Following its proposal to create a Small Business Lending Fund, aimed at increasing community banks’ small-business lending, the Obama Administration recently announced the final terms of a new program aimed at increasing the small-business lending of Community Development Financial Institutions (CDFIs).

Under the program, CDFI banks, thrifts and credit unions—which have been certified as targeting more than 60 percent of their small-business lending to underserved communities—would be eligible to receive capital investments at a dividend rate of two percent from the Troubled Asset Relief Program (TARP). After eight years, the dividend rate would increase to nine percent.

Institutions could apply for U.S. Department of Treasury investments of up to five percent of their risk-weighted assets. Credit unions would be eligible to apply for up to 3.5 percent of total assets—an amount approximately equivalent to that of banks and thrifts.

The program would require participating CDFIs to be approved by their regulators. For non-approved institutions, Treasury might offer matching capital investments of up to five percent of risk-weighted assets “against private investments on a dollar-for-dollar basis, provided that the combined amount would return the institution to a viable position.”

Although certified CDFIs typically lend to clients that banks consider too risky—as they, by definition, serve markets that are underserved by traditional financial institutions—their loans have held up relatively well during the current economic downturn. This largely is attributable to CDFI’s focus on technical assistance. Accordingly, many policymakers and bankers expect them to play an increasingly important role in small-business financing during any eventual economic recovery. CDFIs receive their funding from the federal government, foundation grants, and commercial banks.

A number of large banks are expected to announce investments in and partnerships with CDFIs in the coming year, as banks always are pleased to find ways to enlarge their pool of potential borrowers and these investments help banks comply with the Community Reinvestment Act of 1977. Complying with Community Reinvestment Act requirements is especially relevant, as several large financial institutions recently converted to bank holding companies and soon will be subjected to them for the fist time.

The CDFI community welcomes the expected investments. In a December survey of CDFIs, 48 percent of the respondents claimed they were capital constrained during the third quarter; and, overall, CDFIs nearly doubled their demand for Treasury funds in 2009.

NSBA welcomes efforts to increase small-business lending and commends the Obama Administration for continuing to explore ways that this might be achieved.