Feds to invest $1 billion in small banks

WASHINGTON — The Treasury Department said Wednesday it will invest up to $1 billion in small banks that serve poor communities as part of the Obama administration's efforts to spur more lending to small businesses.

The money will come from the $700 billion bank bailout fund. About 210 banks, thrifts and credit unions that are certified by the Treasury Department as "Community Development Financial Institutions" will be eligible.

In Utah, "pretty much every community bank" would be eligible, according to Howard Headlee, president of the Utah Bankers Association.

Banks and other financial institutions that target more than 60 percent of their small business lending to lower-income rural and urban communities can qualify as CDFIs.

"These institutions operate in areas where unemployment is way above the national average," said Treasury Secretary Timothy Geithner. "This program ... is a very powerful way to make sure that we're starting to open up the credit channels ... where it's most needed."

The banks will pay only 2 percent interest on the investments, lower than the 5 percent that large banks were required to pay under the bank bailout or Troubled Asset Relief Program.

The initiative is the latest in a series of proposals by the Obama administration to spur more lending to small businesses. On Tuesday, President Barack Obama promoted a separate effort to shift $30 billion in TARP funds to a small business lending program.

And Obama's budget also includes a proposed $5,000 tax credit for small businesses that hire new workers. The administration has shifted its focus to the economy and jobs from health care reform in the wake of a surprising Republican victory last month in the race for a Massachusetts Senate seat.

Administration officials said about 60 banks and thrifts and 150 credit unions would be eligible for about $500 million to $1 billion of investments under the CDFI program. CDFIs will be able to apply by the end of the month.

In addition, other small banks are worried about the "stigma and restrictions" that come with TARP and are reluctant to receive funds from it, the administration officials said. That's why the $30 billion effort announced Tuesday will be a new program that requires approval by Congress. It would use funds from the TARP repaid by the large banks.

The CDFIs don't share those concerns, the administration officials said. Investments in those institutions will come from the bailout fund.

Dorothy Bridges, CEO of City First Bank in Washington, D.C., attended the announcement by Geithner and said her bank would apply for up to $5 million. City First has lent to small businesses, such as Cakelove, a popular local bakery, and local churches.

Contributing: Lois M. Collins