The Trump plan that may hurt red state bankers

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WASHINGTON — In a budget that was otherwise relatively short on specifics, the Trump administration on Thursday called for eliminating the Treasury Department’s grant programs for community development financial institutions, a popular industry feature that helps impoverished communities access financial services.

The budget's two-page priorities for the Treasury Department included eliminating the CDFI program itself, the Bank Enterprise Award Program, the Native American CDFI Development Program, and the New Markets Tax Credit Program.

“The CDFI Fund was created more than 20 years ago to jump-start a now mature industry where private institutions have ready access to the capital needed to extend credit and provide financial services to underserved communities,” the budget said.

But industry representatives and bankers — many of whom are in areas which Trump easily carried in the presidential election — said the cuts would hurt many poor, rural consumers.

“In a community where 20% of the citizens are unbanked and underbanked, because of the [CDFI] programs we have been able to make investments in people and resources” that benefit a community with fewer alternatives, said Bob Jones, CEO of the $558 million-asset United Bank in Atmore, Ala.

Jones said that regulators have certain performance standards for the banks they oversee, and losing the grants would force the bank to either drop its small-dollar loan program which has a higher loss rate, or pay more in deposit insurance assessments. In particular, he cited the loss of Bank Enterprise Awards.

“In most community banks, because of the regulatory pressure, they have gotten out of small-dollar loans,” Jones said. “So on the one hand there is a disincentive to do it based on federal regulation, but on the other hand there is a need to do it to make economic viability in the community. The BEA gives us the opportunity to offset that costs and gives us a legitimate reason to be in that business.”

Dara Duguary, executive director of Credit Builder Alliance and former director of Citi’s Office of Financial Education, said the move would probably not kill off the CDFI banks since they also receive funding from larger banks as a part of banks’ Community Reinvestment Act activities. But the cuts would hurt, and the CDFIs are primarily in states that supported Trump. The cuts in some way would harm the very people the president promised to help.

“I would say the vast majority have a huge proportion, if not the majority, of their funding comes from the Treasury CDFI fund,” Duguary said. “Fifty-six percent of the certified CDFIs are in red states. So the majority of CDFIs are in states that voted for the new administration — they are going to be disproportionately hurt.”

Jones said the stakes for rural communities like his are high, because the low population density means there may be less talent and intellectual capital that is more prevalent in urban areas. Providing a way for those communities to access basic financial services is critical if communities like his are going to be competitive.

“I understand that there have to be changes in the way the government functions at the federal level, and I support that,” Jones said. “The model that we have blends the best of public support with private capital and private resources to deliver in an efficient way to market and customers and communities that have otherwise been left out. In rural America, if it weren’t for what we do as a community bank, there is no future.”

Lisa Mensah, president and CEO of the Opportunity Finance Network, a group that represents nearly 240 CDFIs, said the program helps provide incentives to coax private investment into areas that might otherwise be neglected.

“This is the flagship federal program that provides these kinds of equity grants that really leverage,” Mensah said. “For every dollar that a CDFI gets from the fund they use that to get 10 other dollars from other sources, most of those private. This is really the yeast that allows the whole tank to grow.”

The call to eliminate the CDFI grants appears to have originated with a Heritage Foundation budget circulated last year that identified programs to slash, including the CDFIs. The foundation criticized the CDFI program as “corporate welfare” and said the grants “hinder competition and distort private markets, ultimately leading to higher consumer prices and further justification for increased federal spending.”

Norbert Michel, a research fellow at Heritage who suggested the elimination of the CDFI program in the group’s blueprint, said the program creates artificial incentives for institutions to make loans that have a higher risk of not being repaid. The federal dollars that spur that lending are essentially sacrificed to provide a service that private enterprise would otherwise decide is not profitable, he said.

“If private institutions are not going to make loans without any sort of government subsidies, then maybe they shouldn’t be making them,” Michel said. “Poverty is a concern, but we don’t think this is a way to solve poverty. If you want to give away money, go ahead and give it away.”

The CDFI grants were established in 1994 with the passage of the Riegle Community Development and Regulatory Improvement Act. That law created the CDFI designation, which allows banks, credit unions and other financial institutions to access financial and technical support from the CDFI Fund, a distinct department within the Treasury. The Consumer Financial Protection Bureau has also carved out an exemption from its Qualified Mortgage rules for CDFIs.

The CDFI Fund not only disburses grants to designated institutions but also certifies every CDFI on an annual basis. Jeannine Jacokes, chief executive of the Community Development Bankers Association, said that it remains unclear whether a bare-bones CDFI fund would be able to recertify the more than 1,000 CDFIs in a timely fashion. That failure could have large implications for mortgage loans that rely on the CDFI exemption.

“It does put into serious question whether the Fund would continue to certify organizations,” Jacokes said. “[For] banks and the credit unions and other that are doing single-family lending that rely on that exemption, it would certainly put into question whether that would still be available.”

While the White House may want to eliminate the program, the budget still has to get through Congress. That may be challenging, because the CDFI program has traditionally garnered bipartisan support, with the House routinely funding the program in excess of what the White House requested, even in the contentious Obama administration years.

Jacokes said the program’s demonstrated efficiency and utility has earned it a reputation as worth supporting, and she said her organization and its members will push back against the cuts as the budget process moves forward.

“The program over the 20 years has demonstrated that it’s effective,” Jacokes said. “We’ve been able to build some really strong bipartisan support because the program works.”

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