Community lenders get a mini bailout

June 30, 2009

Timothy Geithner It’s considerably less than the multi-billion bailout the commercial banking sector received as part of President Obama’s Recovery Act legislation, but battered community banking institutions will gladly take it.

On Monday, Treasury Secretary Tim Geithner pledged $90 million to help 59 Community Development Financial Institutions (CDFIs) in 26 states and Puerto Rico. CDFIs help companies, including many small businesses, in economically distressed urban, rural, and Native communities.

Geithner’s announcement comes on the heels of Federal Reserve Chairman Ben Bernanke’s speech that called for help for CDFIs at the Global Financial Literacy Summit in Washington, DC two weeks prior. Bernanke said, “while community development is a small part of our overall capital and credit markets, the Federal Reserve recognizes that these financial flows are critically important for many low- and moderate-income communities.”

In making his own announcement on CDFIs, Geithner said the increased funding “will help generate capital for small businesses, mortgage loans for homebuyers, and funding for affordable housing projects and other facilities in communities across the country.”

According to a forthcoming CDFI Data Project (“Providing Capital, Building Communities, Creating Impact – Fiscal Year 2007″) there are more than 1,000 CDFIs in the U.S., with a collective $25 billion in assets.

The government’s budget for the CDFI Fund this year is $107 million, a figure President Obama plans to more than double to $243.6 million for 2010.

Mark Pinsky, president and CEO of the Opportunity Finance Network (OFN) – a nationwide network of CDFIs – said while the government funds are appreciated, it represents a minuscule portion of the overall capital.

“We were around for 20 years before there was a federal program that even thought of us,” said Pinsky, in reference to the CDFI Fund that was established in 1994. Still nearly 70 percent of the funds doled out by Geithner will go to Pinsky’s OFN members (A complete list of OFN award recipients can be viewed here).

Despite the credit crunches currently facing community lenders, Pinsky expects the CDFI industry to grow at a “healthy clip” over the next few years. He also expects more small businesses to leverage CDFIs, as commercial banks cut back their lending.

“Businesses that have been bankrolled for an extended period of time, say 15-20 years, and rely on seasonal lines of credit for inventory, go to the bank and suddenly discover that their line of credit isn’t good anymore,” said Pinsky, who added that more laid-off workers are starting new businesses and coming to CDFIs for help. “We finance businesses that are outside the margins of where conventional finance will go.”

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