Full text of Bridges (Federal Reserve Bank of St. Louis) : Bridges, Fall 2006

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Linking

Lenders

And

Communities

Autumn 2006

P U B L I S H E D Q UA RT E R LY

Exploring Innovation

BY T H E C O M MU N I T Y

Bridges

A F FA I RS D E PA RTM E N T OF
T H E F E D E R A L R E S E RV E
B A N K O F S T. L O U I S

I N DE X

5

Exploring Innovation

8

Specialized
Mor tgages :
Game of Chance?

Spanning the Region
Direct to Mexico

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2

w w w. s t l o u i s f e d . or g

Call for
Session
Proposals

Stored Value Cards: Opportunities, Risks
Stored value cards
resemble a typical debit
card, using magneticstripe technology to store
information and track
funds. However, unlike
traditional debit cards,
stored value cards are
prepaid, providing consumers with immediate fund
availability and little risk
of overdraft. In addition,
there is no physical
account at a financial
institution in the name
of the stored value card
holder. This virtual existence of the card’s backing
raises questions about
FDIC insurance coverage
and consumer protection
regulation coverage.

By Lyn Haralson
Community Affairs Specialist
Federal Reserve Bank of St. Louis

I

n the 1980s, prepaid cards,
as they were called, first
emerged in the longdistance telephone service
market. By the mid 1990s,
large retailers realized the costsaving possibilities of stored
value cards and began issuing
them in place of traditional,
paper gift certificates. Over
the past decade, the stored
value card market has grown
exponentially. Today, stored
value cards are being used
for many purposes, including
payroll, general spending, travel
expenses, government benefit payments, retailer-specific
spending, and employee benefit
and reward payments. Card
issuers include financial institutions, individual retailers,

government agencies and nonbank financial service providers.
Stored value cards fall into
two categories: closed loop and
open loop. (See chart, page 4).
Closed-loop cards can only be
used for the issuers’ products
or for other limited purposes.
Open-loop cards are more
widely accepted and can be
either nonbranded or branded
with a bank association’s logo,
such as Visa, MasterCard and,
most recently, Discover. They
can be used to make purchases
or pay bills virtually anywhere
the brand is accepted.
General Spending, Payroll Cards
Two of the most common
stored value cards issued by
financial institutions are payroll
cards and reloadable general
spending cards.
General spending cards
are typically branded, open

loop and reloadable, allowing
purchasers to load and deplete
funds multiple times during a
specified period.
Many parents are choosing to
provide funds to their teens with
a general spending card instead
of cash. Besides being safer
to carry than cash, these cards
allow parents to easily monitor
their teen’s spending habits by
using online technology.
New Americans and migrant
workers find general spending
cards an inexpensive way to
send money to relatives in their
native countries. Dollars can
be loaded onto the card in the
United States, and the recipient
can access the funds in their
country using a duplicate access
card. Fees for this service average $6 per ATM withdrawal as
opposed to $15 to $40 for the
same transaction using money
continued on Page 2

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transmitter services or traditional wire transfers.
Payroll cards are another
form of stored value card gaining acceptance in the marketplace. For an employer, payroll
cards have a cost advantage.
A typical electronic funds
transmittal (whether direct to a
depository account or a payroll
card) is 20 cents. Conversely,
the cost to process and distribute a payroll check is roughly
between $1 and $2. Cost savings for a full-time employee
for one year range between $20
and $50, depending on the
frequency of pay periods.
Closed-loop payroll cards and
ATM-access-only payroll cards
provide limited access to funds
at a finite number of locations.
Since 2001, the majority of payroll cards issued are branded,
open-loop cards that allow
recipients to withdraw cash
at ATMs, pay bills and initiate
both personal identification
number transactions and signature transactions at point-of-sale
terminals. Branded, open-loop
payroll cards are similar to a
depository account.
Unlike gift cards and general
spending cards, payroll cards
are marketed to employers
versus the end user. Employers
as commercial customers of the
financial institution are often
offered payroll cards as part of a
suite of services.
While cost savings accrue to
the employer, what about the
employee? Employees who
usually opt for a payroll card
are those who do not have a

traditional bank account. It is
estimated that 20 million Americans do not have a traditional
depository account (i.e., checking or savings account). Payroll
cards provide them with a less
expensive way to access their
pay than check-cashing outlets
and money-service businesses.
Payroll cards also provide a less
expensive way to pay bills than
the customary money order.
As with general spending cards,
consumers can request two
cards so family members in

Stored value cards of any type
operate in a virtual reality at the
issuer level. Funds underlying
stored value cards are traditionally commingled and do not
exist in accounts set up under
individual names. Proposed
regulatory changes and guidance
issued by the financial institution regulatory agencies include:
Regulation D—
Reserve Requirements
of Depository Institutions
The Federal Reserve Board’s

Stored Value Card Pricing
Function

Price

Card issuance

$1.00–$9.95

Card re-load

Free–$5.95

Card re-issuance

$1.00–$9.95

Monthly maintenance

Free–$3.00

IRVU

$0.50–$1.00

ATM

Free–$2.00

Bill payment

$0.50–$1.50 per transaction

Dormancy Fee

$5.00–$15.00

Activity Statement

$10.00–$25.00

Industry standard pricing can help consumers make informed decisions and help potential
financial institution suppliers structure a profitable program. (Source: University Bank)

other countries have access to
the payroll account.
Regulatory Considerations
The rapid growth of the stored
value card, both in volume and
varied uses, has raised questions
with the regulatory agencies.
This trend triggers discussion
of whether these entities should
be considered deposit accounts
for purposes of insurance and
consumer regulation coverage.

