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Remarks by Governor Laurence H. Meyer

Community development: Changes and challenges
Federal Reserve Bank of Chicago Biannual Community Development Conference
"The New Mosaic: New Partners, New Ventures," Chicago, Illinois
October 31, 1997
I am very pleased to be here in Chicago to discuss community development with you. The
theme of the conference -- "The New Mosaic: New Partners, New Ventures" -- is especially
appropriate here in the seventh Federal Reserve District, where there has been invaluable,
pioneering work in community development partnerships reflective of this theme. In my
time with you, I would like to explore how we got to this point, both here and nationally,
and share some thoughts on where we might be headed with new ventures and new partners.
Let me begin by saying a few words about the Community Reinvestment Act. This is fairly
unusual for me, especially in a speech that's focused on community development, since I do
not believe that the community development activities of financial institutions necessarily
should or must flow from their obligations under the CRA.
I mention it first in this instance because the CRA is having its 20-year anniversary. At this
milestone, I believe it is not inappropriate to recognize the role CRA has played in the
community development process. I am sure that many believe that the types of community
development initiatives highlighted here at this conference became possible, at least in part,
due to the evolution of CRA and responses to CRA by financial institutions. This view is not
without credence, as I shall discuss later.
But I also would suggest that the success of CRA has been dependent to a quite large extent
on progress on a host of other fronts, the importance of which can easily be underestimated.
The progress I'm talking about is reflected in four interrelated trends that I would like to
briefly review: (1) the maturation of the concept of community development; (2) the
evolution of public policy and programs; (3) the growth in number, diversity and
sophistication of participants; and most importantly, (4) the development of a powerful set
of diverse partnerships at the local and state level.
The Changing Community Development Environment
I think it's instructive to take a moment to look at the community development environment
of 1977, the year CRA was passed. The concept of community development was limited,
though some changes were beginning to take shape that would later become the major
trends I am highlighting. The primary focus was on development of community
infrastructure projects, such as street improvements, water and sewer projects, and
recreational facilities. There were large, nationally driven and financed housing programs
and some housing rehabilitation resources. A number of communities were using public
community development funds for downtown malls or traditional industrial development
projects. Most of the funds used were public funds and most of the key players were

governmental, especially local and state housing or economic development agencies. LISC
was barely a dream and most foundations didn't even have community development, at least
as we know it today, on their radar screens.
Here in 1977, NHS of Chicago was in only its second year of operation, working in three
neighborhoods with a small staff, and it was one of the pioneers of the NHS movement. The
Community Investment Corporation, one of the first effective multi-bank loan consortia in
the country, did begin operations in 1974, and its first ten years were as a 1-4 unit, single
family housing rehab lender. In 1977, there were very few community-based CDCs, and
there was no CANDO. Here and throughout the country, most partnerships entailed local
groups going begging to the local or state housing and economic development agencies for
grants or use of tax-exempt revenue bonds.
Policy was primarily dictated from Washington because that's where the big money came
from. There was little attention to specific local needs, and most federal programs were illdesigned to respond to the diverse needs of neighborhoods.
But now, let's flash forward to 1997. The juxtaposition is startling.
First, the concept of community development is starkly different. Yes, construction of public
facilities, the rehabilitation of buildings, the production of affordable housing, and
commercial and industrial development remain important, but they are now considered
hardly sufficient. Community development now encompasses "community building" with,
by, and for people, not just development of bricks and mortar. Community development
now requires community leadership and participation, right down to, and perhaps especially,
the neighborhood level. It is not just about finding public subsidy dollars, but leveraging
those funds with significant private sector investment and expertise. In short, the concept of
community development now encompasses much more comprehensive strategies; it
includes the fundamental notion that rebuilding neighborhoods and communities, by
necessity, entails helping create economic value and economic opportunity through job
creation, training, and services for those of limited means.
Second, where the concept of community development has gone, public policy and
programs have followed. Federal programs have shrunk, but many have become much more
flexible and responsive to local needs. Many, such as the CDBG and HOME programs, have
been purposefully structured so that they can and must be used to leverage private sector
involvement. And leveraging private sector resources was certainly the impetus for the new
Community Development Financial Institutions program, which has demonstrated that a
small national program can have a significant local impact.
We should also not lose sight of the fact that state and local governments have been creating
a growing variety of community development funding programs that incorporate the
attributes of flexibility and leveraging.
Third, there has been an explosive growth in the number, diversity, and sophistication of
community development organizations. Unlike 1977, today there really is a quite
identifiable community development industry, complete with a diverse set of production
"companies," financial intermediaries, and other support mechanisms.
The production side of the industry is led by a growing network of over 2,500 nonprofit

