Posted: February 12, 2010

By Michael Schwartz

michael.schwartz@insidebiz.com

The Treasury Department has extended its Troubled Asset Relief Program to offer capital infusions to community development financial institutions, those banks, thrifts and credit unions that serve low-income areas.

The plan allocates up to $1 billion in TARP funds to be lent to certain CDFIs with the goal of stimulating economic activity in those areas that the government deems some of the hardest hit by the recession.

Hampton Roads has one local financial institution that is a CDFI, though its miniscule financial foothold may not make it an ideal candidate for the program.

NCP Community Development Federal Credit Union, based in the historic Berkley section of Norfolk, caters to citizens and businesses in certain low-income census tracts in Norfolk, Chesapeake and Portsmouth.

As of Dec. 31, NCP had $2.17 million in total assets, including $1.83 million in deposits and just $292,000 in loans. It reported losses during every quarter of 2009, though those losses lessened as the year went on.

Qualifying banks could apply for TARP capital equal to as much as 5 percent of their risk-based assets. Eligible credit unions could apply for the equivalent of 3.5 percent of their total assets. In NCP's case, if deemed eligible, it could receive up to just $75,000.

CDFIs under this program would be eligible to receive TARP capital with a dividend rate of 2 percent to be repaid to Treasury. That's compared to the 5 percent dividend offered to banks under the TARP Capital Purchase Program.

NCP's chairman, Gilbert Bland, did not return a call by press time.

But Carl Ratcliff discussed the new program and how it might benefit NCP. Ratcliff is the CEO of ABNB FCU, with which NCP has an agreement allowing the larger ABNB to run its day-to-day operations.

Under the agreement, should NCP qualify for and receive TARP funds, ABNB would be in charge of lending that money, Ratcliff said.

He wonders how effective the new program will be given that risk aversion has been keeping lending spigots tight in all income categories, particularly commercial lending. Additional lending in low-income and therefore higher-risk areas may be something even CDFIs can't afford to do right now.

"It depends on people's appetite for risk," Ratcliff said.

Another factor that might prevent some community development credit unions from benefiting from TARP is the federally mandated cap on credit union business lending. The highly contentious cap currently allows credit unions to have business loan portfolios worth up to just 12.5 percent of their total assets.

Because of its size and the cap, NCP is already severely limited in how much it could lend to businesses. The cap sets NCP's business loan portfolio amount at around $271,000.

With that cap in place and its ability to qualify for just $75,000 in TARP capital, Ratcliff questions the effectiveness of such a program for small institutions, particularly if money lent to businesses would apply to the business loan cap. "How far would that go?" Ratcliff said.

The communities that CDFIs serve are typically considered underserved because most mainstream financial institutions don't set up shop there. A big reason is low-income areas are risky for lending.

Ratcliff said this new program points to the paradox facing the government: The government knows lending is vital to spur activity in those areas, yet it also wants banks to stay healthy by taking less risk.

Some of the borrowers that come into CDFIs like NCP are there typically because "they have been cut off by traditional lenders," Ratcliff said. "The banks aren't turning down good loans."

The conundrum is the CDFIs those customers turn to are suffering from loan losses on normally strong customers as well.

The program would likely be better served if it came with federal loan guarantees similar to the Small Business Administration's program, Ratcliff said.

Without some guarantees, small CDFIs like NCP would be limited in what they could do with TARP, he said.

"If it's like TARP and is just an advance at a low rate of interest, I'm not sure it would be very beneficial to someone like NCP."

Nevertheless, Ratcliff said he and NCP's chairman Bland would discuss the program to assess whether it is an option. nib