Obama, Geithner Target Loan Help To Hardest-Hit Communities

As part of an effort to redirect TARP funds from Wall Street to Main Street, the Treasury Department Wednesday announced a program to provide lower-cost capital to community development financial institutions that serve the communities that have been hardest hit by the recession. Treasury Secretary Tim Geithner believes that without this help, many of those communities could continue to see their local economies spiral downward even after the recovery takes hold elsewhere, because banks would remain hesitant to lend in those areas, according to Obama administration officials.Between $500 million and $1 billion has been allocated for this program, which is designed to spur lending in the hardest-hit communities. The loans will be used to boost economic development and job growth, and to help small businesses. The amount of money spent under the program will depend on how many qualifying financial institutions decide to participate and how much money they request, according to administration officials. Complete details of this new program will be available by Friday, and transactions could start as soon as the end of the month.

Nationwide, about 210 banks, thrifts and credit unions will be eligible to receive money from the program. How many of these institutions will take advantage of it is unclear, but administration officials indicated they are hoping for widespread buy-in.

Secretary Geithner began consulting last October with members of Congress and officers of community banks, thrifts and credit unions that focus on low- and moderate-income communities, according to administration officials. Based on the feedback Geithner received, he realized that different terms would be needed for small community banks, thrifts and credit unions.

The Treasury Department expects these funds to be used by small businesses, as well as for community needs such as child care centers, charter schools and housing. This program is separate from the $30 billion small business program announced earlier this week.

Administration officials explained during Wednesday's briefing that the program will have five components:
  • Capital will be available at a 2% rate to eligible banks and thrifts. They can apply for capital equaling up to 5% of their risk-weighted assets.
  • Credit unions will be eligible for capital at the 2% rate, but only up to 3.5% of total assets.
  • Community development financial institutions will need to raise private capital to qualify for the program, and the private capital must be junior to the Treasury capital.
  • Community development financial institutions can transfer the money they've already taken under original TARP terms to these more favorable terms. Original TARP funds required dividend payments of 5%.
  • Community development financial institutions will not be required to issue warrants, as were required originally under TARP.
Administration officials said Geithner wanted to see private commitments to the program so he could be sure there was local support before making the funds available. That is why the Treasury Department is requiring private funding in addition to the government funding before financial institutions can access the lower-cost capital.

Many of these financial institutions have been serving their communities for decades, providing loans when no one else would lend in those areas. Now, they can play a critical role in making sure their communities aren't left behind as the country recovers from the Great Recession.

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