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August 11, 2010
New Program Seeks to Unlock $100 Million in Small Business Lending
    by Robert Kropp

A $10 million Bank of America grant program will provide loan loss reserves for Community Development Financial Institutions in order to access $100 million in small business lending.

In this current era of tightened credit, Community Development Financial Institutions (CDFIs) have found demand for their financing services in communities underserved by commercial banks to be growing much more quickly than the funds they have on hand to provide such financing.

For example, the Communities at Work Fund, a partnership of Citigroup, Opportunity Finance Network (OFN), and the Calvert Foundation, was formed in May to provide $200 million to CDFI Loan Funds for small business lending in low-wealth and low-income US communities.

At the time of the launch, Mark Pinsky, President and CEO of OFN, told, "There's at least $600 million in demand right now for the $200 million in the Communities at Work Fund."

This week, Pinsky told, "The Communities at Work Fund is doing great. The demand for the money is high, and the money is moving quickly."

A new $10 million grant program to encourage small business lending, announced last week by OFN and Bank of America, represents another opportunity to deliver much-needed funding to small businesses in underserved communities. With more than $1 billion in loans and investments to 120 CDFIs in 37 states, Bank of America is the largest investor in CDFIs in the US, and a $10 million grant program may seem small in comparison.

However, the potential for leverage through the program is considerable. CDFIs and other nonprofit lenders participate in microloan programs administered by the Small Business Administration (SBA) and the US Department of Agriculture (USDA). To qualify for the loans, participants must set aside loan loss reserves of as much as 15% of the value of the loans. Because of the economic recession, most lenders are unable to meet the reserve requirements.

The Bank of America grant program will help CDFIs and other nonprofit lenders meet loan loss reserve levels, thereby unlocking as much as $100 million in small business loans through the SBA and USDA microloan programs over the next 12 months.

According to the SBA, the country's 30 million small and micro-businesses create two out of every three new jobs in the US.

"Bank of America recognized that there was a problem at the USDA and the SBA, and that there was money that might not get used," Pinsky said. "We recognized that by law we needed to free up $10 million in order to free up another $100 million. We don't want to leave money on the table when we need that money."

"Bank of America will find a set of small business and microbusiness lenders who have high-leverage potential use of grant money, who can take that money and quickly turn it around to activate SBA microdollars or USDA microlending program dollars at a 10 to one leverage," he continued.

Asked about opportunities presented by the grant program to investors interested in fulfilling a community investment mission, Pinsky said, "For those who are looking for investment opportunities in this space, it's good to know that this money is flowing in there. Bank of America is considering using some of the money for folks who are not participating in the SBA or USDA programs, and there may be investment opportunities for social investors."

Because Bank of America already has a direct CDFI lending program in place, Pinsky said, "I don't think of this grant in isolation but as part of a broader lending strategy."

The broader lending strategy referred to by Pinsky extends beyond the programs launched by Bank of America and Citigroup, and now includes many of the nation's largest commercial banks. JPMorgan Chase has invested more than $1 billion in CDFIs over the last five years, and Wells Fargo provides $400 million to CDFIs in loans and investment.

In addition, Goldman Sachs announced last November a $500 million program to aid small businesses, which includes $50 million in grants to CDFIs over five years. By converting to bank holding companies in order to qualify for Troubled Asset Relief Program (TARP) funds, financial institutions like Goldman became subject to the Community Reinvestment Act (CRA), which requires depository institutions to serve disadvantaged communities in which they have operations.

"If you put together what the big commercial banks have been doing, it's well over $1 billion that these banks have committed to CDFIs," Pinsky said. "I think it's an important marker of what the future is going to look like."

"These banks need CDFIs to manage risk and get the deals done," he continued. "There's an increasing realization of CDFIs as a delivery channel for demand in the opportunity markets. There's an acknowledgment among big banks that CDFIs add tremendous value in their ability to move capital safely and soundly."

"In thirty-plus years we've done over $30 billion of financing," he said.

While CDFIs have certainly not been immune to the consequences of the recession—as has been the case with most lenders, rates of delinquencies and defaults on CDFI loans have risen—they have, in general, performed better than most commercial banks. One important reason for their outperformance is that, in addition to financing, CDFIs provide training and technical assistance, often on a one-to-one basis, for their loan recipients.

"Our defaults and net charge-offs were very low in 2009, compared to conventional banks," Pinsky said. "We didn't see an increase in defaults in the first quarter of 2010, but we really won't know until we get the year-end 2010 data if defaults have leveled off."


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