Funding for a major incentive for low-income lending has been dwindling, and there is no sign it will increase soon.
The Bank Enterprise Awards have helped spur investment in economically distressed neighborhoods over the past 10 years.
In fiscal 2004 the Treasury Department awarded $17 million to 49 banks and thrifts with a proven record of assisting in community development. That was down, though, from $46 million to 139 banks and thrifts in fiscal 2001.
In the fiscal 2005 budget, which the House has yet to approve, funding would hold at the 2004 level and probably not increase until a proposed study of the program's effectiveness has been completed, according to the Office of Management and Budget.
Anita Robinson, the chief executive at the $113 million-asset Mission Community Bank in San Luis Obispo, Calif., called the cutbacks "unfortunate." She said the awards are "a true incentive to the banking industry, and there is a lot more money coming into distressed markets through this program."
John Moore, a senior vice president at the $1.8 billion-asset Bangor Savings Bank in Maine, said it decided to apply for an award to help it provide more loans and technical assistance to community development financial institutions in Maine. He had learned of the awards at a Community Reinvestment Act seminar.
"The program encourages and rewards financial institutions that do things to better serve distressed communities, and in many cases it's things that we would be doing anyway," Mr. Moore said.
But that is exactly why funding for the Bank Enterprise Awards program is drying up. In 2001 the OMB said funding for the program should not increase, because its administrators could not demonstrate that it was doing anything to encourage investment in distressed communities.
The program, created by the Federal Deposit Insurance Corp. Improvement Act of 1991, was intended to give discounts on deposit insurance for banks that invested in low-income communities. It was not funded until 1994, however, and no discounts were ever given. Instead the incentive became cash awards, the first of which were given in 1995 through the new Community Development Financial Institutions Fund.
The banks and thrifts that received awards last fiscal year, which ended Sept. 30, had provided a total of $558.1 million of loans or investments in low-income communities and $34.6 million in assistance to community development financial institutions. The next awards will be handed out in the late summer; the application deadline is Feb. 14.
The banks that receive awards for direct lending are generally those that are already designated as community development financial institutions (there are about 50 in all), said Margie Nilson, the manager of the awards program manager. More traditional banks benefit from the program by investing in other such institutions.
This year Mission received a $1.2 million award for making about $7 million of loans in distressed communities during 2003.
Ms. Nilson said most banks put the awards back into community development or offset discount rates that they offered their partner CDFIs, which include nonprofits such as Revolving Loan Fund of Los Angeles, Local Initiative Support Corp. in New York, and Four Directions Development Corp. in Maine.
Banks also like that the program rewards a broad range of community-assistance efforts, including loans, deposits, equity investments, and financial education. By contrast, the CDFI Fund's recently introduced New Markets Tax Credit program encourages only equity investments through tax breaks for qualifying businesses and individuals.
Ms. Nilson said the evaluation process of the Bank Enterprise Awards program and its impact would probably start at the end of next year and take many months to complete. If it is deemed worthy, the program could see an increase in funding.
"It's a big topic looking at what motivates a bank's [community-development] activity," she said, "but we plan to do a full-scale evaluation of the program in FY2006."
Robert E. James, the president of Carver State Bank in Savannah, Ga., is concerned that without this incentive, small banks may not be able to provide the same level of service to low-income communities. The $24 million-asset bank received an award of $187,000 this year for its First Account deposit program in Savannah's poor neighborhoods and for its work with a local loan fund.
"We have been pleased with the [Bank Enterprise Awards] program, but we just hope it's better funded, because the money helps small banks like ours to compete - particularly against the larger banks," Mr. James said.
Ms. Nilson said she has been assured that the Bank Enterprise Awards program will remain in place, and she hopes it will start expanding again. "I see a continued need for the Bank Enterprise Awards program to facilitate these bank/CDFI relationships that result in low-cost financing that might not otherwise happen," she said.
In the meantime, the Bank Enterprise Awards program is trying to get its limited funds to as many banks as possible. To do so, the fund has put a $500,000 cap on all awards for fiscal 2005. (The cap was $1.5 million for fiscal 2004.)
Modifications were made in 2003 to spread the awards dollars more evenly across all types of activities by all types of banks. Changes included limiting the CDFI partners of banks to those with less than $25 million of assets and eliminating awards on housing developments that are not exclusively serving low-income residents.