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Regulation D sets uniform
requirements for reserves that
depository institutions are
required to maintain for facilitating the implementation of
monetary policy by the Federal
Reserve System. Institutions
should note that, to the extent
stored value or other electronic
money represent a demand
deposit or transaction account,
the provisions of Regulation D
would apply to such obligations.

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Regulation E—
Electronic Funds Transfer Act
The Federal Reserve Board’s
Regulation E implements the
Electronic Funds Transfer Act.
The act provides an array of
protections to consumers who
use electronic funds transfer
(EFT) systems. A transaction
involving stored value products is covered by Regulation E
when the transaction accesses
a consumer’s account, such
as when value is loaded onto
the card from the consumer’s
deposit account at an electronic
terminal or personal computer.
On Aug. 24, the Federal
Reserve Board announced its
approval of a final rule that
states payroll card accounts are
covered by Reg E. The rule is to
become effective July 1, 2007.
Payroll card accounts can be
set up either directly or indirectly by employers on behalf
of employees. The accounts
receive electronic fund transfer
infusions of an employee’s salary, wages or other compensation. They are managed by the
employer, a third-party processor, a depository institution or
other entity.
The rule does not require
financial institutions to furnish
periodic statements for payroll
card accounts as long as they
provide the consumer with
a telephone number to call
to receive the account’s balance. The institution must also
provide a web site at which the
consumer can access at least a
60-day history of the account’s
transactions. At the consumer’s
request, an institution must

also provide a written history
of transactions occurring in the
preceding 60 days.
Regulation BB—
Community Reinvestment Act
The Federal Reserve Board’s
Regulation BB encourages
regulated financial institutions
to meet the credit needs of their
entire community, including
low- and moderate-income
neighborhoods, consistent with
the safe-and-sound operation of
the institution.
Payroll cards have the potential to qualify for credit under
the community development
service test of the Community
Reinvestment Act (CRA) if
they are free or low-cost and
improve access to financial
services for low- or moderateincome individuals.
Remittance service provided
either through general spending
cards or payroll cards also has
the potential to qualify for
CRA credit.
Regulation DD—
Truth in Savings Act
The Federal Reserve Board’s
Regulation DD implements the
Truth in Savings Act, which
helps consumers compare
deposit accounts offered by
depository institutions, principally through the disclosure
of fees, the annual percentage
yield, the interest rate and other
account terms.
Payroll cards that operate similarly to courtesy pay
or bounce-proof checking
accounts fall under the purview
of this regulation.

Stored Value Card Types, Features and Capabilities
Open Loop

Closed Loop

Unbranded

Branded

Point-of-sale purchases

Yes—Within issuer’s network
(can’t use a Starbucks card at
grocery store)

Yes—Anywhere with PIN keypad
or ATMs

Yes—Anywhere with Visa,
MasterCard, American Express
or Discover logo

Reloadable

Depends on issuer and type
of card

Depends on issuer and type
of card

Depends on issuer and type
of card

Direct Deposit

No

Yes—Depends on set-up

Yes—Depends on set-up

Risk of overdraft

None

None

Slight—Depends on
reconciliation

Closed Loop

Open Loop

Can only be used for the issuer’s
products or for limited purposes.
Examples include the Starbucks
card, or a Borders gift card.

Similar to a debit card but without a linked account. They allow
a variety of uses, including bill payment, ATM withdrawals, and
point-of-sale purchases from grocery stores and other retailers.
Open-loop cards can be branded or unbranded.
Unbranded cards are linked to point-of-sale and ATM
networks and use PIN-based technologies for sales
and withdrawals. Examples include grocery store PIN
networks and public benefit cards.
Branded cards carry the Visa, MasterCard, Discover or
American Express logo and use signature-based technologies that allow users to make purchases anywhere
the brand is accepted—retailers, restaurants, auto-repair
shops, online retailers, etc.
(Source: National Community Investment Fund.
www.ncif.org)

FDIC Insurance Coverage
Equally difficult to address
in regard to stored value cards
is the issue of Federal Deposit
Insurance Corp. (FDIC) insurance of the underlying value
of stored value cards. In April
of 2004, the FDIC published
notice and comment of a proposed rule to clarify the meaning of “deposit” as it relates to
funds underlying stored value
cards at insured depository
institutions.
In August 2005, the FDIC
issued a proposed rule to clarify

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at

whether funds underlying stored
value cards, such as employee
payroll cards or retail store gift
cards, qualify as deposits for
insurance coverage purposes.
The FDIC considers the funds
that underlie stored value cards
deposits if a depository institution has an obligation to either
hold or transfer the funds. In
that case, the funds qualify for
insurance coverage following the
same guidelines that apply to
other deposits.
Comments on this rule were
due by Nov. 7, 2005. To date,

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the final rule has not been issued.
To read more on the proposed rule, go to: www.fdic.
gov/regulations/laws/federal/
2005/05cstoredval88.pdf.
USA PATRIOT Act/Bank Secrecy
Act/Anti-Money Laundering Laws
The USA PATRIOT Act
requires financial institutions
to be diligent in documenting
customer identification. Financial institutions issuing payroll
cards or general spending
cards should require adequate
continued on Page 4

