The BEA Program Reportedly Produces Benefits, but Available Evidence Suggests That the Program’s Impact Has Likely Not Been Significant

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. 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. Available Evidence Suggests That the BEA Program’s Impact Has Likely Not Been Significant

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. 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. 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. BEA Program Performance Measures Likely Overstate Program Impact

To assess the BEA program’s performance, Treasury publicly reports bank  applicants’ total reported increase in CDFI investments and distressed  community lending. 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. By not accounting for such  factors, Treasury’s performance measure likely overstates the BEA  program’s impact. Without sufficient controls  to help ensure that properties are located in eligible distressed  communities, the BEA program is vulnerable to making improper  payments. Conclusions

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. Appendix I: Objectives, Scope, and Methodology

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. We also  compared the BEA program’s internal controls to GAO’s Standards for  Internal Control in the Federal Government.
Why GAO Did This Study

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 Found

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.