing, and other aspects of community development.¹

Local community development organizations carry out a variety of activities to address local issues, including but not limited to³

• affordable housing development and rehabilitation,
• neighborhood beautification and business district enhancement or revitalization,
• local business and workforce development, and
• community wealth building.

The federal government administers a wide range of programs and resources that may support community development organizations directly or indirectly. Some federal programs support the capacity of community-based organizations to facilitate or lead community development efforts. The Section 4 Capacity Building for Community Development and Affordable Housing program is one such program within the U.S. Department of Housing and Urban Development (HUD).

In addition to the Section 4 program, there are several other sources of federal funding administered by HUD and other agencies that may also support organizational capacity for community development or similar efforts. This report provides an overview of the Section 4 program's structure and funding, briefly describes a selection of similar programs, and discusses some potential policy considerations for Congress.

Section 4 Capacity Building for Community Development and Affordable Housing Program

Originally authorized under Section IV of the HUD Demonstration Act of 1993 (P.L. 103-120),⁴ the Section 4 program awards grants on a competitive basis to selected eligible national community development intermediary organizations. In turn, these organizations support the work and enhance the capacity of local community development organizations.⁵ Program activities are focused on training, technical assistance, and financial support for community development and affordable housing projects and efforts.

Eligible Entities

As amended, the program's authorizing statute identifies five national community development intermediary organizations as eligible applicants for Section 4 program funds.⁶ Congress has further limited eligibility to three organizations in recent appropriations acts:⁷

• 1. Enterprise Community Partners;
• 2. The Local Initiatives Support Corporation (LISC); and
• 3. Habitat for Humanity International.

In 1993, Section 4 of P.L. 103-120 authorized HUD to "provide assistance through the National Community Development Initiative" (NCDI, currently known as Living Cities), a consortium of private entities funding community revitalization efforts.¹⁰ Under this structure, NCDI worked with LISC and Enterprise to enhance the capacity of community development organizations in 23 designated U.S. cities. Congress amended the Section 4 program's authorizing statute in 1997 under Title II of P.L. 105-18, which adjusted the program's structure and expanded its geographic coverage. Specifically, the act modified grantee eligibility by formally listing LISC and Enterprise as eligible direct grantees¹¹ and included additional organizations in statute, such as Habitat for Humanity and YouthBuild.¹²

Application Process

Typically, HUD releases Notices of Funding Availability (NOFA) for the Section 4 program on an annual basis. The NOFAs outline the application process and program requirements for a given year, as provided in the program's statute.¹³ HUD assesses and scores eligible grant applications based on five rating factors, each with corresponding maximum point values, as outlined in the program NOFA. The overall maximum point value within the five-factor assessment is 100 points.¹⁴ As an example, Table 1 provides an overview of the rating factors and maximum point values outlined in the FY2021 Section 4 NOFA.

HUD may also award preference points for applications that demonstrate planned activities that align with specified department or Administration priorities. For instance, the FY2021 Section 4 NOFA allowed for up to two preference points for applicants with proposed activities in a designated Promise Zone. Typically, HUD sets a point threshold that applicants must reach in order to qualify for additional preference points. In its FY2021 NOFA, HUD required applicants to have a score of at least 75 points under the five rating factors in order to be eligible for preference points.¹⁵

Grant Terms

HUD informs applicants of their application status and negotiates grant agreements and amounts with grantees based on a process outlined in the corresponding Section 4 program NOFA.¹⁶ Section 4 grantees administer program funds over a four-year period in accordance with the planned activities outlined in the application. Planned activities may be subject to any changes made during grant agreement negotiations. Grantees are required by statute to match Section 4 funds with private resources in an amount that is three times the amount awarded,¹⁷ satisfied by primary grantees or subrecipients.¹⁸ Intermediaries are reimbursed once program costs have been incurred. Typically, Congress requires that at least $5 million of Section 4 funds appropriated annually be used to support rural community development capacity efforts.¹⁹

Eligible Beneficiaries

As stated earlier in this section, HUD competitively awards Section 4 funds to specified eligible intermediary organizations. Those intermediaries, in turn, provide funding to eligible beneficiaries. Organizations may qualify as beneficiaries for Section 4 financial and technical assistance if they meet one of three sets of criteria for eligible Community Development Corporations (CDCs) or Community Housing Development Organizations (CHDOs). HUD defines these beneficiary organizations in annual NOFAs. Generally, the Section 4 program definition for CHDOs is consistent with that of HUD's HOME Investment Partnership Program.²⁰ An organization is eligible as a CDC if its work is aligned with eligible program activities and it meets certain criteria related to organizational structure.²¹ The specific eligibility criteria as enumerated in Section 4 program NOFAs and the relevant program regulations defining CHDOs are included in Appendix A.