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documentation to verify the
identity of the card recipient.
In the case of payroll cards,
banks should conduct due
diligence with their commercial
customer to ensure the controls
of the company are adequate to
verify identity.
Another implication of the
act applies to payroll cards and
general spending cards where a
second card is issued for a family member in another country.
The challenge is in verifying the
identity of individuals living
outside the United States. To
aid in this process, financial
institutions should engage in
effective dialogue and communicate control needs to their
partnering institutions in the
other country.
The Bank Secrecy Act (BSA)
requires financial institutions
and other financial service
providers to keep certain paper
trails on their customers’ transactions. Issuers, sellers and
redeemers of stored value cards
are for the most part exempt
from BSA. However, they are
subject to certain reporting
requirements under BSA to
include cash transactions in
excess of $10,000. Due diligence must be employed and
controls put in place to prevent
money laundering through
these instruments.
Other Considerations
State payroll laws vary and
should be reviewed by financial
institutions to ensure compliance in the structure of any
payroll card offerings. Some

states have laws requiring that
employees have access to pay
at no cost. Other laws govern
whether direct deposit can be
offered or mandated.
The person who receives a
gift card or general spending
card and never uses it up can
cause a problem for financial
institutions in states where
strict laws govern abandoned
property. Despite the card
expiring, there are dollars left
unspent. Financial institutions
should follow the same procedures they would in the case
of an abandoned depository
account to ensure compliance
with the law.
Concerns for Consumers
Consumers who choose to
use stored value cards should
understand how they work and
be aware of possible fees.
Stored value cards may have
entrance/activation fees, maintenance fees, point-of-sale fees,
domestic ATM transaction fees
(in and out of network), transaction limit fees, bill payment
fees, phone or online transaction fees, reload fees, money
transfer fees, international
ATM transaction fees, inactivity
fees, overdraft fees, overdraft
protection fees, payday advance
fees, credit-reporting fees and
dispute fees.
The issuers of gift cards and
general spending cards can
easily disclose fees at the time
of purchase to the purchaser.
However, the transfer of these
cards from the original recipient
to another party raises disclosure concerns regarding the fees

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and other terms associated with
the card, such as the expiration
date, the amount or existence
of maintenance or other types
of fees, and information about
where to call for assistance.
Cost-conscious consumers
should compare the cost of
using the more common reloadable general spending cards in
lieu of a checking account or
other alternative financial services, such as a check-casher or
money-transfer service. Checking account fees, money order
purchase fees and check cashing
fees should all be considered.
Conclusion
For financial institutions,
the opportunity to reach new
customers or expand services to
existing customers has a positive
potential for the bottom line.
However, financial institutions
developing a stored value card
product must consider how
they will provide disclosures,
notices, periodic statements and
error resolution procedures.
A survey of stored value card
providers conducted by the
Center for Financial Services
Innovation was inconclusive as
to what makes a stored value
card product profitable. However, a common denominator
for most was scale.
To develop a profitable stored
value card system structure,
providers should complete a
market analysis to determine
card volume potential, card
load potential, anticipated
frequency of use, break-even
analysis of frequency of use and
potential float volume.

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REFERENCES

“Prepaid Cards: How Do They Function? How Are They Regulated?”
2004. Mark Furretti. Federal
Reserve Bank of Philadelphia,
conference summary.
Legislative Update. Stored Value Cards
and Payroll Cards. Payment Cards
Center. Federal Reserve Bank of
Philadelphia.
“Stored Value Cards: An Alternative
for the Unbanked?” Office of
Regional and Community Affairs
of the Federal Reserve Bank of
New York.
Community Developments Insights.
Paper from the Office of the
Comptroller of the Currency,
Community Affairs Department.
June 2005. Samuel Frumking,
William Reeves and Barry Wides
et al.
“Banking the Poor: Policies to Bring
Low-Income Americans Into the
Financial Mainstream.” Michael
S. Barr. Metropolitan Policy Program. The Brookings Institution.
“Stored Value Cards: Challenges
and Opportunities for Reaching
Emerging Markets.” April 2005.
Working paper. Center for Financial Services Innovation. Kathy
Jacob, Sabrina Su, Sherrie L.W.
Rhine, and Jennifer Tescher.
“Prepaid Cards: An Important
Innovation in Financial Services.”
Consumer Interests Annual. 2006.
Julie S. Cheney and Sherrie
L.W. Rhine.

Specialized Mortgage Products: A Game of Chance?

T

hose returning to the
home-buying market after
several years will be surprised by the baffling array of
mortgage products. Choosing
the right mortgage is no longer
as simple as knowing the difference between a conventional
and FHA loan or a fixed rate
versus adjustable rate.
On the contrary, specialized
products such as the “piggyback”
and “interest-only” mortgage are
being offered to all segments of
the market from the first-time
home buyer to the more sophisticated investor.
Many of these products have
been developed in response to
the demand from home buyers for an affordable mortgage
that requires little or no down
payment on a home purchase.
Other features offer more flexibility to accommodate the lifestyle changes of certain market
segments over time. Although
this industry shift has accounted
for a significant increase in
home ownership, what potential
pitfalls await home buyers? Is
the flexibility worth the risk?
Piggyback Loans
A piggyback loan is a combination of a first and second
mortgage closed at the same
time. Often involving 100 percent financing, the first mortgage
loan can cover 80 percent of the
cost of the home with a “piggyback” second mortgage valued at
the remaining 20 percent.

Corp. (MGIC), home buyers
with FICO scores of 770 or
higher account for 80 percent
of the lost volume. These borrowers are considered to be the
most desirable market segment.
Mortgage insurers are fighting
back by pushing to make PMI
tax deductible for families earning up to $100,000 by developing new products and by urging
home buyers to compare the
advantages and disadvantages
of financing with a piggyback
loan versus a PMI loan.

