Community Reinvestment Act programs on small-business lending, according to a Chicago-based advocacy group. "Most banks have directed their CRA efforts at housing development, but CRA really needs to be directed more toward small business," said Daniel Immergluck, vice president of the Woodstock Institute, which promotes investment in lower-income and minority communities. "This is a component that's really been neglected." Communities benefit because these loans create jobs and increase economic activity, and banks win because fledgling small businesses might become larger customers, he said. The institute released a study this month profiling several lenders who have found creative ways to serve small businesses in the inner city. "If we're going to push CRA into the small-business arena and expect lenders to do more, they need to know more about what's being done successfully," Mr. Immergluck said. "So we decided to look for programs that targeted these markets and made a real impact on communities that needed economic development." The model programs use several devices to reduce bank exposure. Most prominent is the Small Business Administration 7(a) program, which guarantees as much as 90% on many loans. Some banks offer below-prime interest rates for small businesses in the inner-city. They are able to do so because companies or other banks have placed low-interest deposits in the institution. The bank uses the savings from these low-interest deposits to underwrite lower loan rates. Banks also offer longer loan amortization periods and temporary principal payment deferrals. For riskier loans, several banks pool their funds to form community development corporations. Some participate in government-sponsored portfolio insurance programs, in which states, banks, and borrowers contribute a small percentage of each deal to a loan-loss reserve fund. The programs usually target inner-city small businesses that have positive cash flow but little collateral - the type of company that would not qualify for a conventional loan. Delaware Trust Co., a $1.5 billion subsidiary of Meridian Bancorp, has three loan programs that cater to inner-city businesses: SBA 7(a) loan guarantees, a state-administered loan-loss reserve fund, and an interest rate writedown program made possible by a linked deposit from a credit card bank. "It's not charity," said Mike Skipper, vice president of Delaware Trust. "Each loan is based on the ability to repay, although we try to do special things through rates or terms. But we really do want to make an investment that's going to last." Other banks have set up special units to handle community lending. Society National Bank, a $22 billion bank in Cleveland, created a community development lending group that makes small loans at market rates but with more flexible terms than conventional loans. First Community Bank, a division of the Bank of Boston, uses credit enhancements, including SBA 7(a) guarantees, to make small-business loans in urban areas. Its greatest success is the restoration of Boston's Codman Square neighborhood, which now boasts 38 new businesses. "We're not quite as profitable as other units of the bank, but we're awfully close," said Jeffrey Zinsmeyer, director of commercial lending at First Community Bank. In San Diego, 28 banks banded together in 1992 to form Bankers CDC. The corporation makes "microloans" ranging from $5,000 to $50,000. "In this banking environment, you cannot get a loan if you don't have collateral and a pretty good track record," said Lee Fenn, corporate secretary for Bankers CDC. "That's the market we took on, and it fits in perfectly with what the banks aren't able to do." Although 10% to 30% of the organization's loans may be in default at any given time, Mr. Fenn said that the organization has had to write off only three loans in three years. Meanwhile, 40 loans created more than 100 jobs, he said. "We'd be out of business if we ran it like a bank," he said. "Bankers tend to dwell on the delinquencies and the bankruptcies. I tend to dwell on the jobs created and the positive impact on the community." Mr. Serb writes for the Medill News Service.

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