TARP Goes Across the Tracks

The Obama administration today unveiled the second leg of its plan to increase lending to small businesses: making cheap capital available to financial institutions that target economically distressed areas.

Under the plan, the Treasury Department will use up to $1 billion in Troubled Asset Relief Program funds to provide low-cost capital to up to 210 banks and credit unions that are certified as community development financial institutions. To qualify as a CDFI, banks and credit unions must do more than 60 percent of their lending in underserved areas.

These CDFIs will have to pay a dividend rate of only 2 percent for this capital, compared with the 5 percent dividend normally required under TARP. To help more CDFIs meet regulatory standards for participation in the program, the Treasury Department will provide matching capital if an institution can raise enough private capital.

This program is being done under the government’s existing TARP authority and doesn’t require congressional approval. Term sheets for the program will be out by the end of this week, and the Treasury Department will start taking applications by the end of this month.

CDFIs, unlike community banks, aren’t concerned about the stigma of taking TARP money. They’re more concerned about getting capital as quickly as possible so they can make loans to charter schools, day care centers, and other businesses that serve low- and moderate-income communities, senior administration officials said.

Loans made as a result of this program won’t reach as many small businesses as the administration’s proposed $30 billion fund for community bank lending, but they will help businesses in the nation’s hardest-hit urban and rural communities, businesses that likely wouldn’t receive loans from conventional lenders.

Since their mission is to serve distressed areas, the bottom line for CDFIs is broader than just dollars and cents. They deserve to get lower dividend rates for their capital than other financial institutions because of this, senior administration officials said. Helping CDFIs—whose funding from banks and foundations has declined during the financial crisis—will help them pull hard-hit communities out of their downward spiral, administration officials said.

“We think their role is vital,” one official said.

Meanwhile, President Obama told Democratic senators today that moving $30 billion of TARP funds into a new Small Business Lending Fund should be “priority No. 1” in any jobs package moving through Congress. This fund would make cheap capital available to community banks for use in making loans to small businesses.

“The timing of it is perfect,” Obama said, concerning both this lending fund and his proposed tax incentives for hiring new workers.

“The economy is now growing,” he said. “But what’s happening is businesses, either because they can’t find financing or because they’re still just dipping their toe in the water, have been hesitant to hire full-time workers. And for us to start giving them some serious incentives, giving them access to financing, could accelerate a process that otherwise could take a much longer time.”