Treasury's Bank Enterprise Award Program: Impact on Investments
in Distressed Communities Is Difficult to Determine, but Likely
Not Significant (31-JUL-06, GAO-06-824).
Established in 1994, the Department of the Treasury's Bank
Enterprise Award (BEA) program provides cash awards to banks that
increase their investments in community development financial
institutions (CDFI) and lending in economically distressed
communities. CDFIs are specialized institutions that provide
financial services to areas and populations underserved by
conventional lenders and investors. In 2005, Treasury provided
nearly $10 million in BEA awards. The BEA program has faced
longstanding questions about its effectiveness and experienced
significant declines in funding in recent years. This report (1)
examines the extent to which the BEA program may have provided
banks with financial incentives and (2) assesses the BEA
program's performance measures and internal controls. To complete
this study, GAO reviewed relevant award data; interviewed
Treasury, bank, and CDFI officials; and assessed the BEA
program's performance measures and internal controls against
GAO's standards for effective measures and controls.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-824
ACCNO: A57744
TITLE: Treasury's Bank Enterprise Award Program: Impact on
Investments in Distressed Communities Is Difficult to Determine,
but Likely Not Significant
DATE: 07/31/2006
SUBJECT: Bank loans
Community development
Community development programs
Internal controls
Lending institutions
Performance measures
Program evaluation
Program goals or objectives
Bank Enterprise Award Program
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GAO-06-824
* Results in Brief
* Background
* The BEA Program Reportedly Produces Benefits, but Available
* According to Treasury Officials and Some Award Recipients, t
* Isolating the BEA Program's Impact from Other Existing Econo
* Available Evidence Suggests That the BEA Program's Impact Ha
* The BEA Program's Performance Measures Likely Overstate Its
* BEA Program Performance Measures Likely Overstate Program Im
* Treasury Has Not Established Effective Controls to Help Ensu
* Conclusions
* Recommendation for Executive Action
* Agency Comments and Our Evaluation
* Appendix I: Objectives, Scope, and Methodology
* Appendix II: Comments from the Department of the Treasury
* GAO Comments
* Appendix III: GAO Contact and Staff Acknowledgments
* GAO Contact
* Staff Acknowledgments
* Order by Mail or Phone
Report to Congressional Committees
United States Government Accountability Office
GAO
July 2006
TREASURY'S BANK ENTERPRISE AWARD PROGRAM
Impact on Investments in Distressed Communities Is Difficult to Determine,
but Likely Not Significant
Treasury's Bank Enterprise Award Program Treasury's Bank Enterprise Award
Program Treasury's Bank Enterprise Award Program Treasury's Bank
Enterprise Award Program Treasury's Bank Enterprise Award Program
Treasury's Bank Enterprise Award Program Treasury's Bank Enterprise Award
Program Treasury's Bank Enterprise Award Program Treasury's Bank
Enterprise Award Program Treasury's Bank Enterprise Award Program
Treasury's Bank Enterprise Award Program Treasury's Bank Enterprise Award
Program Treasury's Bank Enterprise Award Program Treasury's Bank
Enterprise Award Program Treasury's Bank Enterprise Award Program
Treasury's Bank Enterprise Award Program Treasury's Bank Enterprise Award
Program Treasury's Bank Enterprise Award Program Treasury's Bank
Enterprise Award Program Treasury's Bank Enterprise Award Program
Treasury's Bank Enterprise Award Program Treasury's Bank Enterprise Award
Program Treasury's Bank Enterprise Award Program Treasury's Bank
Enterprise Award Program Treasury's Bank Enterprise Award Program
Treasury's Bank Enterprise Award Program Treasury's Bank Enterprise Award
Program Treasury's Bank Enterprise Award Program Treasury's Bank
Enterprise Award Program Treasury's Bank Enterprise Award Program
Treasury's Bank Enterprise Award Program Treasury's Bank Enterprise Award
Program Treasury's Bank Enterprise Award Program Treasury's Bank
Enterprise Award Program
GAO-06-824
Contents
Letter 1
Results in Brief 4
Background 6
The BEA Program Reportedly Produces Benefits, but Available Evidence
Suggests That the Program's Impact Has Likely Not Been Significant 9
The BEA Program's Performance Measures Likely Overstate Its Impact, and
Treasury's Internal Controls to Ensure Proper Award Payments Have
Weaknesses 14
Conclusions 18
Recommendation for Executive Action 19
Agency Comments and Our Evaluation 19
Appendix I Objectives, Scope, and Methodology 24
Appendix II Comments from the Department of the Treasury 26
GAO Comments 31
Appendix III GAO Contact and Staff Acknowledgments 32
Tables
Table 1: Percentage of Reported Increase in Award-Eligible Activities,
Fiscal Year 2005 and 2006 7
Table 2: Average BEA Award as a Percentage of Large Banks' Assets, 2003
through 2005 13
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Abbreviations
BEA Bank Enterprise Award
CDFI community development financial institution
CRA Community Reinvestment Act of 1977
OMB Office of Management and Budget
Treasury U.S. Department of the Treasury
United States Government Accountability Office
Washington, DC 20548
July 31, 2006
The Honorable Christopher Bond Chairman The Honorable Patty Murray Ranking
Minority Member Subcommittee on Transportation, Treasury, the Judiciary,
Housing and Urban Development, and Related Agencies Committee on
Appropriations United States Senate
The Honorable Joe Knollenberg Chairman The Honorable John W. Olver Ranking
Minority Member Subcommittee on Transportation, Treasury, and Housing and
Urban Development, the Judiciary, the District of Columbia and Independent
Agencies Committee on Appropriations House of Representatives
Established in 1994, the Department of the Treasury's (Treasury) Bank
Enterprise Award (BEA) program was designed to provide financial
incentives for FDIC-insured banks and thrifts (hereafter referred to as
banks) to increase their investments in community development financial
institutions (CDFI)1 and lending within eligible distressed communities as
defined by statutory and regulatory requirements.2 CDFIs are private
for-profit or not-for-profit financial institutions that provide financial
services (e.g., loans) to communities traditionally underserved by
conventional lenders and investors and that Treasury may certify for
participation in the BEA program and other related programs.3 CDFIs
include community development banks, which may receive BEA awards because
they are FDIC-insured; credit unions, which are ineligible for BEA awards
because they are not FDIC-insured; loan funds; and venture capital funds.4
Due to statutory and regulatory requirements, community development banks,
which tend to be small institutions, receive relatively larger BEA awards
for increasing certain award-eligible investments and lending compared to
traditional banks.5 In providing banks with incentives to increase their
award-eligible activities, the BEA program seeks to build the financial
capacity of CDFIs, so they may better serve their customers, and the
availability of direct lending within distressed communities.
1For purposes of this report, investments in CDFIs are equity investments,
equitylike loans, grants, loans, deposits or shares, and technical
assistance.
2See 12 C.F.R. S:1806.200, which requires a BEA award applicant to
designate one or more distressed communities in which it will carry out
distressed community financing or service activities and establishes
minimum eligibility and distress requirements for such a community.
