Critics decry lack of funds for new development banks.

Financial institution measure raises hackles of local experts

A little more than a year after President Clinton unveiled a plan to fund community development banks, Congress passed a bill that puts that plan into action.

Critics are charging, however, that the banks will not be able to meet the needs of underprivileged urban and rural communities, simply because the bill's funding is inadequate.

The bill, approved by the Senate on Aug. 10, earmarked $382 million for community development funding over a four-year period.

A new agency, the Community Development Financial Institutions Fund, will manage the money allocated by Congress. In the first year, $60 million will be made available for the CDFIs.

CDFIs will operate much like the Small Business Administration, providing guarantees to lenders on loans made for financing small business development, construction of low income housing, commercial development, and community facilities.

Banks, state and local government, and community organizations may form partnerships with community development institutions such as small business development centers to apply for federal funding and to operate as a CDFI.

Under the provisions of the bill, CDFIs will be given some flexibility to take on more risk than commercial banks.

Bankers and community development activists alike criticized the bill for not putting enough money into the community development pot for the CDFIs to be effective. Jerry Loeser, senior vice president of First Interstate Bank of California, said the amount was "a pittance." The legislation has turned out to be a big disappointment all around, he said.

"Clinton campaigned on the promise of establishing 100 community development banks around the country and giving them $1 billion worth of funding," said Loeser. Instead, only $382 million was allocated over a period of four years. Loeser added that not all of the $382 million will go to CDFIs. About one-third is earmarked to fund the Bank Enterprise Act.

The Bank Enterprise Act was part of the Federal Deposit Insurance Corporation Improvement Act passed by Congress in 1991.

The Bank Enterprise Act set up an agency to investigate investments banks were making in underserved areas. If the investments were deemed solid by said agency, the bank would receive credit toward paying its FDIC insurance premium.

"When the Bank Enterprise Act was passed, there was no money to fund it, so one-third of the community development money is going to funding it," said Loeser. "That leaves only about $250 million for four years to fund community development across the country."

For comparison purposes, Loeser pointed out the City of Los Angeles allocates, through the Private Industry Council, $100 million in job training funds annually.

He added that "$60 million all over the country is pathetic. It is so insignificant."

Likewise, Bob Gnaizda, general counsel of the Greenlining Coalition, called the sum "meaningless."

He added that the community development banks bill represents a "symbolic commitment" to change in the inner city, but real change will only occur when the president demands reform of the Community Reinvestment Act.

The CRA requires banks and savings and loans to make more credit available to the communities where they take deposits. Revision of the CRA is now being debated in Congress.

"It is a Clinton sham," Gnaizda said. "The president is taking credit for this as if it is doing something about the lending plight of African Americans."

According to Gnaizda, Clinton's actions are politically motivated. "This trivial commitment diverts attention from the major players who are necessary to revitalize the inner cities," he said. Gnaizda maintains the federal government should put more pressure on commercial banks to make loans available to inner city businesses by revising the CRA.

"If the president took a strong stand on the CRA, he would influence banks that control $5 trillion in assets," said Gnaizda. "He needs to tell regulators that he wants CRA effectively enforced and he has not done that."

Carlton Jenkins, president of Los Angeles-based Founders National Bank, said he was pleased the legislation was rewritten from its original form to allow small banks to participate in the program.

The original version of the bill would have excluded minority-owned banks, such as Founders, from applying for funds -- and it is mainly these institutions that act as community development banks now by lending in underprivileged neighborhoods, Jenkins said.