Last week, the Treasury Department outlined President Barack Obama’s plan to invest in community banks that lend to small businesses in the nation’s most economically challenged communities.
The Community Development Financial Institution (CDFI) initiative is meant to use money recouped from the Troubled Asset Relief Program to invest lower-cost capital in community banks or CDFIs. Those CDFIs in turn, would lend to small businesses in at-risk communities.
Officials with the department believe that, although the economy is believed to have seen is roughest days, without additional assistance the chance for the things to get worse in hard hit communities remains a concern.
“There’s still enormous potential for an uneven recovery with hard-hit communities facing downward spirals,” said Gene Sperling, a counselor to Treasury Secretary Timothy F. Geithner. “One of the reasons for that could be a hesitancy to lend in our nations hardest-hit areas.”
Michael Barr, Treasury’s assistant secretary for financial Institutions, agrees that this program is necessary.
“As the president and Secretary Geithner has asked; we are quite focused on helping build jobs and create growth all across the United States including in very hard-hit low and moderate income communities,” Barr said.
A 2009 report by the Small Business Administration claims there are over 6 million small businesses in the country, which contribute over $14 trillion to the economy. So officials think there is an obvious need to make sure businesses in hard hit areas see their portion of the pie as well. In particular, they sought out financial institutions that served low and moderate-income communities.
“It was not necessarily the case that if a bank that had a viable future faltered that another bank would necessarily pick up the lending that they were doing,” Sperling said. “Thus it made sense for us to have a different standard for CDFIs.
“One that did not provide funding for a CDFI that had no viable future, but one that made sure that those that had been serving their communities for years and do have viable futures have the ability to use our capital matched with capital they would raise from the private sector.”
The program benefits CDFIs by allowing them to borrow at a rate of 2 percent instead of the 5 percent rate under the Capital Purchase Program (CPP). It also gives the CDFIs eight years to pay the loan back before it would face any punitive damages instead of the standard five years.
The Treasury Department expects to invest up to $1 billion with the understanding that the number could grow with more CDFIs joining the program.