The most common type,
however, is the 80-10-10 in
which the second mortgage
product accounts for 10 percent
of the purchase price and the
borrower invests 10 percent as
a down payment on the loan.
Although the second mortgage carries a higher rate than
the first mortgage and extends
for a shorter term, the advantage of the piggyback mortgage
is that the interest expense
is potentially tax-deductible
while the mortgage insurance
payment (typically required for
loans exceeding 80 percent of
the home’s value) is not.
According to a survey by the
National Association of Realtors, 25 percent of all home
buyers financed 100 percent

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of the purchase price of their
home. Forty-two percent of
first-time home buyers bought
with no money down.
Popular Alternative to Private
Mortgage Insurance
The popularity of the piggyback loan has been partly
fueled by home buyers who
want to avoid private mortgage
insurance (PMI). PMI is circumvented by keeping the first
mortgage amount at 80 percent
or less, and taking out a second
mortgage for the remainder.
Piggyback loans have taken
40 percent of the market share
from private mortgage insurers. According to Patrick Sinks,
executive vice president of
Mortgage Guaranty Insurance

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Mortgage Insurers
Offer New Products
In response to the piggyback
loan boom, MGIC developed its
SingleFile lender-paid mortgage
insurance product. Instead of
the borrower paying PMI, the
lender pays the mortgage insurance premium, but charges the
borrower for this expense either
in the form of a higher interest rate on the mortgage loan,
a mortgage origination fee or
a combination of both. When
the lender charges a higher rate
to cover the mortgage insurance
premium, it is recast into a taxdeductible interest expense for
the borrower.
SingleFile is cheaper than
other mortgage insurance
because it is a low-risk product
offered to borrowers who have
excellent credit. Eligibility
requirements include a 700
credit score or higher and a
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total debt-to-income ratio of
45 percent or less. The discounted, lender-paid mortgage
insurance premium is 40 to 65
percent less than regular borrower-paid insurance.
Interest-Only Loans Attract Both
Wealthy and Low-Income Borrowers
One of the fastest growing
adjustable-rate products in the
last two years is the interestonly mortgage. As the name
implies, interest-only mortgages
allow the borrower to pay only
interest on the mortgage in
monthly payments for a fixed
term of usually five to 10 years.
At the end of the fixed period,
the loan is fully amortized over
the remaining term of the loan.
Historically the interest-only
mortgage has been considered
a product for savvy, wealthy
borrowers who prefer to use the
principal portion of their payment for more lucrative investments, such as the stock market.
It also provides flexibility for
individuals with cyclical income
(commissions, for example) who
can make lower payments during the lean months and repay
principal when their incomes are
higher. Another good fit is with
young professionals who want to
leverage future income potential
for a larger home today.
Although not a new product,
the interest-only mortgage has
made a comeback in recent
years as mainstream borrowers
try to combat high home prices.
Lower interest rates and more
innovative financing options
have increased the demand for

housing and, in many markets, driven housing prices up.
Consequently, home buyers are
seeking ways to borrow more
money without increasing their
payment or income.
Interest-only loans are especially popular in markets where
home prices are appreciating
fastest, including California,
Arizona and Florida. However,
Georgia led the nation in share

55 percent of mortgages issued
in 2004 were interest only.
The lure of the lower payment does come with increased
risk for the borrower. First,
borrowers are gambling that
their incomes will rise enough
to cover the future increase in
monthly payments. Second,
they are counting on market
appreciation rather than debt
retirement to build equity in

Percentage of Interest-Only (I-O) Loans in
the Federal Reserve’s Eighth District States
State
Arkansas

Illinois

Indiana

Kentucky

Mississippi

Missouri

Tennessee

New Single- I-O Refinance I-O Total
Origination I-O
Family
Home
Origination
Year
Mortgages (%) Mortgages (%) Count (%)
2004

7.2

4.6

5.7

2005

11.2

6.7

8.9

2004

13.7

9.5

11.3

2005

21.3

15.4

18.2

2004

6.0

4.6

5.2

2005

9.1

6.6

7.8

2004

14.6

7.8

10.7

2005

16.7

9.8

13.2

2004

8.2

4.2

6.1

2005

8.8

4.4

6.8

2004

9.1

6.5

7.6

2005

13.5

9.8

11.5

2004

15.3

8.8

12.0

2005

17.6

9.4

14.1

Source: First American LoanPerformance MBS/ABS securities database. (Does not
include agency or bank portfolio loans.)

of interest-only loans in 2004
even though home prices did
not appreciate as significantly as
in other states. More than half
of the “purchase” mortgages
in Georgia were interest only,
compared with less than onethird nationwide. In Atlanta,

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their homes. Third, they are
assuming the risk of possible
hikes in interest rates after the
fixed term expires as well as the
potential for payment shock.
New Twist to Interest-Only Option
An interest-only option can

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be attached to both fixed-rate
and adjustable-rate mortgages
(ARMs). Interest-only ARMs
are gaining in popularity, but
misperceptions about this
product’s features can be costly
for uninformed borrowers.
One common misunderstanding is that the quoted interest
rate on an interest-only ARM is
fixed for the entire interest-only
period. This is not the case.
The interest-only period is the
period during which the borrower is allowed to pay interest
only. An ARM with an interestonly option also stipulates a time
limit for the initial loan rate.
In the case of ARMs with a
very low initial rate, the interest-only period is always longer
than the initial rate period. For
example, an ARM with an interest-only option for 10 years
may have an initial rate period
of six months. So a 5 percent
rate today may rise to 7 percent
in six months. Consequently,
borrowers should not shop for
a mortgage solely based on the
quoted rate without assessing
the overall risk of the product.
A Cautionary Note
This new wave of real estate
business poses risks to two segments of potential home buyers.
The first consists of individuals
who see real estate as a better
way to accumulate wealth than
investing in the stock market.
They sell quickly for capital gain
and refinance to “put equity
to work,” thus growing equity
through property appreciation
rather than by paying down their
loan balance. However, this