Eligible Activities

Section 4 grantees can use program funds to support technical assistance and/or financial assistance for eligible beneficiaries. Technical assistance activities include (1) training, (2) education, and (3) advice or other forms of informational support. Financial assistance under the Section 4 program includes (1) loans, (2) grants, and (3) predevelopment assistance for community development and housing projects benefitting low- and moderate-income households and persons.²² Additionally, participating intermediary organizations may seek approval from HUD for other related activities.²³ Figure 1 provides an overview of the Section 4 program's funding process, which is further detailed in this section.

Figure 1. Section 4 Program Flow of Funds

Source: Developed by CRS using HUD Program Information. Note: Intermediary organizations may provide training and technical assistance directly or provide funding for the procurement of such services.

Program Monitoring

As directed in the Section 4 program authorizing statute (42 U.S.C. §9816 note), HUD enumerates program reporting requirements and other information for grantees in program NOFAs.²⁴ HUD requires Section 4 grantees to report program performance, finances, and other aspects of implementation in accordance with guidance from the Office of Management and Budget and HUD.²⁵ HUD requires grantees to submit performance reports on a semiannual basis.²⁶ The semiannual reports provide an update on progress toward the goals outlined in a grantee's Section 4 application and approved work plan.²⁷ Grantees submit their semiannual Section 4 performance reports to the HUD Disaster Recovery Grant Reporting system.²⁸ Grantee reports typically include updates on (1) expenditures and matching funds, (2) program outcomes, and (3) an overview of the status of planned activity implementation.²⁹

Appropriations

Congress typically funds the Section 4 program in the Self-Help Homeownership Opportunity program account in annual Transportation, Housing and Urban Development, and Related Agencies appropriations legislation.³⁰ Title II of Division L in the Consolidated Appropriations Act, 2022 (P.L. 117-103), included $41 million in Section 4 program funds for FY2022. This was equal to the program's FY2021 appropriation. Table 2 provides an overview of annual appropriations for the Section 4 program from FY2018 to FY2022.

Grant Awards

HUD awards Section 4 program funds to eligible grantees based on analysis of grant applications and negotiation of grant agreements. As mentioned above, in recent years, program awards have been granted to three national community development intermediary organizations. Table 3 provides a breakdown of Section 4 program awards to participating intermediary organizations for funds from FY2021, FY2020, FY2019, and FY2018.³¹

Table B-1 in the Appendix includes Section 4 program award amounts by organization for FY2010-FY2020.

Implementation

Section 4 intermediary grantees administer program funds over a four-year period in accordance with the plans submitted during the application process and as approved in the grant agreement process.³² In some cases, intermediaries offer training and technical assistance activities, including facilitation of professional development courses and events.³³ Grantees also provide financial assistance to support the technical and operational capacity of community development organizations. The most common form of Section 4 financial assistance is subgrants (sometimes referred to as pass-through grants). It is also common for Section 4 grantees to award subgrants for purposes that support the administrative and technical capacity of community development organizational operations, such as staffing or consulting services.³⁴

In its FY2023 Congressional Budget Justification, HUD indicated that with funds awarded between FY2016 and FY2020, Section 4 intermediary grantees have supported more than 5,000 local community development organizations.³⁵ This assistance included more than 550 trainings; 1,484 sub-grants (totaling $108.7 million); and seven loans (totaling $9.1 million). According to HUD's reporting, Section 4 financial assistance from funds awarded during this period supported the construction of 15,018 new housing units; rehabilitation or reconstruction of 20,649 housing units; and pre-development support for 44,564 units.³⁶

Table 4 provides a sample of projects that received Section 4 funding from intermediary organizations since FY2008.³⁷

Section 4 in Context

The Section 4 program is part of a broader landscape of federal resources that may support the capacity and efforts of local community development organizations. In some cases, federal program funds make up a large portion of operating budgets for local organizations focused on affordable housing and community development.³⁸ In recent NOFAs, HUD has encouraged the use of Section 4 program funds to enhance projects and activities funded by other federal programs.³⁹

These programs are similar to the Section 4 program in that they provide funding or technical assistance to local organizations, through intermediaries or directly, to support operational and project capacity. Table 5 provides an overview of some federal programs or federally chartered organizations that provide financial or technical capacity support to community development entities, including nonprofit organizations.

Programs focused specifically on strengthening the capacity of local community development entities generally provide relatively low levels of funding as compared to other federal housing and community development programs. Some broader federal community development programs provide funding to states or eligible local governments on a formula basis for a range of activities related to community development or housing. Although these funds are not exclusively designed to support community development organization capacity and projects, they may be eligible for such uses. Table 6 provides an overview of selected federal block grant programs that may support local community development and housing organizations.

