Building Capacity of Lenders to the Underserved

By Rasul M. Raheem, Emphani Aldridge, Taylor Calvert and Monique Eubanks

In March, the Treasury Department announced a $9 billion investment into community development financial institutions and minority depository institutions through the Emergency Capital Investment Program, which Congress funded in the spending and COVID-19 recovery bill passed at the end of 2020. ECIP is designed to support access to capital in communities have struggled the most during the COVID-19 crisis via institutions that have long faced unique challenges: community development financial institutions and minority depository institutions.

Treasury is currently accepting applications to ECIP using its application portal. While Treasury has extended the deadline through the end of the day on Tuesday, July 6, 2021, limited time remains for eligible CDFIs and MDIs to apply. This article is intended to help illuminate the process and how ECIP is structured to help small businesses, minority-owned businesses and consumers in low-to-moderate-income communities.

Treasury will use ECIP to support LMI, minority and rural communities; underserved areas and consumers; small businesses; and nonprofit organizations, among others. Using information provided in ECIP applications, Treasury will determine a methodology for allocating available funds and determining investment amounts. Treasury has said it will make its methodology public prior to making any investments under the ECIP. In addition, Treasury may determine, based on the volume and types of applications that are submitted, to withhold a portion of the available ECIP funds for a subsequent round of investments to be made at a future date. As required by law, Treasury has issued restrictions on executive compensation, share buybacks, and dividend payments for CDFIs and MDIs that receive ECIP investments.

If successful, ECIP will both strengthen CDFIs and MDIs and channel critical financing to minority business owners, who have a greater need for financing than do most white business owners yet have the most trouble accessing funding. For example, a 2018 Small Business Association report found personal and family savings are the most common sources of financing for all entrepreneurs, and with Black and Hispanic founders, the reliance on those funds is even higher. However, Black households’ median net worth is about a tenth of that of white households.

Additionally, the 2018 SBA report found that minority-owned enterprises typically pay higher interest rates and experience more frequent loan denial than white-owned businesses. Minority entrepreneurs are less likely to apply for loans due to fear of denial. This disparity in credit use had costly consequences during the coronavirus pandemic, with a recent Federal Reserve Bank of New York study finding that Black-owned business suffered the sharpest rate of closures in the first part of 2020.

The challenges minority-owned businesses face are compounded by their locations, with many located in poorer urban communities. SBA research found the location of the business plays a major factor in the approval for a small business loan. Notably, a vast amount of minority-owned business are located in poorer urban communities.

How ECIP works

ECIP investments in participating institutions will be made at a capped low-cost dividend or interest rate, with no dividends or interest payable during the first 24 months after issuance. Treasury said it is developing additional “deep impact” metrics to further incentivize targeted investments by participants in those communities most in need of capital.

The ECIP application requires details on how the applicant plans to expand or maintain significant lending or investment activity in minority communities. Additionally, the application requests a detailed plan describing how the applicant will engage in community outreach and with minority-owned business and consumers, especially low-income and underserved communities.

Treasury has collaborated closely with federal banking regulators to ensure the preferred stock investments under ECIP qualify for beneficial capital treatment to help institutions leverage their capital to maximize lending reach and impact.

In March, the OCC, FDIC and Federal Reserve published an interim final rule to support and facilitate the timely implementation of the congressionally authorized ECIP. This rule provides that preferred stock issued under ECIP qualifies as additional tier 1 capital and that subordinated debt issued under ECIP qualifies as tier 2 capital under the agencies’ capital rule. The Tier 1 and tier 2 capital treatment should strengthen a participating bank’s underlying balance sheet and increase its overall lending capabilities.

ECIP’s capital treatment will especially help Black-owned banks, which have significantly less capital than other financial institutions, opportunity for growth and market expansion. Black-owned banks generally do not have the discretionary capital for technology and product and service origination which keeps them lagging behind their peers, according to CNBC. Thus, ECIP will help Black-owned banks leverage more capital to improving their services and community impact.

Over the long term, Treasury expects the program will strengthen the viability of CDFIs and MDIs, sustaining their role as important vehicles for fostering access and inclusion in low-income and traditionally underserved communities. Along with existing partnerships and programs to support CDFIs and MDIs, ECIP’s $9 billion investment in the minority community is a bold stride to address financial disparities and the legacy of discrimination that have historically faced financial institutions that focus on the underserved.

Rasul M. Raheem is senior counsel in the Detroit office of the nationwide business law firm Dykema. Emphani Aldridge and Monique Eubanks are associates in Dykema’s Detroit office, and Taylor Calvert is an associate in Dykema’s San Antonio office.