WASHINGTON -- President Clinton yesterday unveiled his long-awaited proposal for establishing a national network of community development banks, but the plan does not include, as some hoped, a proposal to give such banks added incentives to purchase small-issue, tax-exempt industrial development bonds.
In offering his plan, Clinton said the community-oriented lending institutions "will bring new life, opportunities, and direction to distressed communities."
The proposal, which lawmakers pledged would be put on a legislative fast track, would create a fund to provide assistance to financial institutions devoted to development of areas or populations that currently are underserved by conventional banks.
The fund, which under the Clinton plan would receive $382 million over four years, would provide seed money to new and existing community development institutions.
Development banks and credit unions that are federally insured could receive capital from the fund only after making a dollar for dollar match. Institutions that are not federally insured also will be required to offer matching funds, but the amount is left to the discretion of the fund. The Treasury Department estimates that the federal investment could be leveraged to provide up to $2.5 billion in new credit.
Sources said the Clinton proposal does not contain provisions that would allow community development institutions to take limited deductions for the costs of acquiring and carrying tax-exempt small-issue industrial development bonds.
The administration had been urged by some to include in its development bank plan a limited exemption on the first $1 million of each project financed with tax-exempt small-issue IDBs, regardless of who issued the debt.
Supporters said the tax break would make those bonds more attractive to the development banks than non-bank qualified bonds. But a Capitol Hill source said that although such a provision is not in the plan now, it could be added as the measure moves through Congress.
Since 1982, Congress has limited the bank Interest deduction for carrying costs associated with tax-exempt debt. In 1982, banks could take an 85% deduction, which was subsequently lowered in 1984 to 80%. The Tax Reform Act of 1986 effectively eliminated the deduction for most issuers, allowing an 80% deduction only for bonds purchased from an issuer that expects to sell no more than $10 million of bonds annually.
The Clinton plan does, however, appear to leave open the possibility that industrial development authorities could issue more tax-exempt debt as a way of providing capital for new and existing development banks that could be leveraged to secure federal matching funds.
In an accompaniment to the development bank plan, Clinton yesterday said he was directing the federal banking agencies to revamp enforcement of the Community Reinvestment Act of 1977 to emphasize performance over paperwork.
The reinvestment act, which codifies the responsibilities of banks to meet the credit needs of their communities, has been attacked by the industry as being more of a distraction than a prod in meeting community capital needs.
Congressional reaction to the package was largely favorable. Senate Banking Committee Chairman Donald W. Riegle Jr., D-Mich., commended Clinton for "the bold thinking and commitment to communities" evidenced by the proposal, which he called "a good start."
Riegle and his House counterpart, Rep. Henry B. Gonzalez, D-Tex., are introducing the measure on Clinton's behalf. Riegle held hearings on the proposal just more than an hour after the conclusion of the President's announcement, while Gonzalez's panel will hold hearings on Wednesday and on July 28.
