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Community banks express concern over some aspects of Obama’s lending fund

by Malathi Nayak
Feb 03, 2010


Maggie Hyde/MEDILL

Some community banks, like Devon Bank in Chicago, are apprehensive about some aspects of the Obama administration's small business lending fund.

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Community Development Financial Institutions or CDFIs share their views

Community development financial institutions, which also lend money to small businesses, are not currently included in the President Obama’s proposed plan to increase small business lending.  But two local CDFIs recently expressed their views on the program.

Jonathan Brereton of ACCION Chicago, located near the Pilsen neighborhood, said, “The government is recognizing the role they (CDFIs) play in the economy in addition to focusing only on the large banks like JP Morgan or the Bank of America.”

Brereton added, “Even if they were going to give us this money at 5 percent it wouldn’t work for us as it would be more expensive.”

Anita Hollins, president of Chicago Community Ventures, a CDFI based in the Loop, said the dividend rate "may be a point to review."

The small business lending fund proposal does not specifically talk about lending by CDFIs.

U.S. Treasury Secretary Tim Geithner on Wednesday,however, announced another program that supports low cost capital to CDFIs at 2 percent under TARP to encourage small business lending.

Some community-based lenders in Chicago are expressing displeasure over a requirement that they pay interest on any federal funds received under President Obama’s $30 billion plan to boost the number of small-business loans. 

Bankers interviewed said the requirement, just released along with other details of the president’s job stimulus program, will discourage community financial institutions from participating in the program.

 “If it is only capital that would be good. But if it is capital at a 5 percent rate that will be not so good,” said Richard Loundy, chairman of Devon Bank, which caters to residents in and around the North Side's West Rogers Park community.

According to the plan, dubbed the "small business lending fund,"banks with less than $10 billion in assets could apply for money repaid to the government’s bank bailout program. The money they receive would be earmarked for lending to small businesses looking to expand and add jobs.

Jonathan Swain, a Washington, D.C.-based spokesman for the U.S. Small Business Administration said, “This proposal  (the small business lending fund) is one of several pieces of the president’s agenda to help small business grow and create jobs.”

A press statement from the White House explaining the elements of the small business lending program said the interest, or dividend rate, for a capital investment payable by community lenders to the federal government under the program would begin at 5 percent. Reductions to 1 percent would be given, however, “if a bank demonstrates increased small business lending relative to a baseline set in 2009.”

The fund is to be established separately from the government’s Troubled Asset Relief Program that places strict restrictions on banks from lending to small businesses.

Loundy’s Devon Bank, with assets of $300 million would qualify for the program, as would First Eagle Bank, with $320 million in assets, located in the city’s Near West Side neighborhood. 

Andy Salk, president and CEO, said he’s still unclear on how Obama’s small business lending program will work. “It appeared that the cost (of capital) was 5 percent going in. That’s the real issue. What does it take to go from 5 percent to 1 percent money in this environment? How much in loan volume do you need to do to get to the first percent?”

According to Loundy, community banks “can get money to lend” and would not necessarily need to sign up for the federal program. He said they could raise funds for lending to small businesses by increasing customer deposits or by offering higher rates on certificates of deposits and checking accounts.

 “The real problem is that the examiners are so rigid in the examination of the loan that we are going to find it hard to lend to good borrowers and small businesses,” Loundy said.

Loundy also said the government has “missed the target”; he recommended an existing solution–the U.S. Small Business Administration, or SBA, loan.

“If they made it easier to get an SBA loan with a government guarantee that would be better,” he added referring to the Section 7(a) loans of the U.S. Small Business Administration. The SBA does not lend directly to small businesses but guarantees up to 90 percent of loans made to small businesses by banks or other lenders.

In March, the Obama administration pumped $15 million into the small business loan market as a move to create jobs. It also temporarily raised the SBA guarantee on small business loans to the 90 percent level from the earlier guarantee of 75 percent. Subsequently, in December President Obama extended the SBA's enhanced loan program, which was announced in March, through Feb. 28.

First Eagle Bank’s Salk said his bank would also find the SBA program more attractive as “part of our (the community banks') underwriting risk is protected by a government guarantee.“

Economist Charles M. Kahn, chairman of the department of finance at the University of Illinois, Urbana -Champaign, said the 5 percent dividend rate in the Obama administration’s lending fund program is not a good deal if community banks are not going to do small business lending. 

However, he added that it is a "clever plan" with a good outline.

"It forces those banks to decide if they are interested in doing small business lending. If they are going to, indeed, then it is a good deal for them. It is an inducement for them in that direction."