tactic ignores the fact that mortgage amortization is in the home
owner’s control, while appreciation is not. Even the savviest
borrower must bear this in mind.
If the value of the home does
not appreciate as anticipated, the
buyer will be liable to pay the
difference out of pocket.
Individuals who want to
realize the American dream
of home ownership, but have
not accumulated the savings
for a down payment or need a
lower payment to qualify for
a mortgage product, are also
drawn to these loans. Young
professionals who can count on
rising salaries or executives who
receive annual bonuses may
run less risk than others, but
those who utilize one of these
products to buy a house they
cannot otherwise afford are taking a gamble. These loans are
not designed to address affordability issues, and thus they can
set up home buyers for failure.
Although these products may
permit home purchase for little
or no money down, allow for
smaller initial payments or both,
they all have costs, and they
all have risks. These products
should be used for their intended
purposes. Consumers must shop
to see which if any of these loans
will work best for them.

New from the Federal Reserve
Kids and Money is a new booklet from the Federal Reserve Bank
of St. Louis that helps parents teach their school-age children
how to manage money.
The booklet zeroes in on planning, budgeting and saving and
suggests fun family activities that will encourage children to
think about saving and spending responsibly.
Individuals or organizations can order Kids and Money free of
charge by calling:
314-444-8761 in St. Louis;
501-324-8296 in Little Rock, Ark.;

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502-568-9202 in Louisville, Ky.; and
901-579-4101 in Memphis, Tenn.
The booklet is also available online at
www.stlouisfed.org/community/other_pubs.html

The Rise of Personal Bankruptcy
Oct. 24, 2006, 7:30 a.m. to 9:30 a.m. (breakfast buffet meeting)
Hilton St. Louis at the Ballpark, One South Broadway, St. Louis, MO 63102
The number of personal bankruptcies in the United States has been escalating
dramatically in the past 25 years. For most, declaring bankruptcy happens after
an unexpected financial shock, such as divorce or medical bills, coupled with high
levels of debt.
Thomas A. Garrett, research officer at the Federal Reserve Bank of St. Louis, will
discuss his study on the role other factors—such as availability of credit,
bankruptcy laws and decreased consumer savings—play in making Americans even more susceptible to bankruptcy. Garrett also will present detailed
statistics for counties in the Fed’s Eighth District.

This article was written by
Sibyl Howell, regional community development manager at the
Federal Reserve Bank of Atlanta.
Reprinted with permission from
Partners, Volume 15, Number 3,
2005, the Atlanta Fed’s Community Affairs newsletter.

Judge Barry S. Schermer of the U.S. Bankruptcy Appellate Panel for the
Eighth Circuit will speak about bankruptcy legislation passed in 2005 and
about who is filing for bankruptcy.
For information, contact Cynthia Davis at 314-444-8761. To register online,
visit www.stlouisfed.org/community/conferences.html

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the Region

Spanning
Bowling Green, Quincy
Get Nod from DollarWise
The cities of Bowling Green,
Ky., and Quincy, Ill., in the
Fed’s Eighth District have been
awarded $15,000 grants to
teach financial education to
consumers.
Countrywide Financial Corp.
donated $1 million to sponsor
the grants for five years. Made
under the auspices of the U.S.
Conference of Mayors’ National
DollarWise Campaign, the
grants are intended to expand
local programs that promote
financial education.
Bowling Green will use its
DollarWise Capacity Grant in
several ways: to increase home
ownership among low- and
moderate-income residents
by teaching them about credit
scores and the home-buying
process; to reduce personal
bankruptcies by providing
financial education classes for
residents; and to fund a personal finance program for high
school students.
In Quincy, the money will
be used to fund the Paycheck
Partnership, a program developed by a coalition of employers, educators and city officials
working with the Federal
Reserve Bank of St. Louis.
The goal is to increase financial
literacy among teenagers and
college students and to decrease
student debt. The Paycheck
Partnership also sponsors college students to act as teachers