However, the BEA program has faced long-standing questions about its
effectiveness and experienced significant funding declines in recent
years. A 1998 GAO report, as well as a 2002 review by the Office of
Management and Budget (OMB), both questioned the extent to which the BEA
program provided banks with financial incentives to increase their
award-eligible activities.6 For example, we and OMB stated that the
Community Reinvestment Act of 1977 (CRA) provides banks with incentives to
make similar investments and loans that the BEA program awards and that it
can be difficult to distinguish CRA's incentives from those of a BEA
award.7 Further, from fiscal years 2000 through 2005, BEA program funding
declined from over $46 million to about $10 million, the number of award
recipients declined from 159 to 53, and Treasury has increasingly been
unable to award all qualified applicants.8 The average BEA award amount
also dropped from almost $292,000 to about $187,000 during the period.
3Treasury has a process for certifying a CDFI, which means that the
institution meets certain CDFI eligibility requirements-including having a
primary mission of promoting community development and a predominant
business activity of providing financial products, development services,
or other similar financing to a target population or an investment area.
12 C.F.R. S: 1805.201.
4As of January 1, 2006, Treasury had certified 752 CDFIs. Among these, 55
were community development banks that FDIC insures, 146 were credit unions
that the National Credit Union Share Insurance Fund insures and therefore
are ineligible for BEA awards, 505 were loan funds, 22 were venture
capital funds, and 24 were depository-holding companies. For purposes of
this report, depository-holding companies are considered banks.
5Community development banks, for purposes of this report, are those
Treasury has certified as such banks. Traditional banks, for purposes of
this report, are noncommunity development banks. BEA awards to community
development banks can be as much as three times higher than awards to
traditional banks that make similar investments and loans.
6GAO, Community Development: CDFI Fund Can Improve Its Systems to Measure,
Monitor, and Evaluate Awardees' Performance, GAO/RCED-98-225 (Washington,
D.C.: July 15, 1998); and Office of Management and Budget, Bank Enterprise
Award Assessment (Washington, D.C., 2002).
Noting concerns about funding reductions to the BEA program and other
related programs within Treasury, as well as the lack of a recent
third-party evaluation, a fiscal year 2006 report by the Senate Committee
on Appropriations requires us to assess the BEA program, particularly the
extent to which it affects bank behavior in providing financial services
to distressed communities.9 As agreed with committee staff, this review
also includes an assessment of certain aspects of Treasury's
administration of the BEA program. Accordingly, this report (1) examines
the extent to which the BEA program may have provided banks with financial
incentives to increase their investments in CDFIs and lending in
distressed communities and (2) assesses the BEA program's performance
measures and certain internal controls designed to ensure proper award
payments.
To conduct our work, we reviewed relevant program statutes, regulations,
guidelines, memorandums, and reports; interviewed Treasury officials
regarding the BEA program's impact and administration; interviewed CDFI
trade associations regarding their views of the program; and interviewed a
nonprobability sample of nine BEA award recipients and five CDFI
beneficiaries participating in the fiscal year 2005 round of awards.10
While results from these interviews cannot be projected to the entire
population of BEA award recipients and beneficiaries, we selected these
recipients and beneficiaries for interviews to assure variation on a range
of characteristics, including differing asset sizes, frequency of program
participation, award-to-asset percentages, and CDFI type. Our interviews
with award recipients included both community development banks and
traditional banks. We also assessed the BEA program's performance measures
and internal controls against our standards for effective measures and
controls.
7Pub. L. No. 95-128, title VIII, 91 Stat. 1147 (Oct. 12, 1977) (codified
at 12 U.S.C. S:S: 2901-08). CRA requires financial regulators, for each
institution they regulate, to assess the institution's record of meeting
the credit needs of all areas in the community served, consistent with
safe and sound banking operations, and to take that record into account in
evaluating the institution's applications for a deposit facility, such as
opening new branch offices. 12 U.S.C. S: 2903.
8Treasury's inability to award all eligible activities has resulted in
some banks' reported activities, such as increased lending in distressed
communities, not receiving BEA award dollars. For fiscal year 2006, the
Senate Committee on Appropriations expressed an expectation that the BEA
program would be funded at no less than $11,000,000. See S. Rep. No.
109-109, 129 (July 26, 2005).
9S. Rep. No. 109-109, 129 (July 26, 2005).
10For purposes of this report, CDFI beneficiaries, also known as CDFI
partners, consist of community development banks, credit unions, loan
funds, and venture capital funds. They are the recipients of a BEA
awardee's investment.
We conducted our work from October 2005 through July 2006 in Washington,
D.C., in accordance with generally accepted government auditing standards.
Appendix I provides a description of our scope and methodology in greater
detail.
Results in Brief
The extent to which the BEA program may provide banks with incentives to
increase their investments in CDFIs and lending in distressed communities
is difficult to determine, but available evidence we reviewed suggests
that the program's impact likely has not been significant. According to
Treasury officials and some BEA award recipients we interviewed, the BEA
program produces a range of benefits, such as lowering bank costs
associated with investing in a CDFI or lending in a distressed community,
which encourages and allows banks to increase both types of activities.
According to Treasury officials, the BEA program has also encouraged
partnerships between banks and CDFIs. However, independently evaluating
and isolating the BEA program's impact is difficult because other economic
and regulatory incentives also affect bank behavior. For example, banks
have economic incentives to lend in distressed communities because
BEA-eligible loans can be profitable. In addition, CRA provides banks with
a regulatory incentive to undertake award-eligible activities. In
accordance with CRA, federal regulators examine and assess banks based on
their efforts to provide financial services (e.g., investments in CDFIs or
loans in distressed communities) in all areas of the community they serve
and may consider inadequate compliance when reviewing a bank's application
to merge or expand operations. Moreover, even when not accounting for
other economic and regulatory incentives, BEA awards for large banks may
be small and, therefore, may not have much influence on their overall
investment and lending decisions, although the awards may provide such
banks with the capacity to incrementally increase their award-eligible
activities. In addition, until 2003, BEA awards may have provided certain
community development banks with incentives to benefit financially from
activities that were inconsistent with program goals, and available
studies indicate that certain CDFIs have been able to raise an increased
amount of capital from banks concurrent with recent declines in BEA
program funding and participation.
The BEA program's performance measures likely overstate the program's
impact; in addition, we identified weaknesses in certain BEA program
internal controls. To assess the BEA program's performance, Treasury,
among other measures, annually aggregates the total reported increase in
CDFI investments and distressed community loans by all applicants and
attributes this increase solely to the BEA program. For example, Treasury
attributed a reported $100 million increase in applicants' CDFI
investments and distressed community loans to the $10 million in BEA
awards it distributed in 2005. Because this and similar BEA program
performance measures do not isolate the prospect of BEA award receipt from
other economic and regulatory incentives, such as loan profitability and
CRA requirements, they likely attribute more influence to the program than
can be substantiated. Furthermore, we identified weaknesses in the BEA
program's system of internal control, which increase its vulnerability to
improper payments. Specifically, we found that Treasury has limited
controls in place to ensure that BEA applications contain accurate
information upon which to make award determinations (i.e., bank-financed
properties are located in eligible distressed communities as defined by
statutory and regulatory requirements). We also found that Treasury
provides limited guidance to its application review staff to identify
potential errors in the reporting of a financed property's location and
does not require the reviewers to completely document their work.
