Treasury's Bank Enterprise Award Program: Impact on Investments in Distressed Communities Is Difficult to Determine, but Likely Not Significant
Published: 2006-07-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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. 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.

section_title: Letter
paragraphs: 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) and lending within eligible distressed communities as  defined by statutory and regulatory requirements. 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. 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. 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. 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.
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. 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.  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. The average BEA award amount  also dropped from almost $292,000 to about $187,000 during the period.
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. 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. 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.
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.
subsections: section_title: Background
paragraphs: The BEA program’s goals are to encourage banks to increase their  investments in CDFIs and lending and other financial services in  distressed communities. 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). 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.
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.
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 $369,000 (a 20.5 percent return on investment).  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).
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. 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:  A lending test evaluates the number, amount, and income and geographic  distribution of a bank’s mortgage, small business, small farm, and  consumer loans.
An investment test evaluates a bank’s community development  investments, including its investments in CDFIs.
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.
section_title: The BEA Program Reportedly Produces Benefits, but Available Evidence Suggests That the Program’s Impact Has Likely Not Been Significant
paragraphs: 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.
subsections: section_title: According to Treasury Officials and Some Award Recipients, the BEA Program Produces a Range of Benefits
paragraphs: 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.
section_title: Isolating the BEA Program’s Impact from Other Existing Economic and Regulatory Incentives Remains Difficult
paragraphs: 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. 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. 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.  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.
section_title: Available Evidence Suggests That the BEA Program’s Impact Has Likely Not Been Significant
paragraphs: 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:    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.
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.
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. 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.
section_title: The BEA Program’s Performance Measures Likely Overstate Its Impact, and Treasury’s Internal Controls to Ensure Proper Award Payments Have Weaknesses
paragraphs: 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.
subsections: section_title: BEA Program Performance Measures Likely Overstate Program Impact
paragraphs: To assess the BEA program’s performance, Treasury publicly reports bank  applicants’ total reported increase in CDFI investments and distressed  community lending. 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.
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.
section_title: Treasury Has Not Established Effective Controls to Help Ensure That Bank-Financed Properties Are Located in Eligible Distressed Communities
paragraphs: 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:    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).
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. 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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendation for Executive Action
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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:    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.
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.
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 scottg@gao.gov. 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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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, and two studies by the  CDFI Data Project, which is an industry consortium that gathers and  reports financial data on the CDFI industry. 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. 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.
section_title: Appendix II: Comments from the Department of the Treasury
paragraphs: The following are GAO’s comments on the Department of the Treasury’s  letter dated July 21, 2006.
subsections: section_title: GAO Comments
paragraphs: 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.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.