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February 10, 2010
Treasury Department Will Invest $1 Billion in Community Development Financial Institutions
    by Robert Kropp

With unemployment rates still at record highs and big banks unwilling to lend to small businesses, CDFIs welcome the infusion of capital when demand for their services is greater than ever.


Given that the Troubled Asset Relief Program (TARP) has failed to convince the nation’s largest banks of any social obligation to repay the largesse of a historic taxpayer bailout by increasing their lending to distressed homeowners and small businesses, the burden of doing so has fallen elsewhere. One such industry, which considers its mission to be such lending in communities that are underserved by traditional financial institutions, is comprised of Community Development Financial Institutions (CDFIs).

The Obama Administration has consistently recognized the value of CDFIs, and the proposed 2011 federal budget includes $250 million for the Department of the Treasury's Community Development Financial Institutions Fund (CDFI Fund), as well as $5 billion in New Markets Tax Credit allocation authority.

In addition to the Administration’s budget proposals, last week the Treasury Department announced a new program under TARP to invest up to $1 billion in depository CDFIs. According to a statement by CDFI Fund Director Donna Gambrell, the capital investment will result in increased small business and community development lending in the nation’s hardest-hit communities.

Under the new enhancements of the TARP initiative for CDFIs, not only will the maximum amount of capital available to them be increased by $1 billion, but CDFI banks and thrifts will also be eligible to receive investments with a dividend rate of 2%, and matching capital investments of up to 5% will be offered to CDFIs whose regulators do not approve their participation in the program.

SocialFunds.com spoke with Mark Pinsky, President and CEO of Opportunity Finance Network (OFN), about the Treasury Department announcement. OFN is a national financial institution serving a network of private financial intermediaries that invest in opportunities to benefit low-income and low-wealth people in the US.

“This will be a big help to CDFIs in extending their lending services,” Pinsky said. “There’s not enough credit flowing to small businesses. Demand is greater than ever, and CDFIs have continued lending, even at a greater pace than before the crisis. All our money is out on the street.”

“We can be important contributors to small businesses and economic recovery,” he added.

According to Pinsky, every dollar invested in depository CDFI institutions is leveraged nine to ten times, which means that the Treasury Department’s $1 billion investment can be expected to result in at least $9 billion in loans to CDFI clients, including small businesses.

Pinsky called on the Obama Administration to follow its initiative by engaging the full range of CDFIs ready to lend to small business, including non-depository CDFI loan funds.

Asked by SocialFunds.com to describe the loan funds, Pinsky said, “They are non-depository, unregulated financial intermediaries that borrow money from a number of sources, including socially responsible investors. They pool the capital they raise in revolving loan funds that lend to small business, microenterprise, nonprofit facilities, and private and multi-home ownership. CDFI loan funds are dynamic and flexible lenders, who are able to provide technical assistance and support to borrowers, which is critical.”

“Secretary Geithner made it clear that they are still committed to finding resources for non-depository CDFIs,” Pinsky continued. “Both Senator Dodd and Congressman Frank have indicated strong support for using the full range of resources available to us, including loan funds.”

“Loan funds are not regulated, so it takes longer to evaluate them,” Pinsky said, offering an explanation of why loan funds were not included in the Treasury Department’s initial announcement.

Referring to the Administration’s budget proposal for 2011, Pinsky said, “the amount represents the biggest budget ever for the CDFI Fund. We’re thrilled by the support, and expect Congress to respond.”

Meanwhile, President Obama also announced a proposal to use $30 billion in TARP funds to create a new Small Business Lending Fund that would provide capital to community banks to increase lending to small businesses. Unlike the Treasury Department’s decision to increase its investment in CDFIs, Obama’s proposal will require approval from Congress.

In his address, Obama said, “Because financing remains difficult for good, credit-worthy small businesses across the country, I’ve proposed that we take $30 billion from the TARP fund originally used for Wall Street and create a new Small Business Lending Fund that will provide capital for community banks on Main Street.”

As for the big banks that received TARP funds, and declined to use those funds on behalf of a national economic recovery, the Qu arterly Report to Congress issued on January 30th by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) was sharply critical.

“Despite the fact that the explicit goal of the Capital Purchase Program (CPP) was to increase financing to US businesses and consumers, lending continues to decrease, month after month,” the report stated.

It continued, “Notwithstanding the fact that preserving homeownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (EESA), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation.”

“The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system,” the report added. “Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.”

 

 
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