This report recommends that Treasury revise its guidance to application
review staff and require staff to document their work to help ensure that
errors in the reporting of property location are identified and the risk
of improper payments is minimized. Treasury provided written comments on a
draft of this report that are reprinted in appendix II. In its comments,
Treasury agreed with our conclusion that determining the BEA program's
impact is difficult, but disagreed with certain aspects of our analysis.
For example, Treasury said that our examination of the BEA program's
impact on bank behavior bases many of its conclusions on information that
is overly general, outdated, or developed for purposes other than to
evaluate the BEA program. Treasury also said that we did not adequately
consider evidence the department provided regarding the BEA program's
impact. We believe the information and evidence used to support our
conclusions is appropriate and continue to conclude that the BEA program's
impact on bank behavior has likely not been significant. Treasury did
agree to implement our report's recommendation. Treasury's comments and
our evaluation of them are discussed in greater detail at the end of this
report. Treasury also provided technical comments that we have
incorporated, as appropriate.
Background
The BEA program's goals are to encourage banks to increase their
investments in CDFIs and lending and other financial services in
distressed communities.11 Unlike grant programs, which are usually
prospective-meaning they award applicants based on their plans for the
future-the BEA program is retrospective, awarding applicants for
activities they have already completed. Under the program's authorizing
statute, BEA award recipients are not limited in how they may use their
award and, therefore, may use their award proceeds in any manner they deem
fit.
To encourage increased investment and lending, the BEA program awards
applicants on the basis of their increased activities from one year (known
as the baseline year) to the next (the assessment year).12 For example,
for the fiscal year 2005 round of awards, calendar year 2003 was the
baseline year and calendar year 2004 was the assessment year. When
applying for awards, applicants may submit an application for any of the
following three award categories: (1) CDFI-related activities, (2)
distressed community financing activities, and (3) service activities.
CDFI-related activities are primarily investments in CDFIs, such as equity
investments (including grants and equitylike loans), loans, and insured
deposits. Distressed community financing activities are primarily loans,
such as affordable housing loans, small-business loans, commercial real
estate loans, and education loans. Service activities include the
provision of financial services such as check-cashing or money order
services, electronic transfer accounts, and individual development
accounts.
11According to BEA program regulations, a distressed community is defined
as a geographic area where at least 30 percent of its residents have
incomes less than the national poverty level; the unemployment rate is at
least 1.5 times greater than the national average; and (a) the population
of that area is at least 4,000 residents if any portion of the area is
located in a metropolitan area with a population of 50,000 or greater, (b)
the population must be at least 1,000 residents if no portion of the area
is located within such a metropolitan area, or (c) the area is located
entirely within an Indian reservation. 12 C.F.R. S: 1806.200; and 69 Fed.
Reg. 54718, 54719 (Sept. 9, 2004). Further, under program regulations,
distressed communities with poverty rates as low as 20 percent may qualify
under certain circumstances.
12In 2003, Treasury changed the baseline and assessment periods from 6
months each to 12 months each.
Pursuant to statutory and regulatory requirements, BEA awards are
percentage matches of an applicant's reported increase in activities; that
is, banks qualify for a BEA award equal to the sum of the percentage
increase in the three program areas. For equity investments in CDFIs, the
percentage match for both community development banks and traditional
banks is the same-15 percent (see table 1). However, community development
banks are eligible to receive awards three times higher than traditional
banks for increasing CDFI support activities (e.g., increasing insured
deposits in other CDFIs) or increasing their lending and service delivery
in distressed communities. For distressed community financing activities,
a priority factor of 3.0 or 2.0 is assigned to each type of eligible loan
a BEA applicant originates-for example, a small-business loan is assigned
3.0 and an affordable housing development loan is assigned 2.0. The change
in award-eligible activity (i.e., the increase in lending from the
baseline to the assessment year) is multiplied by the applicable priority
factor, and the result (or weighted value) is then multiplied by the
applicable award percentage, yielding the award amount for that particular
activity.
Table 1: Percentage of Reported Increase in Award-Eligible Activities,
Fiscal Year 2005 and 2006
Source: GAO.
To illustrate how the BEA program works, suppose a community development
bank that did not have any investments in other CDFIs or loans in eligible
distressed communities during the baseline year. During the assessment
year, the bank makes the following investments or loans in
CDFIs: $300,000 in insured deposits in three community development credit
unions (three insured certificates of deposits of $100,000 each), $500,000
in small-business loans, and $1 million in affordable housing development
loans in distressed communities (total increased investments and loans of
$1.8 million). Under this example, the bank would be eligible for a BEA
award totaling $369,00013 (a 20.5 percent return on investment).14 Under
the same scenario, a traditional bank would be eligible for a BEA award of
$123,000 (or a return on investment of 6.8 percent).15
According to Treasury officials, the BEA program is seasonal and employs
the equivalent of about six staff annually, who work on the program on an
as-needed basis. A program manager oversees the BEA program on a
day-to-day basis. During the program's peak application season, Treasury
reassigns roughly 10 staff members from other job responsibilities to
review BEA applications over a period of approximately 10 business days.
During fiscal year 2005, it cost approximately $1.2 million to administer
the BEA program. These costs are composed of personnel compensation,
information technology, and administrative contracting services, among
other costs.
CRA requires federal bank regulators to assess how well the banks they
regulate meet the credit needs of all areas of the community they serve,
including low- and moderate-income areas (insofar as is consistent with
safe and sound operations) and to take this performance into account when
considering a bank's request for regulatory approval of a regulated
action, such as opening a new branch or acquiring or merging with another
bank. Federal regulators conduct examinations for compliance with CRA
requirements on a frequency that varies depending on an institution's size
and prior rating.16 When conducting examinations, regulators check to see
whether a bank's CRA compliance activities are an ongoing part of the
bank's business and generally apply three tests to make this
determination:17
13There is currently a $500,000 cap on the award any one bank may receive
in a given year.
14That is, the bank would be eligible for $54,000 for making $300,000 in
insured deposits in the credit unions ($300,000 x 18 percent), $135,000
for increased small-business lending ($500,000 x weighting factor of 3.0 =
$1.5 million x 9 percent = $135,000), and $180,000 for increased
affordable housing lending ($1 million x weighting factor of 2.0 = $2
million x 9 percent = $180,000). In sum, $54,000 + $135,000 + $180,000 =
$369,000.
15That is, the bank would receive $18,000 for $300,000 in insured deposits
($300,000 x 6 percent), $45,000 for $500,000 small-business lending ($1.5
million x 3 percent = $45,000), and $60,000 for affordable housing lending
($2 million x 3 percent = $60,000). In sum, $18,000 + $45,000 + $60,000 =
$123,000.
16For example, the frequency would be no more than every 5 years for a
small bank with an outstanding rating and every year for a large bank with
less than a satisfactory rating.
o A lending test evaluates the number, amount, and income and
geographic distribution of a bank's mortgage, small business,
small farm, and consumer loans.
o An investment test evaluates a bank's community development
investments, including its investments in CDFIs.
o A service test evaluates a bank's retail service delivery
operations, such as branches and low-cost checking services.
Upon completing examinations, regulators assign one of four
ratings to a bank: outstanding, satisfactory, needs improvement,
or substantial noncompliance.