The region served by the Federal Reserve Bank of

and mentors
St. Louis encompasses all of Arkansas and parts of Illinois,
about financial
Indiana, Kentucky, Mississippi, Missouri and Tennessee.
issues.
The U.S. ConferThe ASBDC created the award loans of up to $5,000 through
ence of Mayors is the
to emphasize the economic
the ECD-BERO Micro Loan
official nonpartisan organizaimportance of entrepreneurship
Program to help with startup or
tion of cities with populations of
and to encourage more comexpansion costs.
30,000 or more. There are 1,139
munities to engage in economic
To apply, potential borrowsuch cities in the country today,
development planning with a
ers will need a business plan
each represented in the conferfocus on local businesses.
and must be willing to attend
ence by its mayor.
In addition, Paul Shuffield
business training workshops at
with Southern Financial Partners Tennessee Small Business DevelArkansas SBDC Recognizes
in Arkadelphia was presented
opment Centers, with locations
Entrepreneurial Support
with the District Director’s
throughout the state. The
The City of Arkadelphia is
Award for Service to Small Busicenters will provide technical
the first recipient of the Arkannesses by the U.S. Small Busiassistance to applicants, includsas Entrepreneurial Community
ness Administration. Among
ing business plan development
of the Year Award presented
his other accomplishments,
and business training. Appliby the Arkansas Small Business
Shuffield has been involved
cants must be located in a rural
Development Center (ASBDC).
in the Rural Entrepreneurship
area as defined by USDA and
The award recognizes ArkadelInitiative in Arkadelphia.
classified as a microenterprise
phia’s organized efforts to
Both awards were presented
(a for-profit small business with
assist and encourage entrepreat the 16th annual Arkansas
five or fewer employees, one of
neurial activities.
Small Business Awards Lunwhom owns the business).
Arkadelphia’s community
cheon this past summer.
The ECD-BERO Micro
and economic development
For more information on the
Loan Fund is financed with a
strategy includes nurturing new
awards or the honorees, contact
$125,000 investment through
and existing small businesses.
Linda Nelson at linda.nelson@
the USDA Rural Business EnterA central component of these
sba.gov.
prise Grant program. Over the
efforts is the completion of the
next three years, 25 to 30 loans
Rural Entrepreneurship InitiaNew Loan Fund Set Up
are expected to be allocated
tive survey. In 2005, the Arkafor Tennessee Entrepreneurs
with additional loans made as
delphia Chamber of Commerce,
The state of Tennessee and
loans are repaid.
the ASBDC, the Clark County
the Department of Agriculture
For more information, contact
Industrial Council, the Fed(USDA) have teamed up to
Michelle Proctor of the Tenneseral Reserve Bank of St. Louis,
launch a new revolving loan
see Department of Economic and
Henderson State University and
program for rural microenterCommunity Development’s BusiSouthern Financial Partners
prises in the state. Beginning
ness Services Division by e-mail,
joined forces to conduct the
in October 2006, the Tennessee
michelle.proctor@state.tn.us.
survey. Survey results are being
Department of Economic and
used in economic development
Community Development’s Busi- Tax Credits Available
planning to encourage business
ness Enterprise Resource Office
to Louisville Companies
retention and expansion.
(ECD-BERO) will administer
Republic Bank and Louisville

LINKING

LENDERS

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COMMUNITIES

IRS Offers Taxpayers
New Refund Program
Metro Government have
partnered to create a $4 million New Market Tax Credit
(NMTC) Loan Fund to support
economic growth in lowincome areas. Through this
fund, small businesses will be
encouraged to expand, add new
jobs and improve Louisville’s
economically distressed areas.
Proposed projects that demonstrate the greatest positive
community impact and the
greatest need for funding will
qualify for loans, which will
range from $250,000 to $1 million. Applications for the funds
are available through Republic
Bank, Louisville Metro’s Development Authority or at Louisville Development Bancorp’s
web site, www.morethanabank.
com. Click twice on New
Markets Tax Credits. For
details on this program, contact
Andy Powell of Republic Bank
at 502-561-7118 or apowell@
republicbank.com.
Trucker Training in Kentucky
Helps Fill Industry Void
A new Driving for Inner
City Development workforce
initiative recently held its first
graduation ceremony for disadvantaged students.
The truck-driving workforce
program, funded by $619,317
from the state of Kentucky,
graduated seven students, who
are now full-time employees for
C.W. Johnson Xpress trucking
company, a vested partner in

the training program.
Jefferson Community & Technical Colleges, the Career Academy and other local community
development agencies partnered
to establish curriculums that
prepare West Louisville residents for careers in the truck
driving industry. The curriculums combine technical training
with a series of “wraparound
services,” including assessments, counseling, and job and
entrepreneurial opportunities.
The American Trucking Association says the national shortage of drivers is nearly 80,000
and growing. KentuckianaWorks, the region’s workforce
investment agency, estimates
a need for more than 12,000
tractor-trailer drivers in the
region by 2012 and shows that
drivers in the area currently
make median annual salaries of
nearly $32,000, with more than
$11,000 in benefits.
To learn more about Driving
for Inner City Development,
contact Gary Alexander at
502-410-6423.
Local Organizations
Receive CDFI Funds
Several organizations in the
Federal Reserve’s Eighth District
states are among 73 recipients
of federal Community Development Financial Institutions
(CDFI) Fund awards.
In August, the CDFI Fund
awarded $26,373,900 to organizations across the country

On

the

internet

at

that serve economically distressed communities, including:
• Enterprise Corporation of
the Delta, Jackson, Miss.,
$585,000;
• Federation of Appalachian
Housing Enterprises, Berea,
Ky., $585,000;
• Mountain Association for
Community Economic
Development, Berea, Ky.,
$585,000;
• The Illinois Facilities Fund,
Chicago, Ill., $585,000;
• Southern Financial Partners, Arkadelphia, Ark.,
$585,000;
• Dallas/Fort Worth Capital Fund, Jackson, Miss.,
$100,000; and
• Kentucky Habitat for
Humanity, Louisville, Ky.,
$99,895.
These institutions are certified
by the CDFI Fund as community development financial
institutions or CDFIs. They
provide capital, credit and basic
financial products, such as
savings and checking accounts;
and technical assistance, such as
financial education, to community residents and businesses.
For a list or other information regarding these awards,
visit the fund’s web site at
www.cdfifund.gov.

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The Internal Revenue Service
(IRS) recently announced a new
program that will allow taxpayers who use direct deposit to
divide their refunds in up to
three financial accounts. The
program will take effect in
January 2007.
According to the IRS, more
than three-quarters of the
nation’s taxpayers receive
refunds each year. Last year,
the average refund was $2,171.
By using a new form, Form
8888, taxpayers will be able to
choose up to three accounts—
such as checking, savings
and retirement accounts—for
refund deposits.
The new split-refund option
will be available to all individual
filers, whether they file Forms
1040, 1040A/EZ, 1040NR or
any of the other 1040 series
forms. Taxpayers who want all
their refund deposited directly
into one account can still use
the appropriate line on the
Form 1040 series.
An IRS spokesman said
the split-refund program is
intended to encourage consumers to save more and to open
depository accounts.
The IRS will work with
its Stakeholder Partnerships,
Education and Communication
(SPEC) team to collaborate with
IDA programs, VITA sites and
nonprofit organizations. SPEC
works with 60 national partners
and 290 community coalitions.

