(Bloomberg) -- President Donald Trump’s mandate to pause all federal loans and grants, albeit short-lived, is raising questions about US banks’ ongoing support for nonprofit community groups.
From Wall Street giants like Bank of America Corp. and JPMorgan Chase & Co. to smaller regional and community lenders, banks have hundreds of billions of dollars in loan exposure to people and groups that rely in some part on federal assistance. They loaned about $150 billion to community development groups and more than $320 billion to borrowers in low-income areas in 2022, according to the latest figures compiled by the National Community Reinvestment Coalition.
Without federal funding, the creditworthiness of those groups suddenly came into focus last week, forcing their bankers to start figuring out a game plan before the order was rescinded a day and a half later, according to sources with knowledge of the banks’ inner workings.
At one regional bank, an executive for community development began examining cash flows of the bank’s nonprofit clients to try to map out their ability to repay current loans and their potential creditworthiness in the future, according to one of the sources, who declined to be identified because the deliberations were private. Other banks noticed larger nonprofits moving to draw down on revolving lines of credit, prompting bankers to reassess whether to provide these kinds of loans in the future.
Cutting off federal funding to nonprofits would be “a huge economic hit one way or another with ripple effects that won’t stop at the nonprofits,” said Randell Leach, Chief Executive Officer of Beneficial State Bank, a California lender focusing on community development work. “Some banks won’t finance nonprofits at all.”
Community Reinvestment
US banks are obligated to partner with and finance community groups and low income borrowers under the Community Reinvestment Act, a 1977 law put in place to reverse the effects of redlining, the practice that historically excluded minority groups from banking and real estate services. They routinely lend to landlords with tenants receiving rental assistance, and developers building affordable housing projects using grants and forgivable loans from the Department of Housing and Urban Development. They give lines of credit to nonprofit hospital chains and education providers.
At the largest Wall Street banks, executives last week were trying to understand whether the billions of dollars in business they had done through federal affordable housing tax credit programs was safe. The tax credits were, but other programs were not, including project-based rental assistance plans, which received $15 billion in federal funds in 2023, according to an analysis of government data by advocacy group Peter G. Peterson Foundation.
The banks declined to comment on any preparations they might be making for another freeze. The industry’s Washington, DC trade groups, including the Bank Policy Institute and the Independent Community Bankers of America, also declined to comment.
DEI Concerns
Banks could pull back from doing business with some community groups even if the funding freeze isn’t reinstated, according to Kara Ward, a partner at law firm Baker Donelson and a former attorney with the Treasury Department. That’s because of concerns that the Trump administration’s sharp focus on eliminating diversity, equity and inclusion programs from corporate America might change the government’s treatment of the banks’ obligations under the Community Reinvestment Act.
While banks are required to do business in low-income communities under the regulation, they could become more hesitant to support work tied to reducing racial inequality and instead invest in a hospital system for example, she said.
The Jan. 27 executive order on the funding freeze caused panic among organizations providing everything from day care to housing and healthcare, with staffers suddenly unable to access the government funds they relied on to make their budgets work.
Extra Demands
When the freeze was announced, Lila Anna Sauls, president of Homeless No More, was preparing to close on a $3 million bridge loan to begin construction on a new affordable housing complex. The loan was set to be paid back with funds that came from the Department of Housing and Urban Development.
If she hadn’t been able to get the money the government had promised, “I would have had a $3 million loan with a really scary repayment option,” she said. One of her bankers raised the prospect that she and other similar groups might need more help from banks’ charitable giving arms, said Sauls, whose South Carolina organization runs homeless shelters and builds affordable housing.
Nonprofits could start to make extra demands on banks for capital investments, charitable contributions, or additional loans as their funding sources become less certain, said Beneficial State Bank’s Leach. While that might make some banks stop financing these groups, other lenders could step in to more aggressively manage the situation by trying to help through capital investments or charitable donations.
In the meantime, community groups and banks remain on edge, according to Leach.
“Folks are still really taking a look at their financial models to see if they’re really going to be in jeopardy in case this comes back,” he said.
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