community-based development corporations producing a variety of housing, commercial
and other economic development projects.
The financing side of the industry is equally impressive and, unlike in 1977, includes a
remarkable array of private financial institutions, corporations and foundations, in addition
to the public financing programs I've mentioned. Community development has become a
line of business for many banks and thrifts, and use of a highly creative and diverse set of
financial tools and techniques is commonplace. Institutions have created new vehicles, such
as multi-bank lending consortia, bank and thrift community development corporations, and
limited partnerships and equity pools. Add to them participation by the secondary market
agencies, the Federal Home Loan Bank System, national intermediaries, such as LISC and
the Enterprise Foundation, and revolving loan funds run by nonprofit groups.
Fourth, and finally, the current environment differs significantly from that of 1977 in that all
of the players recognize that they must work together in local partnerships. The power of
these working partnerships as reflected in their results is, perhaps, the single most
distinguishing factor in any review of changes since 1977.
There are hundreds, perhaps thousands, of examples, but let me cite one that recently came
to fruition here in Chicago. It was the development of a $9.1 million, 78,000 square-foot
shopping center in the city's south side community of North Kenwood-Oakland, the first
such development there in over 50 years. And it was the community development industry
using public/private partnership techniques that produced it. Participants included a local
CDC, a private planning and development firm, LISC, and its funding program The Retail
Initiative, the City of Chicago, and Harris Bank. The depth of the partnership is also
reflected in the fact that one of the key players, The Retail Initiative, itself is funded by a
diverse group of 10 corporations, including the Prudential Corporation, the General Electric
Capital Corporation, as well as banks and thrifts, such as J.P. Morgan & Company, Bankers
Trust New York, Bank of America, and Home Savings of America.
This and other types of partnerships are the hallmark of community development in the
1990s.
Challenges
In providing this overview, let me assure you that I am no Pollyanna. Community
development is a tough business under any circumstances and, certainly, we have learned
that efforts targeting low- and moderate-income persons or areas raise a multitude of
problems and issues. The evolving community development industry continues to face a
number of significant challenges that could slow or derail its progress. Let me touch on just
a few.
Declining Public Subsidies
One issue that is troubling many community developers is the declining level of public
subsidy funding, especially from federal programs. We are all quite aware that fiscal policy
in the 1990s has focused on an ongoing effort to reduce the federal budget deficit. Spending
cuts have been a necessary and critical part of the process, and the debates will continue to
focus not only on how much can be cut, but also specifically, which programs to cut.
Housing, community, and economic development program resources continue to be
threatened.