Fed Product Helps Banks Serve Mexican Immigrants

M

exican immigrants
working in the United
States send at least $20
billion annually to family members in their home country. The
bulk of these transactions (called
“remittances”) are made through
storefront money-transfer services, which, on average, charge
the sender about $10 in fees for
a $300 transfer.
Recently, the Federal Reserve
Banks and Banco de México, the
central bank of Mexico, introduced Directo a México (Direct
to Mexico), a service banks
can use to send customers’
funds from the United States to
Mexico more quickly and economically. Banks that use the
service can offer remittances for
less than $5 a transaction.
As Federal Reserve Chairman
(formerly Fed Governor) Ben
Bernanke said in 2004, mainstream financial institutions that
provide remittance services have
a potentially effective method

Have you

Heard
Entrepreneurship Focus
of New Online Project
The Social Science Research Network
recently announced the creation of the
Entrepreneurship Research & Policy
Network (ERPN).
Sponsored by the Ewing Marion Kauffman Foundation, ERPN is an online community for research on entrepreneurship.
The foundation also is providing free ERPN

of attracting unbanked immigrants to other services, such as
direct deposit services, savings
accounts and consumer loans.
Targeting remittance services
to consumers who need them
can be difficult because as
many as half the Mexicans in
the United States do not regularly use a bank for remittances
or any other service, according
to Larry Schultz, vice president
in the Federal Reserve’s Retail
Payments Office.
Directo a México helps banks
reach these consumers and
overcome other barriers. The
service that supports Directo a
México, FedACH International
Mexico Service, is priced so
that U.S. banks can offer it at
competitive rates. ACH is a
low-cost payments channel and
is already in place in almost
every financial institution in the
United States. For this reason,
there are no setup costs for
most banks that choose to offer

the program. ACH also uses
standardized formats that make
it possible for the payments
to be channeled to Mexico
in an automated fashion and
delivered electronically to bank
accounts there.
Financial institutions also
receive a Directo a México
promotional tool kit that is
customizable. It includes Spanish-language templates for color
brochures and posters, lobby/
tent cards, statement inserts,
foreign exchange information
and text for a radio spot. The
program’s Spanish-language promotional templates help small
and medium-sized financial
institutions produce professional
materials with minimal investment. The materials feature the
consumer benefits that the banks
can provide using the remittance
program: security, speed, low
cost and conveniences.
Remittances present a strong
market opportunity for financial

subscriptions to U.S. universities and notfor-profit institutions for the first year.
To learn more, visit www.ssrn.com and
click on ERPN.

The Home Ownership and Equity Protection Act of 1994 restricts credit terms,
such as balloon payments, and requires
additional disclosures when total points
and fees payable by the consumer exceed
the fee-based trigger or 8 percent of the
total loan amount, whichever is larger.

Federal Reserve Adjusts
Reg Z Disclosure Trigger
The Federal Reserve Board recently
made its annual adjustment to the dollar
amount that triggers additional disclosure
requirements under the Truth in Lending
Act (Reg Z) for home mortgage loans that
bear rates or fees above a certain amount.
The amount of the fee-based trigger
has been adjusted to $547 for 2007. The
adjustment is effective Jan. 1, 2007.

LINKING

LENDERS

Credit Reporting Firms
Announce New Score
A new credit score was introduced
earlier this year by the nation’s three consumer credit reporting companies: Equifax,
Experian and TransUnion.
VantageScore was developed in
response to market demand for a more

0

AND

COMMUNITIES

institutions, but the decision to
enter this line of business is up
to each bank and is subject to
the same due diligence as any
new product. Before offering Directo a México, Elizabeth
McQuerry, assistant vice president with the Federal Reserve
Retail Payments Office, suggests
that banks consider compliance
issues, such as account opening requirements and ceilings
for payment amounts. Offering remittance services, such
as Directo a México, may help
financial institutions meet their
Community Reinvestment Act
requirements since they are
providing a low-cost financial
product to immigrants traditionally not using mainstream
financial services and products.
More information on Directo a
México is available at: www.frb
services.org/Retail/intfedach.html.

consistent and objective approach to
credit scoring methodology across the
three credit reporting companies, a statement from the companies said. Under the
new scoring system, credit score variance
between the companies will be attributed
to data differences within each of the
three consumer credit files and not to the
structure of the scoring model or data
interpretation.
The new system is expected to provide
consumers and businesses with a predictive, consistent score that is easy to
understand and apply, the statement said.
Scores will range from 501 to 990.

Resources
2004 Illinois Community Lending
Fact Book—Published by Woodstock

Institute, this statewide resource for
mortgage-lending and home-buying trends
includes statistics on low- and moderate-income home buying and high-cost
lending. The book features information
on the top metropolitan areas, including
Springfield, Peoria, Champaign-Urbana,
Bloomington-Normal, Rockford, the Quad
Cities, Kankakee and Decatur in Illinois
and St. Louis in Missouri. Information
for individual metropolitan areas can be
found online. The books can be purchased
online for $25. Visit www.woodstockinst.
org/factbook.

Farmers Market Resource Guide—

The USDA Agricultural Marketing Service’s
guide lists grants, programs and other
financial and informational resources available from public and private organizations.
It is available online at www.ams.usda.gov/
farmersmarkets/Consortium/Resource
Guide.htm or in printed form by contacting
the Agricultural Marketing Service in Washington, D.C., at 202-720-8317.

