President Clinton's proposals to expand bank lending and community investment are to be applauded for the steps they take to reduce the regulatory burden on banks. That will free up banks' resources to serve and make actual loans to low-income and moderate-income communities.

But the President's proposal to establish a new fund to support community development banks, while well-meaning, would represent unnecessary duplication of facilities that already exist and are working well.

One of these entities is the Federal Home Loan Bank System, which consists of an oversight agency in Washington, 12 regional Home Loan banks, and 3,905 financial institutions -- thrifts, commercial banks, insurance companies, and credit unions -- that own stock in the Home Loan banks.

Source of Liquidity

The Federal Home Loan banks are wholesale lenders, providing liquidity and intermediate-term and long-term funds on short notice at competitive interest rates.

Member institutions, which average $332 million in assets, must meet demanding criteria, the most important of which is engaging in residential mortgage lending and holding mortgage-related assets.

By virtue of size, geographical dispersion, and lending activity, these institutions clearly satisfy anyone's criteria for community banks. What can be more "community" than residential mortgage lending?

The story doesn't end here. The Home Loan banks and their members actively engage in two programs that support housing and community -- the Affordable Housing Program and the Community Investment Program.

Portion Reserved for the Poor

The affordable housing subsidies are used to finance home ownership by families with incomes at or below 80% of their area's median income, with at least 20% of the housing targeted for very low income households.

The Community Investment Program provides funding for community-oriented mortgage lending. This is defined as making loans to meet the housing needs of families with incomes at or below 115% of the area median as well as to finance economic and commercial development in low-income and moderate-income neighborhoods.

Affordable housing funds are limited in size and availability because they represent subsidies that are charged against the Home Loan banks' earnings. Community Investment Program funds are lent at a mere 5 basis points over Home Loan bank costs and are, therefore, available at any time in much larger amounts.

The Federal Home Loan banks and their customer institutions are making these loans profitably, in the spirit of entrepreneurship as well as community. The delivery system is in place and working.

High Level of Commitment

The projects originate with community groups working together with bankers. They are housing and commercial projects that are the brainchild of some individual or group within the community, not a government bureaucrat. So the ultimate borrowers believe in these projects and are highly motivated to make them work.

Some of the Federal Home Loan banks have segmented their districts and organized regional lending consortiums. The local trade associations cooperate and help coordinate.

The genius of this approach is its reliance on local knowledge and local initiatives. Community banks need to join their district Federal Home Loan bank to access the affordable housing subsidies and low-cost funds under the Community Investment Program.

A second, existing community lending facility is the network of community development corporations, authorized for banks and holding companies in 1971 as a means of promoting joint action and diversifying risk.

Forms of Investment

Financial organizations can make equity and debt investments, provided they are designed primarily to promote community welfare in the form of housing and job opportunities for people with low and moderate incomes, assist small and minority businesses, or provide important community services.

A variation is the consortium a multibank or nonbank development corporation. Such entities pool the resources of a number of financial institutions and invest in large-scale community development projects in order to spread the risks and broaden participation.

These consortiums generally are organized on a regional basis and are particularly attractive to institutions that do not yet have the expertise or resources to engage in this kind of lending, especially on a large scale.

The consortium approach gives wholesale banks a way to participated in loans originated by community banks. This is a major step forward in community lending since it addresses so many problems that have arisen from both the regulatory and lending standpoints.

In summary, new federal programs are not needed. The tools for solving community investment problems already exist and they work best at the local level. They simply need to be better used, or freed from over-regulation.

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