The largest program ever targeted to community development lenders offers them unprecedented opportunities to support small businesses and consumers in under-resourced communities.
Community development financial institutions (CDFIs) have long provided access to capital in under-resourced communities and for people with low incomes. This was especially true in the early days of COVID-19, when CDFIs were credited with making Paycheck Protection Program loans to small businesses that were otherwise overlooked by mainstream financial lenders.
In fact, three CDFIs ranked in the top 10 of all 2021 Paycheck Protection Program lenders by volume. Recognizing the important role CDFIs play in the financial system, the federal government in 2021 appropriated emergency support to them and to minority depository institutions (MDIs) through the Emergency Capital Investment Program (ECIP).
Depositories, such as banks and credit unions, are those financial institutions that obtain their funds mainly through deposits from the public. Under the ECIP, depositories are eligible to receive investment–via loans, grants and forbearance–to support small businesses and consumers, particularly those in under-resourced communities that have been disproportionately impacted by COVID-19. At $9 billion, this is by far the largest program ever targeted to CDFIs.
A total of 186 financial institutions received an ECIP award (PDF) in December 2021, including several based in the St. Louis Fed’s District, the Eighth Federal Reserve District.
Investment Amounts and Terms
Each depository’s investment is capped at $250 million and is limited to:
- 7.5% of total assets for institutions with more than $2 billion in total assets
- 15% of total assets for institutions with $500 million to $2 billion in total assets
- 22.5% of total assets for institutions with less than $500 million
The U.S. Treasury will purchase senior preferred stock, or in the case of institutions that cannot feasibly issue preferred stock (such as subchapter S corporations, mutual savings banks and credit unions), the Treasury will purchase subordinated debt. The investment is considered Tier 1 capital, and dividends or interest do not accrue and are not payable for the first two years. Tier 1 capital is a bank’s equity capital and disclosed reserves.
The maximum dividend/interest rate is 2%, though it may be reduced to as low as 0.5% depending on the level of qualified and deep-impact lending—defined in the table below.
| Target Communities | Qualified Lending | Deep Impact Lending |
|---|---|---|
| People | LMI borrowers
Other targeted populations |
Low-income borrowers
Mortgage lending to other targeted populations |
| Places | Communities that are: • Rural • Urban low-income • Underserved • Minority |
Persistent poverty counties
Indian reservations and Native Hawaiian homelands U.S. territories |
| Businesses | Small businesses or farms | Small businesses with revenues that do not exceed $100,000
Businesses majority owned by low-income individuals or other targeted populations |
| Projects | Affordable housing
Public welfare investments that primarily benefit low-income people and communities Community service facilities |
Deeply affordable housing
Public welfare investments that primarily benefit low-income or minority individuals or minority-owned businesses |
| SOURCE: U.S. Department of Treasury. | ||
Three ECIP Recipients Plan to Grow
In the second quarter of 2022, I spoke with leaders of three ECIP recipients in the Eighth District: Southern Bancorp, of Little Rock, Ark.; Park Community Credit Union, based in Louisville, Ky.; and Ozarks Heritage Financial Group Inc., based in Gainesville, Mo.
ECIP represents one of the largest one-time investments they have ever received.
All three:
- Plan to expand their geographic footprints while deepening their presence in their existing markets.
- Expect to make considerable investments in technology and personnel to accommodate the planned growth.
Challenges and Opportunities for Lenders
Rising interest rates have the potential to slow demand for loans. Feedback from the three Eighth District ECIP recipients suggests this is starting. At the same time, recipients mentioned that the countercyclical nature of their lending programs could minimize the negative impacts from a slowing economy. For example, one recipient noted that demand for affordable housing and, by extension, for financing increases in times of a slowing economy.
ECIP represents a tremendous opportunity for CDFIs and MDIs to support communities that have been hit particularly hard by COVID-19. While the current economic conditions could pose a challenge for ECIP recipients, the nature of CDFI and MDI lending has the potential to minimize the negative impacts from a slowing economy.
The largest program ever targeted to community development lenders offers them unprecedented opportunities to support small businesses and consumers in under-resourced communities.
