The U.S. Treasury Department's Community Development Capital Initiative drew a charge of political tampering last week from an economist who has often been critical of programs related to the Troubled Asset Relief Program.

The Treasury Department used money from the TARP program to fund almost $70 million in long-term loans at low interest rates to a total of 48 credit unions before the TARP program came to an end.

But the use of TARP money to fund the loans has always caused some degree of misgivings among some credit unions. They are worried about the possible stigma of using funds from the controversial bank-oriented program might bring and a critical paper last week seemed to incarnate some of those concerns.

Linus Wilson, an academic who has specialized in studying TARP, has alleged that political influence played a role in deciding which credit unions received CDCI money. Wilson, an associate professor of finance at the University of Louisiana at Lafayette, has authored 14 papers on different aspect of TARP and testified before Congress on TARP oversight.

His paper, “Political Influence and TARP Investments in Credit Unions,” charged that credit unions eligible for TARP funds under Treasury's Community Development Capital Initiative program were three times more likely to receive funds if they were located in a district represented by a member of the House Committee on Financial Services.

The statistical analysis also showed, Wilson said, that “credit unions that received bailout money had significantly lower ratios of loans to deposits,” adding, “this means that TARP recipients lent less to their communities as a percent of deposits, relative to eligible credit unions that did not receive TARP investments.”

Wilson called this “startling” because credit unions had been picked, in part, on their ability and willingness to lend money into their communities.

“Forty-eight credit unions received capital injections as part of the financial sector bailout. The predicted probability of receiving bailout funds jumps from 23% to 76% for the typical credit union, if the institution's headquarters was in the district of a member of the U.S. House Financial Services Committee,” Wilson wrote.

Wilson's work drew upon a similar study from two University of Michigan economists who made a similar allegation about the ways the U.S. Treasury distributed TARP money to banks.

Ron Duchin and Denis Sosyura, both assistant professors of finance at the University of Michigan's Ross School of Business authored “TARP Investments: Financials and Politics” in June 2009 and updated it in October 2010. The two analyzed the banks that got money under the Capital Purchase Program, the largest vehicle Treasury used to channel money to support potentially troubled banks in the wake of the credit crisis.

“Our findings suggest that political ties, at least in some cases, affected federal investment decisions under TARP, resulting in a deviation from the declared focus on healthy institutions and shifting at least some of the federal capital toward ailing banks,” the authors wrote. “This interpretation justifies the additional requirements for accountability, disclosure and transparency in TARP investment decisions that are advocated by the GAO and other oversight bodies of the program.”

Wilson's paper drew its own criticism from the National Federation of Community Development Credit Unions, a trade association that helped many of the credit unions prepare applications for the CDCI money and shepherd the applications through a multistage and multireview application process.

The federation's analysis of Wilson's paper, according to federation CEO Clifford Rosenthal, showed Wilson lacked critical data about who applied for CDCI funds that was not made public. Further, when such data was used, an analysis of which credit unions received CDCI funds shows a greater percentage of credit unions located in House Financial Services districts were rejected for CDCI money than were approved.

“Wilson states that 'forty-eight of the eligible credit unions were selected to receive TARP funds,'” Rosenthal wrote in a detailed critique of Wilson's paper. “In fact, we know that at least 72 credit unions received final approval for CDCI secondary capital loans and at least 24 of these credit unions declined to accept the investment.”

Rosenthal pointed out that Wilson's thesis that credit unions that received CDCI money failed if he did not have a real list of credit unions that received the money. The Treasury Department clearly meant for more than 48 credit unions to have access to CDCI support, Rosenthal noted. The fact that only 48 credit unions actually received the money is a failure in the program, not its intent.

Rosenthal also observed that Wilson's number for how many credit unions were eligible for CDCI money was flawed.

As a foundation of his calculations, Wilson used 189 credit unions listed as community development financial institutions on the a website maintained by the U.S. Treasury's Community Development Financial Institution fund. But participation in the CDCI had been opened only to CUs that were both recognized as CDFIs and designated as low- income credit unions by the NCUA. In addition, Rosenthal pointed out that some credit unions had had been merged or closed and had not yet been purged from the CDFI list and that the NCUA has said that only 111 credit union applied for CDCI loans.

“These two points alone destroy the foundation of Wilson's argument,” Rosenthal wrote. “Instead of political influence having 'driven the selection' of 48 credit unions out of 189 eligible institutions, we see that at least 72 credit unions qualified and were approved for loans out of 111 eligible applicants.”

Rosenthal also pointed out that Wilson lacked the identities of credit unions that had applied for CDCI funds since neither Treasury nor the NCUA had ever made the list public. The lack of such a list meant that Wilson lacked a control group against which he could test his thesis, Rosenthal observed.

Since the federation had served as an adviser to more than 100 credit unions that applied for CDCI funds, Rosenthal said that it had such a control group. Its analysis of that list showed that while 7.1% of credit union CDCI applicants were located in districts represented by members of the House Financial Services Committee, only 6.9% of CU applicants in those districts were approved for CDCI money and 7.7% of CU CDFI applicants in those districts were rejected for CDCI loans.

For his part, Wilson said he is willing to modify his research to reflect the new data but said that when he contacted the federation for their list, it declined to share it. Rosenthal confirmed this and said the federation had acted to protect the credit union involved.

“Our conclusions came from painstaking one-on-one contacts with every credit union we knew or thought was applying,” Rosenthal wrote in an e-mail. “The credit unions that withdrew or were rejected do not want that information disclosed because it was confidential and they do not want to suffer reputation risk. The baseless political attacks of Wilson only heighten those concerns.” he added.