But as important, the ongoing budget debates also have brought into focus the question of
how to continue progress on important national goals by using federal spending more
effectively. One objective is to obtain the most public benefit for the least federal dollars.
Consequently, the premium now placed on any public program that helps leverage private
spending and investment will continue to be an important factor. That means that at the local
level, where federal funds are used, the need for collaborative, public/private partnerships
that can demonstrate that they can deploy these limited subsidy funds wisely remains a
priority.
Given these realities, I think I have come to appreciate even more the essential roles that the
private sector, and especially financial institutions, can... and... must, continue to play in
community development and reinvestment.
The Evolving Structure of Banking
The consolidation of banking presents another set of challenges to which the community
development industry must respond. No one can deny that banking's commitment to
community development has grown dramatically since 1977. Banks and thrifts have learned
the community development business and committed the personnel and resources needed to
participate as effective partners. Institutions have developed targeted marketing programs,
specialized loan and investment products, and organizational units devoted exclusively to all
aspects of community development finance.
Consolidation of the financial services industry, however, is raising concerns among
community developers that the resources and personnel devoted to community development
activities may be decreasing in proportion to the increasing size of institutions. When two
institutions with active community development programs merge, the resulting combined
organization, though larger, may have fewer lending officers, relative to total institution
assets, devoted to affordable housing, or fewer loan programs. A bank-owned community
development corporation operating in one community or state may be serving multiple
communities or states following a merger, with the same or only slightly more in resources.
Also, in lieu of having lending officers working at the grassroots level, some institutions are
placing more emphasis on standardized loan products, and are adopting credit scoring
systems on a regional and national basis for many types of loans, including affordable
mortgage loans. This may reflect efforts to streamline the affordable housing loan process
and generate loan volumes. But there are some concerns that it is a one size fits all approach
that may not be as responsive to neighborhood needs as when two competing organizations
offered community development loan products in the same market.
Whether increasingly larger institutions can maintain the level of commitment to affordable
housing and community development, consistent with their increased market power, will
remain a challenge, both for banks and the communities they serve.
Jobs and Housing
Another issue that is affecting the community development industry is the increased
emphasis on economic development and jobs, as part of the more comprehensive approach
to community development I mentioned earlier. The rising tide created by economic growth
does not necessarily lift all boats, though it certainly helps most. Community developers
know better than anyone that even when the economy is doing quite well, some people and
places in America are still left behind.

Although there has been a renewed emphasis on encouraging home ownership in lowerincome neighborhoods, community-based development practitioners have long recognized
that this strategy often cannot succeed unless jobs are created for neighborhood residents,
and commercial and retail services are restored. As illustrated by the shopping center
example I previously noted, there is an emerging movement to focus increased public and
private resources on economic development, job creation, and commercial revitalization in
lower-income neighborhoods. In communities around the country, neighborhood
organizations that may have started out as essentially housing organizations are moving
resources into economic revitalization activities, creating balanced, comprehensive
strategies and programs. These strategies have great merit, but their impact in the short run
may be to create heavier burdens on community-based groups, as projects become more
complex and require more resources from a broader variety of public and private sources.
This challenge will be played out at the neighborhood level, and it is likely that resources
will continue to be stretched thin.
CRA Redux
In the context of these changes and emerging challenges, let me conclude by returning
momentarily to CRA. There may seem to be no economic rationale for a law like the CRA.
Encouraging banks to enter any particular market -- low- and moderate-income
neighborhoods -- does not, after all, seem to square with an economist's fundamental notions
about how free markets function most efficiently.
We know, however, that some potential markets may go unnoticed or at least unexplored
due to perceived risks, or insufficient information about market participants and potential.
That, I believe, was part of the genesis of CRA.
As an economist, I subscribe to the principle that free markets work best when information
about the economic performance of participants, including their problems and opportunities,
is readily available. The more and better the information about market opportunities, or
unmet needs, the more likely it is that someone will find a way to fill them, at least if there
are no external barriers preventing action.
That general principle is certainly applicable to the banking industry and its relationships
with low- and moderate-income and minority communities. The more the banking
community has learned about low- and moderate-income areas -- largely as a result of their
response to CRA obligations -- the more it has been able to find economically viable ways
to meet the financial needs of consumers and businesses located there.
For any individual business or investor, there is a general reluctance to jump alone into any
market perceived as treacherous or unprofitable. Lending in new areas involves much
uncertainty. A few may see opportunity and take the plunge, but most wait on the sidelines
to see what happens.
What CRA did, in this context, was to make all banks jump in together. That accelerated the
information flow and the learning curve, and has made possible the development of
successful lending and investment strategies that two decades ago might have seemed
unthinkable. In that regard, CRA has made a contribution to the strengthening of the
community development industry and its capacity to access critical financing from the
private sector. The rest, as I've tried to demonstrate here this morning, is history.

Conclusion
But history moves on. There has been a lot of success. Our point, however, should not be to
celebrate, but to help energize the next steps in the evolution of community development.
Given the direction of changes I have described, those steps can and likely will be taken at
the local level, by community-based organizations, financial institutions, public agencies,
and a host of other intermediaries. They will, of course, be working together with new
partners on new ventures in the growing community development industry.
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