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			 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
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

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

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.

           The Government Accountability Office, the audit, evaluation and
           investigative arm of Congress, exists to support Congress in
           meeting its constitutional responsibilities and to help improve
           the performance and accountability of the federal government for
           the American people. GAO examines the use of public funds;
           evaluates federal programs and policies; and provides analyses,
           recommendations, and other assistance to help Congress make
           informed oversight, policy, and funding decisions. GAO's
           commitment to good government is reflected in its core values of
           accountability, integrity, and reliability.

           The fastest and easiest way to obtain copies of GAO documents at
           no cost is through GAO's Web site ( www.gao.gov ). Each weekday,
           GAO posts newly released reports, testimony, and correspondence on
           its Web site. To have GAO e-mail you a list of newly posted
           products every afternoon, go to www.gao.gov and select "Subscribe
           to Updates."

           The first copy of each printed report is free. Additional copies
           are $2 each. A check or money order should be made out to the
           Superintendent of Documents. GAO also accepts VISA and Mastercard.
           Orders for 100 or more copies mailed to a single address are
           discounted 25 percent. Orders should be sent to:

           U.S. Government Accountability Office 441 G Street NW, Room LM
           Washington, D.C. 20548

           To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax:
           (202) 512-6061

           Contact:

           Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail:
           [email protected] Automated answering system: (800) 424-5454 or
           (202) 512-7470

           Gloria Jarmon, Managing Director, [email protected] (202) 512-4400
           U.S. Government Accountability Office, 441 G Street NW, Room 7125
           Washington, D.C. 20548

           Paul Anderson, Managing Director, [email protected] (202)
           512-4800 U.S. Government Accountability Office, 441 G Street NW,
           Room 7149 Washington, D.C. 20548

                        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

                                  GAO Contact

                             Staff Acknowledgments

(250265)

GAO's Mission

Obtaining Copies of GAO Reports and Testimony

Order by Mail or Phone

To Report Fraud, Waste, and Abuse in Federal Programs

Congressional Relations

Public Affairs

www.gao.gov/cgi-bin/getrpt? GAO-06-824 .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact George A. Scott at (202) 512-5932 or
[email protected].

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. ***