Treasury officials and some BEA award recipients we interviewed
said that the BEA program provides banks with incentives to
increase their investments in CDFIs and lending in distressed
communities. However, determining the program's impact is
difficult because other economic and regulatory incentives also
encourage banks to undertake award-eligible activities. Although
it is difficult to determine the BEA program's impact, the
available evidence we reviewed suggests that the program's impact
has likely not been significant. For example, for large banks, a
BEA award (when compared with total bank assets) is small and
likely not large enough to have much influence on such banks'
overall investment and lending decisions. Other evidence also
indicates that the BEA program's impact has likely not been
significant. In particular, until 2003, BEA awards may have
provided certain community development banks with incentives to
benefit financially from activities that were inconsistent with
BEA program goals, and available studies indicate that certain
CDFIs have been able to raise an increased amount of capital from
banks, while BEA program funding and participation have declined.
According to Treasury officials and some award recipients, the BEA
program allows award recipients to increase their lending and
investment levels beyond those that would occur without the
program. Award recipients we interviewed stated that one of the
program's main benefits is reduced transaction costs. Transaction
costs are primarily the time and expense associated with
researching markets or borrower qualifications and underwriting
loans within distressed communities. Award recipients stated that
transaction costs are higher in distressed communities than in
other communities because, for example, loans are typically
smaller (thus generating less interest income) and have a higher
risk of default. Because BEA awards are in cash, award recipients
said that award proceeds can be used to provide more loans, on
more favorable terms, than are otherwise possible. Award
recipients said that such an arrangement benefits both BEA award
recipients and loan borrowers.
Another benefit that award recipients cited is the formation of
partnerships between banks and other financial institutions,
including CDFIs. When investing in a CDFI-the activity awarded
with the highest payout-applicants identify and select a CDFI in
which to invest, such as a community development bank, credit
union, loan fund, or venture capital fund. According to officials
from banks and CDFIs, the resulting investment in the CDFI
produces two benefits. First, the investment increases the CDFI's
capacity by providing it with capital, often at below-market
rates, which in turn allows the CDFI to provide more loans in
distressed communities. Second, according to one CDFI official we
interviewed, the partnership allows traditional banks to learn
about and understand the work of CDFIs. For example, the CDFI
official we interviewed noted that the partnership formed through
the BEA program allowed officials from a traditional bank to sit
on the CDFI's board of directors, which exposed the traditional
bank officials to the products and services of the CDFI. When
initially established, Treasury intended the BEA program to
encourage traditional banks to become involved in community
development banking activities by, for example, investing in a
CDFI or lending in a distressed community.
A third benefit of the BEA program, according some award
recipients we interviewed, is the provision of capital needed to
help the community development banking industry grow and develop
during its early years and sustain its level of operations today.
An official representing the community development banking
industry noted that there were only three Treasury-certified
community development banks in the mid-1990s when the BEA program
began, but today there are over 50 such banks, growth the official
attributes to the BEA program. Some award recipients we
interviewed also stated that award proceeds have allowed them to
sustain their current level of operations within distressed
communities, where, as previously noted, transaction costs are
higher than in other areas. Accordingly, the BEA program is said
to help community development banks remain true to their core
missions of serving the financing and developmental needs of their
community.
Independently evaluating and isolating the BEA program's impact on
bank investment and lending decisions is difficult because other
economic and regulatory incentives also affect bank behavior. In
1998, we reported that the prospect of receiving a BEA award,
while one factor, was not always the primary reason banks
undertook award-eligible activities.18 In 2000, the Federal
Reserve Board completed a survey providing additional evidence
that loan profitability can be an important factor in banks'
community development lending decisions.19 This survey, which
focused on the performance and profitability of CRA-related
lending, found that a majority of respondents' community
development loans were profitable. The survey also found that a
majority of respondent's CRA special lending programs, which
target low-income borrowers and areas, were profitable.20 Because
community development loans can be profitable, as noted in the
Federal Reserve Board's survey, banks have economic incentives to
make these loans even without the incentive of potentially
receiving a BEA award.
In addition to economic incentives, regulatory incentives can also
encourage banks to undertake award-eligible activities. In our
1998 report, we found that compliance with CRA was a major reason
banks made investments in CDFIs and loans in distressed
communities. CRA incentives may be particularly strong for banks
that plan to open a new branch or merge with other banks because
federal regulators may consider inadequate compliance when
reviewing banks' requests to merge with other banks or expand
their operations. However, Treasury officials said that the BEA
program provides banks with more targeted incentives than CRA
requirements do. For example, the officials said that the BEA
program provides banks with incentives to provide financial
services in the most distressed communities-communities that banks
are not required to service in their efforts to comply with CRA.
To obtain feedback on the BEA program's design and implementation,
Treasury has conducted surveys of BEA program applicants.
Treasury's most recent survey, conducted in 2002, suggests that
both the BEA program and CRA requirements are responsible for
banks' increased investments in CDFIs and lending in distressed
communities. For example, the 2002 survey of 115 program
applicants found that both the prospect of a BEA award and credit
for CRA compliance motivated banks to undertake many CDFI-related
activities, including providing CDFIs with loans, grants, and
technical assistance, but found that the BEA program contributed
toward the development of new financial products. The survey also
found that, in many cases, neither the BEA program nor credit for
CRA compliance motivated banks to lend in distressed communities.
Rather, the banks reported making loans in distressed communities
because such lending is part of their community development
mission or part of their everyday business activities.
Although it is difficult to determine the BEA program's impact,
the available evidence we reviewed suggests that the program's
impact has likely not been significant for large traditional
banks, although it may allow for incremental increases in
award-eligible activities. The available evidence also suggests
that the BEA program may have provided some community development
banks with incentives to benefit financially without furthering
program goals. Further, available studies we reviewed indicate
that some CDFIs have raised an increased amount of capital from
banks while BEA program funding and participation have declined.
Specifically, we found the following:
o For large traditional banks, as noted in our 1998 report, BEA
awards are likely not large enough to provide a meaningful
financial incentive. As shown in table 2, the size of a BEA award
when compared with the assets of large traditional banks (those
with over $1 billion in assets) was .0004 percent of assets in
2005. For these banks, the prospect of receiving a BEA award,
independent of any economic and regulatory incentives the banks
may have, is unlikely to serve as a significant financial
incentive for increased CDFI investment or distressed community
lending. However, BEA awards may provide large traditional banks
with the capacity to incrementally increase their award-eligible
activities, offset some of the cost associated with doing so, and
increase the profits of related lines of business. Large
traditional banks may also derive public and community relations
value from receiving a BEA award that outweighs its financial
benefit.