Bridges
Moving Home: Manufactured Housing
in Rural America—Although fewer than

Community Development Financial
Institutions: Providing Capital, Building Communities, Creating Impact—

25 percent of all homes in the United
States are located in rural areas, half of all
manufactured houses are located there. This
study from the Housing Assistance Council
takes a look at who purchases manufactured
housing, how the purchases are financed,
public perception of manufactured housing
and other issues. The study is available
online at http://216.92.48.246/infoReports
Alpha.php#movinghome. Printed copies
are available for $3 each, to cover postage
and handling, from Luz Rosas at the Housing
Assistance Council, 202-842-8600, ext. 137.

The publication analyzes data from 517
community development financial institutions
(CDFIs) for the fiscal year 2004. An industry
overview and five supplemental brochures
provide in-depth analysis of community
development banks, community development credit unions, community development
loan funds, community development venture
capital funds and microenterprise funds.
The publication is the work of the CDFI Data
Project, an industry collaborative supported
by the Fannie Mae Foundation, the Ford
Foundation and the John D. and Catherine
T. MacArthur Foundation. Project partners
include the Aspen Institute, Association of
Enterprise Opportunity, Coalition of Community Development Financial Institutions,
Community Development Venture Capital
Alliance, CFED, National Community Investment Fund, National Federation of Community Development Credit Unions,
and Opportunity Finance Network. Visit
www.opportunityfinance.net/customer/
home.php for more information.

Reaching New Heights—The National

Congress for Community Economic
Development has released its fifth
national census measuring the quantitative achievements of community-based
development organizations. The census
shows significant increases in home and
apartment production, commercial and
industrial development and job creation
by community development organizations.
Read the report online at www.ncced.org.

Calendar
October

November

December

11

15-17

7

Leading for Change: Toward the Greater
Good—Louisville, Ky.
Sponsor: Center for Nonprofit Excellence
(Sixth Annual Leadership & Awards Conference)
www.cnpe.org

Church-Based Community Development
Training Symposium—Ft. Lauderdale, Fla.
Sponsors: BB&T, Freddie Mac
www.bbandttraining.com or 704-954-1108

Community Development Roundtable—
Pine Bluff, Ark.
Sponsor: Federal Reserve Bank of St. Louis
www.stlouisfed.org/community/
conferences.html

28
Women’s Money Matters Workshop—
Crystal City, Mo.
Sponsors: University of Missouri Extension,
Federal Reserve Bank of St. Louis
www.stlouisfed.org/community/
conferences.html

30-Nov. 2

16-17
Arkansas Venture Conference—Rogers, Ark.
Sponsor: Arkansas Venture Forum
www.arkansasventureforum.com

30
Mid-South Delta Summit—Tunica, Miss.
Sponsor: Federal Reserve Bank of St. Louis
www.stlouisfed.org

The Power of Opportunity—Washington, D.C.
Sponsor: The Opportunity Finance Network
www.opportunityfinance.net

11-15
NeighborWorks Training Institute—
New Orleans
Sponsor: NeighborWorks
www.nw.org/network/home.asp

January
31-Feb.2
2007 Community Development
Conference
Sponsor: Missouri Community
Development Society
www.mocds.org

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Bridges is a publication of the Community Affairs department of the Federal
Reserve Bank of St. Louis. It is intended
to inform bankers, community development organizations, representatives of
state and local government agencies and
others in the Eighth District about current issues and initiatives in community
and economic development. The Eighth
District includes the state of Arkansas
and parts of Illinois, Indiana, Kentucky,
Mississippi, Missouri and Tennessee.
Glenda Wilson
Community Affairs Officer, Assistant
Vice President and Managing Editor
314-444-8317
Linda Fischer
Editor
314-444-8979
Community Affairs staff
St. Louis:

Matthew Ashby
314-444-8891
Jean Morisseau-Kuni
314-444-8646
Eileen Wolfington
314-444-8308

Memphis:

Ellen Eubank
901-579-2421
Dena Owens
901-579-4103

Little Rock: Lyn Haralson
501-324-8240
Amy Simpkins
501-324-8268
Louisville:

Lisa Locke
502-568-9292
Faith Weekly
502-568-9216

The views expressed in Bridges are not
necessarily those of the Federal Reserve
Bank of St. Louis or the Federal Reserve
System. Material herein may be reprinted
or abstracted as long as Bridges is credited.
Please provide the editor with a copy of
any reprinted articles.
If you have an interesting community
development program or idea for an
article, we would like to hear from you.
Please contact the editor.
Free subscriptions and additional copies
are available by calling 314-444-8761 or
by e-mail to communityaffairs@stls.frb.org.

Call for Session Proposals

Exploring Innovation

We’re looking for breakthroughs in community
development finance, in access to capital,
and in scale and sustainability for community
development organizations.
Do you have an innovate process or result you
would like to share with us? It must relate
directly to community development finance
that most effectively improves communities.
Examples of presentation topics include, but
are not limited to:

DEADLINE TO SUBMIT PROPOSALS:

• How do you encourage innovation in the
community, and under what conditions
does it occur?

Nov. 30, 2006

• How do you build and sustain a highperformance community development
organization?

The Federal Reserve Bank of St. Louis

• How do you measure success in
innovation?

is seeking presentation proposals for a
conference on community development
finance from May 2-4, 2007, in St. Louis.
Share your knowledge, experience
and ideas with your peers!

It’s easy to submit your presentation idea!
Simply fill out the online form at
www.stlouisfed.org/community/innovation.
This site also has more details about possible
topics and selection criteria for proposals.

Exploring Innovation
a conference on community development finance
May 2-4, 2007
St. Louis