We Don’t Need to Reinvent the Wheel to Help Cities : Banking: The right government incentives to an existing network would make community reinvestment work.
President Clinton’s proposed initiative to pump $382 million into community lending programs is good news for South-Central Los Angeles and other distressed areas that are in critical need of jobs and affordable housing. But the initiative stops short of realizing its full potential by not fully tapping the resources of mainstream financial institutions and some of the government’s own programs.
Wisely, the President’s proposal for a community development banking and financial institutions fund has moved away from his original idea to create a “network” of 100 new community development banks. The Administration now appears to recognize that we have such a network in place in the form of community development corporations such as the Southern California Business Development Corp., nonprofit loan funds, credit unions and other community-based groups, including the Community Financial Resource Center of South-Central Los Angeles. Creating new institutions to do what these groups already do would have been an unnecessary drain of scarce capital.
The President’s proposed community development fund would supply grants, training and technical assistance to organizations working at ground level to rebuild their communities.
All of that is needed and can be put to good use. But the initiative could go much further by providing new incentives that would encourage existing banks and thrifts to expand their community development lending.
One example is BankAmerica Corp.’s community development subsidiary, Bank of America Community Development Bank. One of this bank’s unique efforts is a “benevolent deposit” agreement initiated with Catholic Healthcare West, a San Francisco-based nonprofit health-care provider. Catholic Healthcare places deposits at below-market rates with B of A Community Development Bank, which in turn makes small business and affordable housing loans--also at substantially below-market rates--in areas targeted by Catholic Healthcare.
Promoting these types of partnerships, where risk and costs are shared to maximize available capital, is what the President’s plan ought to be about. Government can promote new lending and new partnerships among existing institutions with a few creative but powerful incentives.
* Consider the use of tax credits on income generated by community development lending, such as affordable housing construction or small-business loans. This can encourage new and innovative forms of community reinvestment by mainstream financial institutions.
* Streamline and refocus the Small Business Administration to make it more effective overall and to specifically increase the capital available to minority and women-owned businesses. Today, the SBA guarantees loans that would probably have been made under conventional lending practices, and enables lenders to earn returns that are excessive relative to the risk involved. Like the Community Reinvestment Act, the SBA program should require lenders to assess the credit needs of emerging minority- and women-owned businesses and actively target this market. Chances are that a typical SBA loan today goes to a medical professional in an established suburban neighborhood rather than a minority-owned business in the inner city.
* Create a new equity fund for emerging small businesses by recapturing part of the profit made by SBA lenders. Today, some SBA lenders are earning returns far in excess of the risk they incur because they do not adequately compensate the federal government for the guarantees it provides. Profits from the sale of loans in the secondary market can run as high as 15% to 20% of the guaranteed loan amount. If SBA lenders were required to pay half of their gain on sales into an equity fund for small businesses, the proceeds could be invested directly in nonprofit economic development corporations or used to fund tax credits for small-business loans in targeted areas.
* Stimulate job growth by waiving federal income taxes on new business income generated within designated enterprise zones. Government can help shape business decisions by providing opportunities for corporations to do what is right, as well as what is good for shareholders. Revenue generated by new businesses in designated enterprise zones are exempt from state taxes; a federal exemption would add a tremendous new stimulus to job creation.
* Make low-income housing tax credits permanent. This federal program offers investors a credit against federal income taxes based on the cost of acquiring, rehabilitating or constructing affordable housing. Until the program is made a permanent part of the tax code, it will face extinction each year.
There are many constructive ideas being developed by banks, nonprofit groups and public agencies that move in these directions. We urge the President and Congress to give a full hearing to these ideas, with the goal of promoting new partnerships among business, the public sector and community-based organizations that will empower them to build stronger, more prosperous communities.