Table 2: Average BEA Award as a Percentage of Large Banks'
Assets,a 2003 through 2005
Source: GAO analysis of Treasury data.
aLarge banks, for purposes here, are those with total assets of $1
billion or more.
bLarge banks received 43 percent of all BEA award dollars in 2003,
8 percent in 2004, and 38 percent in 2005.
o Until 2003, many BEA program participants engaged in a
now-prohibited practice called deposit swapping that improved
their financial condition without necessarily furthering program
goals. According to a Treasury official, beginning around 1998, a
group of about 30 community development banks began to purchase
insured certificates of deposit in one another-that is, swap
deposits-to increase their CDFI investments and thereby receive
BEA awards. At the time, Treasury provided a 33 percent award
match for community development banks that increased their
deposits in other community development banks. Following the 2003
prohibition, the percentage of total BEA dollars awarded for CDFI
investments fell substantially-from 87 percent of all BEA dollars
awarded in 2002 to only 18 percent in 2003 (by contrast, total BEA
dollars awarded for increased lending and services in distressed
communities increased from 13 percent in 2002 to 82 percent in
2003). According to a Treasury official, the prohibition on
deposit swapping was, in fact, the primary reason for the
substantial decline in CDFI investments. This decline suggests
that, until 2003, banks may have been responding to financial
incentives that were inconsistent with the BEA program's goals,
which include increasing lending within distressed communities.
o Community development loan funds have raised an increased
amount of capital from banks, thrifts, and credit unions, while
BEA program funding and bank participation in the program have
declined. According to data from a consortium of CDFIs, community
development loan funds-the most numerous type of CDFI and thus the
largest group of potential BEA program beneficiaries-have
continued raising capital from banks, thrifts, and credit unions
concurrent with a decline in funding and bank participation in the
BEA program.21 According to the consortium's data, the percentage
of capital loan funds raised from banks, thrifts, and credit
unions increased from 47 percent in fiscal year 2003 to 56 percent
in fiscal year 2004. As discussed previously, BEA program funding
also declined substantially in recent years from over $46 million
in fiscal year 2000 to about $10 million in fiscal year 2005. We
note that one limitation of the consortium's data for purposes of
this analysis is that it includes credit unions, which are
ineligible for BEA awards. However, an official involved with
completing the studies said that loan funds raised most of the
capital from banks and thrifts, which are eligible for BEA awards.
According to the CDFI consortium, financial institutions are a
growing source of capital for loan funds because loan funds
provide a safe investment, allow banks to earn CRA credit, and are
flexible partners.
Treasury's performance measures for the BEA program likely
overstate its impact on bank investments in CDFIs and lending in
distressed communities. In addition, we identified weaknesses in
Treasury's system of internal control for ensuring proper award
payments. Specifically, we found that Treasury has limited
controls in place to help ensure that bank applicants finance
properties located in eligible distressed communities. We found
that Treasury also provides limited guidance to its application
review staff to identify potential errors in the reporting of a
financed property's location and does not require the reviewers to
completely document their work.
To assess the BEA program's performance, Treasury publicly reports
bank applicants' total reported increase in CDFI investments and
distressed community lending.22 To establish targets for this
measure, Treasury assumes a complete, causal linkage between the
BEA program and applicants' increases in award-eligible
activities. For example, in 2005, Treasury attributed a reported
$100 million increase in award-eligible activities to BEA awards
of approximately $10 million distributed that year. In reporting
results for this measure, Treasury does not account for other
factors that also affect bank lending and investment decisions,
such as loan profitability and CRA compliance. By not accounting
for such factors, Treasury's performance measure likely overstates
the BEA program's impact. As a result, Treasury lacks accurate
information needed to assess program accomplishments and make
changes to ensure that the BEA program is meeting its goals. GAO's
standards for effective performance measures state that measures
should be objective-that is, they should be reasonably free of any
significant bias or manipulation that would distort an accurate
assessment of performance.23
Treasury internally tracks other BEA program data, but these data
also likely overstate the program's impact. For example, as part
of a BEA application, Treasury requests that applicants provide
such data as the number of full-time equivalent jobs created or
maintained and the number of housing units developed or
rehabilitated in distressed communities. Treasury uses this
information to monitor and measure the BEA program's impact.
Similar to its externally reported measure, Treasury assumes a
direct one-to-one correlation between these outcomes (new jobs and
housing units) and the BEA program. Treasury does not account for
external factors, such as economic and regulatory incentives that
could also contribute to an increase in jobs created or housing
units developed. Further, these data are self-reported and,
according to Treasury, not verified. Therefore, they could be
subject to the type of bias and manipulation that would distort an
accurate assessment of performance.
We acknowledge that developing performance measures for the BEA
program is challenging. As stated in our 1998 report, to an extent
that neither we nor Treasury can quantify, banks are receiving
awards for investments and loans they would have made without the
prospect of receiving a BEA award. The available evidence
discussed in this report (e.g., the relatively small size of BEA
awards for large banks) further supports this analysis. While it
may have been advisable for Treasury to attribute less influence
to the BEA program when developing its performance measures, it is
not clear that a reliable and appropriate methodology exists to
accurately measure the BEA program's impact on bank behavior.
According to a Treasury official, one of the most significant
risks the BEA program faces is that applicants may provide
inaccurate information regarding the location of properties
financed by their activities. That is, the potential exists for
banks to receive BEA awards based on loans that finance
properties, such as commercial or affordable housing development
loans, that were not located in eligible distressed communities.
While Treasury has established controls to mitigate this risk,
these controls are not fully consistent with federal internal
control standards, which state that policies and procedures,
including appropriate documentation, should be designed to help
ensure that management's directives, such as verification
procedures, are carried out and that appropriate supervisory
oversight of established processes is exercised. Without
sufficient controls to help ensure that properties are located in
eligible distressed communities, the BEA program is vulnerable to
making improper payments.
According to a Treasury official, application review staff are to
perform the following procedures to ensure that properties are
located in eligible distressed communities:
o Use an online Treasury system, for all loans of $500,000 or
more, to verify that borrower addressers or, in some cases,
properties secured by the loans (collateral) are located in
eligible census tracts (generally referred to as loan geocoding).
o Geocode a sample of loans valued at $250,000 to $500,000 to
verify that borrower or collateral addresses are located in
eligible census tracts.
Treasury officials said that BEA program application review staff
have identified properties that were not located in eligible
distressed communities. For example, a Treasury official said
that, in one case, the address of the borrower (a developer),
which was located in an eligible distressed community, was given
as a basis for the bank to receive a BEA award.24 However, the
official said that the address of the property under development
was not in an eligible distressed community. The official said
that she was familiar with the area where the property was located
and knew that it did not meet eligibility requirements, which
prompted her to do follow-up analysis. According to the official,
Treasury staff disallowed this particular loan as a basis for the
bank to receive a BEA award.
While a Treasury official said that the department has established
controls to mitigate errors in the reporting of property
locations, we identified limitations with the guidance that
Treasury provides to its application review staff. For example,
Treasury's guidance states that for loans of $500,000 or above and
for a sample of loans from $250,000 to $500,000, staff should
geocode the borrower's address. However, for development loans
where the address of the borrower (such as a developer) may differ
from the address of the property under development, the guidance
does not specifically require staff to geocode the property
address. A Treasury official confirmed that the department has not
provided specific guidance to reviewers on geocoding property
addresses in such instances. As noted previously, Treasury staff
have identified at least one example in which the location of the
borrower was in a distressed community but the location of the
property was not, although this identification was largely because
of the reviewer's familiarity with the area where the property was
located. By not specifying in the guidance that reviewers should
geocode property addresses where appropriate, the potential exists
that banks will receive BEA awards based on erroneous information.
