Treasury Throws Out a Lifeline to CDFIs
The Obama administration will make money from the Troubled Asset Relief Program available to credit unions, banks and thrifts that have been recognized as community development financial institutions by the Treasury Department's CDFI fund.
This could funnel significant Federal money to the roughly 150 credit unions that have been certified as CDFIs and may pay a key role in helping some survive the economic downturn.
Credit unions and banks certified as CDFIs have to do the majority of their lending and operations in lower income and underserved communities. Credit unions that are recognized as CDFI institutions are also all community development credit unions and many tend to be small.
The CDFI Fund will administer the distribution of money to CDFIs, and CDFI Fund officials have promised the initial terms of the distribution will be available on the organization's Web site in the next week. The fund hoped to be able to begin taking applications for the money by the end of the month, the officials said.
Treasury Secretary Tim Geithner, other Treasury officials and CDFI Fund Administrator Donna Gambrell met with leaders from bank and credit union CDFIs and members of Congress prior to making the announcement in Washington on Feb. 3. On hand from credit unions were Cliff Rosenthal, CEO of the National Federation of Community Development Credit Unions, and Luis Pastor, CEO from the Latino Community Credit Union, a credit union CDFI headquartered in Durham, N.C.
Geithner and other officials stressed that the move fulfilled a promise President Obama made in October 2009 to make some of the TARP funds available to CDFIs. At the time, the administration promised that CDFI banks and credit unions would be able to borrow up to 2% of their assets from the TARP money at very favorable interest rates.
In the intervening months, however, administration officials said they had met extensively with both bank and credit union CDFIs. The institutions used those meetings to explain that the barriers they saw to being able to effectively use the money, including the fact that a 2% limit may not be enough, particularly for the credit unions, which tended to have higher transaction costs.
Under the terms of the just announced program, credit union CDFI's will be eligible to receive capital in the form of subordinated debt at an interest rate of 2% for eight years in an amount up to 3.5% of their total assets. This will roughly coincide with the limit of 5% of risk-weighted assets for CDFI banks and thrifts, the officials said.
Additionally, CDCUs would need the approval of the NCUA to participate in the program and would need to be considered strong institutions. The officials said Treasury has reached out to the NCUA and that the agency supports the program. CDCUs that might not have sufficiently strong capital positions to participate will be able to approach private investors or foundations for half of the capital they need. The other half of the necessary capital would come from TARP funds, the officials said.
Similar requirements were put into place for bank and thrift CDFIs, and officials stressed the foundation and investor money would be considered junior to the Treasury investments.
Requiring institutions in a weaker capital position to get support from investors or foundations was one way Treasury could feel more certain that they are viable institutions going forward, officials added.
"This is a bold and innovative proposal that will provide significant benefits to low-income credit unions as they strive to find new ways to reach consumers in disadvantaged communities," said NCUA Board Chairman Debbie Matz. "Now that the program has been unveiled, the NCUA Board will move with all appropriate speed to develop a rule that enables qualifying credit unions to make full use of this program."
Gambrell and other Treasury officials stressed that some of the details of the program, such as what criteria credit unions would need to meet to participate and whether credit unions could use previously received CDFI money to help make up any capital gap, are still not resolved.
Geithner and other officials were full of praise for CDFIs when they announced the program, noting that the institutions have a proven track record of helping small businesses and communities at the most local levels.
"What we have seen is that this program is a very powerful way we are starting to see some of the credit channels open up for small businesses around the country where they need to the most," Geithner said.
Rosenthal was even firmer about the importance of helping CDFIs in turn help Americans.
"We are the closest you get to Main Street," Rosenthal said. "We are on Main Street, literally. Our members serve one million people in low income communities across the United States. And what is remarkable and most commendable from the Treasury's role in this is that they achieve a level of granularity, of getting down to the grass roots in the most effective possible way."
The announcement came on the heels of the administration's strong budget request for the CDFI Fund for next year. At a time when the Administration has made a point of capping spending for many domestic programs, the CDFI Fund saw increases.