Federal programs and policy tools may also influence the attraction of private investment to community development and affordable housing projects, which may, directly or indirectly, support the efforts of community development organizations. Table 7 provides an overview of selected community development incentives.

In addition to federal sources, such as those mentioned in this section, community development organizations may receive additional financial assistance from a variety of state, local, philanthropic, and private entities.⁴⁰

Policy Considerations

Community development needs have evolved since the Section 4 program was last reauthorized in 1997, including shifts in the national housing market.⁴¹ As noted in the previous section, the Section 4 program is part of a broader landscape of federal resources for community development in the United States. Some Members of Congress have proposed legislation that would modify the Section 4 program's structure or create alternative models for providing technical and financial capacity support to local community development entities.

Section 4 Structure

Since the Section 4 program's inception, the list of intermediary organizations eligible for program funding has fluctuated in size. Although Congress has not modified the eligibility structure in the program's statute since 1997, some appropriations acts have limited eligibility, as described earlier. Some Members of Congress have introduced proposals that would further modify the eligibility structure for HUD community development capacity funding.

Some proposals have sought to expand or establish additional support for local organizations. For example, the HUD Demonstration Improvement Act of 2010 (H.R. 4737) would have amended the program's authorizing statute by expanding the list of eligible grantees to include the National Urban League and the Housing Partnership Network. Expansion of eligibility under the Section 4 program may increase access and potentially diversify the range of activities carried out under the program.⁴² However, any changes to the list of eligible grantees would need to consider the relative alignment of organizational mission and record of performance with the Section 4 program's intent.

In the 117^th Congress, on November 19, 2021, the House approved the Build Back Better Act (H.R. 5376), a FY2022 reconciliation measure.⁴³ Title IV, Section 40302, of the bill would fund competitive grants for "Community-Led Capacity Building" to be administered by HUD with substantially similar eligible activities to the Section 4 program. However, the proposed competitive grants would include a larger group of eligible grantee organizations and could serve a wider range of community development entities as eligible beneficiaries. Specifically, the funds would be available to

non-Federal entities, including nonprofit organizations that can provide technical assistance activities to community development corporations, community housing development organizations, community land trusts, nonprofit organizations in insular areas, and other mission-driven and nonprofit organizations that target services to low-income and socially disadvantaged populations, and provide services in neighborhoods having high concentrations of minority, low-income, or socially disadvantaged populations.⁴⁴

As illustrated by these proposals, Congress may consider authorizing or funding a separate program, with broader eligibility, to supplement or replace the Section 4 program. Congress could also potentially modify the Section 4 program to address any shifts in community development needs through reauthorization of the program. Congress may also consider maintaining the current structure.

The most recent detailed federal assessments and reports on the program's structure and performance were conducted in the early 2000s. In assessing potential modifications to the Section 4 program, Congress may consider commissioning updated reports or conducting hearings to assess the program's role and effectiveness in addressing current and emerging needs.

Coordination of Federal Community Development Resources

The Section 4 program represents a model in community development by which federal resources are used to generate additional private sector investment to support the financial and technical capacity of community development organizations through selected intermediary organizations.⁴⁵ Section 4 is one of several federal programs that provides funding to national community development intermediaries and local community development organizations.

Federal funding represents an integral component to organizational budgets and enables leverage of other funding and financing.⁴⁶ Although several federal community development and housing programs have unique aspects or separate purposes, some analysis has suggested that there may be redundancies and overlap, which could pose a duplication of benefits risk.⁴⁷ Accessing the full network of community development programs, administered by various federal agencies and offices, might also pose administrative challenges associated with application and reporting processes for some organizations with limited capacity.⁴⁸

Congress may consider options to enhance coordination among federal community development programs and streamline application processes and grant management requirements across programs. Alternatively, Congress might consider other options and identify other tools to assess and address local community development capacity. This may include identifying other types of organizations or other methods for addressing local community development needs.

Appendix A. Section 4 Eligible Beneficiaries

HUD competitively awards Section 4 funds to specified eligible intermediary organizations. Those intermediaries, in turn, provide funding to eligible beneficiaries. Organizations may qualify as beneficiaries for Section 4 financial and technical assistance if they meet one of three sets of criteria for eligible CDCs or CHDOs. The specific eligibility criteria for these organizations are enumerated in program NOFAs and, in the case of CHDOs, Title 24, Section 92.2, of the Code of Federal Regulations. This appendix includes the criteria for each category of eligible Section 4 program beneficiaries as outlined in HUD's FY2020 program NOFA.

Organizations may also qualify as CDCs under the following definition.

Additionally, CHDOs, as defined under HUD's HOME program's authorizing statute and regulations, are eligible beneficiaries in the Section 4 program.

Appendix B. Section 4 Awards FY2010-FY2021