We reviewed two banks' BEA applications for the fiscal year 2004
and 2005 rounds of BEA awards (a total of four applications) to
conduct a limited test of Treasury's implementation of procedures
for verifying certain application data. Each bank in our review
received the maximum $500,000 award in the 2005 funding round. The
files we reviewed did not contain any documentation of the staff's
geocoding of property location data (for loans exceeding $250,000
or $500,000). A Treasury official we interviewed agreed that the
files did not contain any documentation of the staffs' geocoding
effort. Further, our review of Treasury's BEA application guidance
found that the guidance does not establish specific documentation
requirements for the program staff's geocoding efforts. Without
such guidance and documentation requirements, Treasury management
and supervisors, as well as outside reviewers, cannot be assured
that the geocoding is being conducted or that errors in the
reporting of property location are detected.
To assess the potential for improper BEA award payments, we used
Treasury's online geocoding system to determine the locations of
properties contained in the 2004 and 2005 applications for the two
banks. We identified 1 commercial and 5 affordable housing
development loans among these applications, out of a total of 18
such loans with a value of $250,000 or more, where we had
questions as to whether properties financed by the loans were
located in eligible distressed communities. For example, we
identified an affordable housing development loan of approximately
$423,500 that was made to purchase an apartment building. Our
geocoding analysis determined that the address of the property was
not in an eligible distressed community, whereas the address of
the borrower was in a distressed community that could qualify
under certain circumstances. In this case, according to a Treasury
official, the reviewer probably geocoded the address of the
borrower rather than the address of the property. The Treasury
official also suggested that the address of the property may have
been in an eligible distressed community at the time the
application was made in 2004. However, our analysis of census data
indicates that the relevant census tract was not an eligible
distressed community in 2004. Consequently, Treasury's decision to
provide a BEA award to this bank may have been based in part on
erroneous information.
Because of other economic and regulatory incentives that also
affect bank behavior, it remains difficult to isolate and
determine the BEA program's impact on banks' decisions to invest
in CDFIs and lend in distressed communities. Treasury's BEA
program performance measures do not provide additional insights
into the program's impact because they assume that all reported
increases in eligible investment and lending occur solely because
of the program's financial incentives. However, based on available
evidence we reviewed, it is reasonable to conclude that the
program likely does not provide significant financial incentives
for large banks, due to the typical award's relatively small size
for such institutions. To an extent that is unquantifiable, a
significant percentage of reported large bank increases in CDFI
investments and distressed community loans each year would likely
have occurred without the BEA program. Further, the program also
appears to have provided certain community development banks with
financial incentives and opportunities to benefit financially
without furthering program goals. On the other hand, the BEA
program may provide some banks, including large banks, with
additional incentives and capacity to incrementally increase their
award-eligible activities, offer public and community relations
benefits to some award recipients, contribute to the development
of new financial products, and help establish partnerships between
banks and other CDFIs.
Treasury's internal controls to ensure proper award payments are
insufficient. Treasury's guidance to its BEA application review
staff does not require them to geocode property addresses, even
though evidence exists that applications may contain errors in
reported information. The guidance also does not establish
standards for documenting verification efforts. Consequently, the
BEA program is vulnerable to making improper payments.
To help ensure the integrity of the BEA award payment process, we
recommend that the Secretary of the Treasury revise the guidance
for reviewing program applications so that program staff are
required to (1) geocode property addresses where appropriate and
(2) document their efforts to verify property addresses.
We provided a draft of this report to the Department of the
Treasury for its review and comment. Treasury provided written
comments that are reprinted (with annotations) in appendix II. In
its comments, Treasury agreed with our conclusion that determining
the extent to which the BEA program provides banks with incentives
to increase their investments in CDFIs and lending in distressed
communities remains difficult given the number of external factors
that drive such decisions. However, Treasury stated that our
report bases many of its conclusions on information that is overly
general, outdated, or developed for other purposes and, as a
result, does not reflect an accurate portrayal of the BEA program
or its importance within the banking industry. Treasury also said
that we did not adequately consider evidence the department
provided regarding the BEA program's impact. Treasury did agree to
implement our recommendation that application review staff (1)
geocode property addresses, where appropriate; and (2) document
their efforts to verify property addresses. Further, Treasury
stated that it will adopt a policy requiring applicants to report
addresses for transactions; provide program staff with updated
instructions to geocode all transactions over $250,000 (not just
transactions over $500,000, as is the current practice); and
initiate and implement steps to analyze a statistically
significant sample of transactions less than $250,000.
In its comments, Treasury stated that the focus of our report was
inherently flawed. Treasury said our report did not assess, as it
expected, whether the BEA program, as currently structured, is
effective at motivating banks to undertake community development
financing activities they would not normally undertake or, if the
program were found to be ineffective, recommend changes to its
structure. In fact, we did seek to assess whether the BEA program,
as currently structured, is effective at motivating banks to
undertake activities they would not normally undertake. However,
as was the case when we initially evaluated the BEA program in
1998 and as we state in this report, because of other economic and
regulatory incentives that affect bank behavior, it is difficult
to isolate the BEA program's impact from these other incentives.
We note an absence of change in the banking industry since 1998
that would facilitate isolating the BEA program's impact for this
review. On the contrary, isolating the BEA program's impact may be
more difficult today than in 1998 because the average BEA award
amount and number of banks participating in the program have
declined significantly in recent years. Although isolating the
impact of the BEA program is difficult, we believe available
evidence suggests that its impact has likely not been significant.
Treasury also stated that our report relied on inappropriate
information and data to form conclusions and that we did not
consider other evidence. For example, Treasury stated that none of
the studies cited in the report-including our 1998 report, a 2000
Federal Reserve survey on CRA-related lending, and two studies by
a consortium of CDFIs-is an explicit evaluation of the BEA
program. Treasury also stated that we undertook only a limited
review of current program participants. Contrary to Treasury's
assertions, our 1998 report includes an assessment of the BEA
program. Moreover, the Federal Reserve survey and reports by a
consortium of CDFIs address issues that we believe are critical to
independently evaluating the BEA program's effectiveness. In
particular, the Federal Reserve survey indicates that community
development lending can be profitable, which suggests that a
variety of factors-including economic and regulatory
factors-influence bank lending decisions. The variety of factors
that can influence bank lending decisions increase the
difficulties associated with isolating and determining the BEA
program's impact. As discussed in this report, the data from the
consortium of CDFIs also provide evidence that community
development loan funds have been able to raise an increased amount
of capital from banks despite recent declines in BEA program
funding and participation. Regarding our interviews with program
participants, as we note in appendix I, we chose program
participants for interviews based on a variety of
characteristics-including differing bank asset sizes, frequency of
program participation, status as a traditional bank or community
development bank, and CDFI type-to elicit a wide range of views
and perspectives on the BEA program.
Further, Treasury stated that we did not adequately refer to its
2002 survey of BEA program participants in our draft report.
Treasury stated that evidence from the survey clearly demonstrates
that the BEA program plays a role in program applicant investment
decisions. While we recognize that surveys of program
beneficiaries can play an important role in program evaluations,
we believe that their results must be interpreted with caution.
For example, survey respondents who are program beneficiaries have
a financial incentive to overstate a program's impact. To
compensate for this limitation, we sought to obtain and analyze
independent evidence, including available studies, to assess the
BEA program's impact. Even so, the findings of Treasury's 2002
survey are consistent with the findings of our report. For
example, our report states that prior to 2003, when deposit
swapping was prohibited, the BEA program may have provided certain
community development banks with incentives to make investments
that benefited them financially but were inconsistent with program
goals. In Treasury's 2002 survey, CDFI deposits was the only
category in which a majority of bank respondents (52 percent) said
that the BEA program was the primary reason they made an
award-eligible investment. Overall, Treasury's 2002 survey
indicates that various factors, which include, but are not limited
to, the prospect of receiving a BEA award, motivate banks'
decisions to invest in CDFIs and lend in distressed communities.
In fact, Treasury's 2002 survey found that in many cases, neither
the BEA program nor credit for CRA compliance motivated banks'
decisions to lend in distressed communities. Rather, as we state
in our report, the survey found that respondents undertook lending
activities because they were part of their community development
mission or part of their everyday business activities.
Additionally, Treasury said that some conclusions in the report
appear to reflect a lack of understanding of the BEA program and
the banking industry. Specifically, Treasury stated the following:
o GAO's analysis of the size of a BEA award relative to large
banks' total assets was overly general and did not consider that
many banks (in particular large banks) carry out CDFI financing
within specific lines of business, such as community development
business lines. Rather than comparing a large bank's BEA award
amount with its total assets, as we did, Treasury said a more
appropriate and meaningful analysis would have been to consider
the bank's BEA award to the assets of a particular business line
or its relative importance in lowering the bank's transaction
costs. In response to this comment, we added language to the
report that, for large traditional banks, BEA awards may provide
additional capacity to incrementally increase award-eligible
investments and lending, offset some of the costs associated with
doing so, and increase the profits of related lines of business.
In interviews for this report, officials from one large bank said
BEA awards have allowed their bank to provide more loans than they
would have in the program's absence, and officials from another
large bank said BEA awards have allowed their bank to provide
loans on more favorable terms. However, the officials said that
other factors, such as CRA compliance and loan profitability, also
influence their community development lending decisions. Further,
officials from both banks said their banks would continue
community development lending in the BEA program's absence,
although officials from one bank said their bank would continue
such lending to a lesser extent. Therefore, we continue to believe
that the BEA program likely does not have a significant impact on
large banks' overall investment and lending decisions, although
there may be an incremental impact.
o GAO's discussion of the now-prohibited practice of deposit
swapping was based on outdated information, as Treasury moved to
prohibit this practice four years ago. Treasury said it did not
understand why we chose to include a discussion of deposit
swapping in a report on the BEA program's current status. In
response to this comment, we assert that our report sought to
assess the BEA program's impact on bank behavior over time, rather
than at a single point in time. Thus, we believe that our
discussion of deposit swapping, which focuses on bank behavior in
response to incentives that the BEA program provided until 2003,
is appropriate. We note that deposit swapping provides evidence
that, until 2003, the BEA program's impact in encouraging some
banks to make productive investments and loans in distressed
communities likely was not significant. We also note that funding
for the BEA program, and bank participation in it, were highest
prior to 2003 when Treasury prohibited deposit swapping, adding
significance to the issue of deposit swapping and its connection
to bank behavior.
o GAO's report failed to mention other important program
benefits. In support of this statement, Treasury cites its 2002
survey in which 19 percent of respondents indicated that the
prospect of receiving a BEA award prompted them to launch innovate
financial products, services, or educational programs to meet the
needs of underserved households or communities. In response to
this comment, we revised our report to reflect this survey
finding. Treasury also stated that it would have been useful if
our report studied the underlying data from the consortium of
CDFIs to, among other things, determine the BEA program's impact
in initiating productive relationships between banks and CDFIs.
Our draft report stated that a benefit of the BEA program is that
it encourages partnerships between banks and CDFIs. However, it
was not possible to determine from the CDFI consortium data we
reviewed whether the loan funds cited in the reports formed
partnerships with banks participating in the BEA program. For
example, the consortium reports did not specifically identify the
loan funds and banks that were surveyed for inclusion in the
reports. Therefore, based on information in the reports, we were
unable to conduct the types of analyses Treasury proposes in its
comments.
We are sending copies of this report to the Secretary of the
Treasury and other interested congressional committees. We will
also make copies available to others upon request. In addition,
the report will be available at no charge on GAO's Web site at
http://www.gao.gov .
If you or your staffs have any questions regarding this report,
please contact me at (202) 512-7215 or [email protected] . Contact
points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. GAO staff
who made key contributions to this report are listed in appendix
III.
George A. Scott Acting Director, Financial Markets and Community
Investment
The objectives of this report were to (1) examine the extent to
which the Bank Enterprise Award (BEA) program may have provided
banks with financial incentives to increase their investments in
community development financial institutions (CDFIs) and lending
in distressed communities and (2) assess the BEA program's
performance measures and certain internal controls designed to
ensure proper award payments.
To address our first objective, we reviewed relevant documents and
data, including BEA program statutes, regulations, memorandum,
guidelines, and reports; GAO's 1998 report on the CDFI Fund and
BEA program; a 2000 Federal Reserve Board study on the performance
and profitability of Community Reinvestment Act-related lending,1
and two studies by the CDFI Data Project, which is an industry
consortium that gathers and reports financial data on the CDFI
industry.2 We also interviewed three trade associations
representing various segments of the CDFI industry to obtain their
views on the BEA program. Further, we interviewed a nonprobability
sample of nine BEA award recipients and five CDFI beneficiaries
from the fiscal year 2005 round of BEA awards. We selected these
award recipients and CDFI beneficiaries for interviews based on a
range of characteristics, including differing bank asset sizes,
frequency of program participation, status as a traditional bank
or certified community development bank, and CDFI type. Our sample
selection criteria was intended to obtain a diverse pool of
respondents possessing a range of views and perspectives on the
BEA program.
To address our second objective, we interviewed Treasury officials
to obtain information on the BEA program's measures and internal
controls. We compared the program's performance measures to GAO's
standards for effective measures, as outlined in publications we
have issued in connection with the Government Performance and
Results Act. We also compared the BEA program's internal controls
to GAO's Standards for Internal Control in the Federal
Government.3 To further assess the program's internal controls, we
reviewed application documents for two banks that each received
multiple BEA awards from 2000 through 2005 and used Treasury's
online geocoding system to determine the locations of properties
contained in the 2004 and 2005 applications for the two banks. We
also reviewed BEA program application review guidance.
We conducted our work from October 2005 through July 2006 in
Washington, D.C., in accordance with generally accepted government
auditing standards.
The following are GAO's comments on the Department of the
Treasury's letter dated July 21, 2006.
George A. Scott, (202) 512-7215 or [email protected]
In addition to the contact named above, Wesley Phillips (Assistant
Director), Emilie Cassou, David Dornisch, Ronald Ito, Austin
Kelly, Elizabeth Olivarez, David Pittman, Linda Rego, and James
Vitarello made key contributions to this report.
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1. Our report includes a statement by Treasury
officials that the BEA program provides banks with
incentives to provide financial services in the most
distressed communities-communities that banks are not
required to service in their efforts to comply with
CRA. However, as discussed in our report, measuring
the purported impact of the BEA program is difficult.
2. Census tracts that qualify for the BEA program can
exceed those specified in Treasury's letter. For
example, census tracts with poverty rates as low as
20 percent may qualify under certain circumstances.
Therefore, the BEA program may not be as targeted as
Treasury claims.
3. Our report does not address this issue. However,
we note that requiring BEA award recipients to use
their award proceeds for additional community
development activities would pose complexities. For
example, it would require Treasury to develop
information about current award recipients' overall
community development activities and a mechanism for
monitoring recipients' use of award dollars.
4. Our report does not comment on the BEA program's
funding relative to other related programs within
Treasury. We provide information on the program's
funding for descriptive purposes only and make no
assertions concerning its priority within Treasury.
The BEA Program Reportedly Produces Benefits, but Available Evidence Suggests
That the Program's Impact Has Likely Not Been Significant
17Other tests may be applied. A community development test is applied for
certain institutions known as wholesale or limited-purpose banks, and the
small-bank performance standards are applied in evaluating the performance
of a small bank or a bank that was a small bank during the prior calendar
year. See, for example, 12 C.F.R. S: 345.21(a)(2) and (3) (FDIC).
According to Treasury Officials and Some Award Recipients, the BEA Program
Produces a Range of Benefits
Isolating the BEA Program's Impact from Other Existing Economic and Regulatory
Incentives Remains Difficult
18 GAO/RCED-98-225 .
19Board of Governors of the Federal Reserve System, The Performance and
Profitability of CRA-Related Lending (Washington, D.C., July 17, 2000).
20One limitation of this report is that no small banks (those with less
than $950 million in assets) responded to the report's survey and only 21
percent of banks with $950 million to $5 billion in assets responded.
Available Evidence Suggests That the BEA Program's Impact Has Likely Not Been
Significant
The BEA Program's Performance Measures Likely Overstate Its Impact, and
Treasury's Internal Controls to Ensure Proper Award Payments Have Weaknesses
21The CDFI Data Project, Providing Capital, Building Communities, Creating
Impact, Fiscal Year 2003, 3rd ed.; and Providing Capital, Building
Communities, Creating Impact, Fiscal Year 2004, 4th ed. Loan funds are
typically nonprofit organizations that provide financing and development
services to businesses, organizations, and individuals in low-income
communities. There are about 500 Treasury-certified loan funds.
BEA Program Performance Measures Likely Overstate Program Impact
22Treasury reports results for this measure in its annual Performance and
Accountability Report.
23For a more thorough discussion of criteria for effective performance
measures, see GAO, The Results Act: An Evaluator's Guide for Assessing
Agency Performance Plans, GAO/GGD-10.1.20 (Washington, D.C.: April 1998).
Treasury Has Not Established Effective Controls to Help Ensure That
Bank-Financed Properties Are Located in Eligible Distressed Communities
24BEA application materials may contain both the address of the borrower
and the address of the property financed through reported bank lending
activities.
Conclusions
Recommendation for Executive Action
Agency Comments and Our Evaluation
Appendix I: Objectives, Scope, and Methodology Appendix I: Objectives,
Scope, and Methodology
1 GAO/RCED-98-225 ; and the Board of Governors of the Federal Reserve
System, The Performance and Profitability of CRA-Related Lending
(Washington, D.C., July 17, 2000).
2The CDFI Data Project, Providing Capital, Building Communities, Creating
Impact, Fiscal Year 2003, 3rd ed.; and Providing Capital, Building
Communities, Creating Impact, Fiscal Year 2004, 4th ed.
3GAO, The Results Act: An Evaluator's Guide for Assessing Agency
Performance Plans, GAO/GGD-10.1.20 (Washington, D.C.: April 1998); Agency
Performance Plans: Examples of Practices That Can Improve Usefulness for
Decisionmakers, GAO/GGD/AIMD-99-69 (Washington, D.C.: Feb. 26, 1999);
Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
Appendix II: Comments from the Department of the Treasury Appendix II:
Comments from the Department of the Treasury
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
See comment 2.
See comment 1.
See comment 4.
See comment 3.
GAO Comments
A the Department Appendix III: GAO Contact and Staff Acknowledgments
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Highlights of GAO-06-824 , a report to congressional committees
July 2006
TREASURY'S BANK ENTERPRISE AWARD PROGRAM
Impact on Investments in Distressed Communities Is Difficult to Determine,
but Likely Not Significant
Established in 1994, the Department of the Treasury's Bank Enterprise
Award (BEA) program provides cash awards to banks that increase their
investments in community development financial institutions (CDFI) and
lending in economically distressed communities. CDFIs are specialized
institutions that provide financial services to areas and populations
underserved by conventional lenders and investors. In 2005, Treasury
provided nearly $10 million in BEA awards.
The BEA program has faced longstanding questions about its effectiveness
and experienced significant declines in funding in recent years. This
report (1) examines the extent to which the BEA program may have provided
banks with financial incentives and (2) assesses the BEA program's
performance measures and internal controls.
To complete this study, GAO reviewed relevant award data; interviewed
Treasury, bank, and CDFI officials; and assessed the BEA program's
performance measures and internal controls against GAO's standards for
effective measures and controls.
What GAO Recommends
GAO recommends that Treasury strengthen its internal controls to ensure
proper award payments. Treasury disagreed with aspects of GAO's analysis
but agreed to implement the recommendation.
The extent to which the BEA program may provide banks with incentives to
increase their investments in CDFIs and lending in distressed communities
is difficult to determine, but available evidence GAO reviewed suggests
that the program's impact has likely not been significant. Award
recipients GAO interviewed said that the BEA program lowers bank costs
associated with investing in a CDFI or lending in a distressed community,
allowing for increases in both types of activities. However, other
economic and regulatory incentives also encourage banks to undertake
award-eligible activities, and it is difficult to isolate and distinguish
these incentives from those of a BEA award. For example, banks may have
economic incentives to lend in distressed communities because of the
potential profitability of such lending. Although it is difficult to
determine the BEA program's impact, available evidence suggests that the
impact likely has not been significant. For example, the size of a BEA
award for large banks (which was .0004 percent of assets in 2005) suggests
that a BEA award does not have much influence on such banks' overall
investment and lending decisions (see figure). However, BEA awards may
allow large banks to incrementally increase their award-eligible
investments and lending.
The BEA program's performance measures likely overstate its impact, and
GAO identified weaknesses in certain program internal controls. To assess
the BEA program's performance, Treasury, among other measures, annually
aggregates the total reported increase in CDFI investments and distressed
community loans by all applicants but does not account for other factors,
such as economic and regulatory incentives that also affect bank
decisions. GAO also found that Treasury has limited controls in place to
help ensure that BEA program applications contain accurate information. In
particular, Treasury provides limited guidance to application review staff
to identify potential errors and does not require the reviewers to
completely document their work. As a result, GAO found that the BEA
program is vulnerable to making improper payments.
Average BEA Award as a Percentage of Large Banks' Assets,a 2003 through
2005
Source: GAO analysis of Treasury data.
aLarge banks, for purposes here, are those with assets of $1 billion or
more.
bLarge banks received 43 percent of all BEA dollars in 2003, 8 percent in
2004, and 38 percent in 2005.
*** End of document. ***