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Cascade

No. 43
Summer/Fall 2000

a community development publication of the Federal Reserve Bank of Philadelphia

Predatory Lending

By Governor Edward M. Gramlich*

T

his should be a time of great satisfaction for the advocates of
low-income and minority borrowers. As a result of the good economy, various technological changes,
and innovative financial products,
credit to low-income and minority
borrowers has exploded in recent
years. Between 1993 and 1998, conventional home-purchase mortgage
lending to low-income borrowers increased nearly 75 percent, compared
with a 52 percent rise for upper-income borrowers. Conventional
mortgages to African-Americans increased 95 percent over this period
and to Hispanics 78 percent, compared with a 40 percent increase in
all conventional mortgage borrowing. A significant portion of this expansion of low-income lending ap-

CONTENTS
2
5
6
8
8
9
10
11
12
12
13
16

Message from the Community
Affairs Officer
Does a Consortium Make
Sense?
Pennsylvania Utilities Form
Renewable Energy Funds
Social Compact Develops New
Tools for Analyzing Urban
Neighborhoods
Bank, CDFI Form Economic
Partnership
Philadelphia Fed to Host
Minority Entrepreneurs
Conference
State Tax Credits Proposed for
NJ
Identity Fraud, Microenterprise Are Topics of Fed Videos
FRE Develops Mission
Statement
NJRA Issues Request for
Proposals
Financial Literacy Initiative
Under Way
Calendar of Events

pears to be in the so-called subprime lending market. This market
has expanded considerably, permitting many low-income and minority
borrowers to realize their dream of
owning a home and to have a
chance for acquiring the capital
gains that have so increased the
wealth of upper-income households.
But with the good news there is
also bad news, or at least sobering
news. Just as the expansion of
subprime lending has increased access to credit, the expansion of its
unfortunate counterpart, predatory
lending, has made many low-income borrowers worse off.
The distinction is important.
Subprime lending refers to lending
to borrowers who do not qualify for
“prime” rates, those rates reserved
for borrowers with virtually blemish-free credit histories. Prime loans
are often described as “A” credits,
and the mortgage industry has
adopted a grading scheme for
subprime that extends from A-minus through D. Premiums range
from about 1 point over prime for
A-minus loans to about 6 points
over prime for D loans. These premiums have been questioned, and
some have argued that many lowincome borrowers are still charged
too much; but long-run forces may
eliminate inappropriate spreads.
We would normally expect that premiums in a market as competitive
as mortgage lending would at least
move toward appropriate levels
over time.
This optimistic story goes out

Edward M. Gramlich
the window for what is known as
predatory lending. Because the
practices are shady, information is
incomplete and anecdotal. No one
knows how significant a problem,
national or local, that predatory
lending really is. But we hear distressing reports of abusive practices
that include outright fraud, excessive fees and interest rates, hidden
costs, unnecessary insurance, and
deceptive uses of balloon payments.
Self-explanatory labels from the
predatory markets are “loan flipping” and “equity stripping.” Horrifying anecdotes of predatory lending have been standard fare for television exposés and include a notable congressional testimony of a
witness with a bag over his head.
Recently a number of housing and
banking agencies, including the
Federal Reserve, have announced
their intention to study possible restrictions on predatory lending. The
Department of Housing and Urban
Development (HUD) has set up a
...continued on page 2

1

Message from the Community Affairs Officer

E

verywhere you turn these days,
predatory lending is making the
headlines in the national and local
press—and with good reason. When
proven, instances of predatory lending offer particularly ugly evidence
that some people are willing to
make a buck regardless of the harm
it causes another.
I personally came to understand
these details at a conference held on
April 10, 2000, that was organized
by The Reinvestment Fund and
sponsored by the Ford Foundation.
Attorney Irv Ackelsberg of Community Legal Services detailed the abusive practices seen over and over
again in North Philadelphia, and Ira
Goldstein of The Reinvestment
Fund mapped the suspected extent
of the problem from HMDA data.
Other speakers from New York and
North Carolina made it clear this
problem is not limited to Philadelphia.
Despite the particularly egregious nature of predatory lending
abuses, the solution is not simple. In
this issue of Cascade, we have reprinted a speech by Federal Reserve

Predatory Lending

the table to make a similar financial
commitment. In future issues of
Cascade, we will detail those programs for replication here.
We hope you will join our efforts
to combat financial illiteracy and be
part of the solution for reaching lowand moderate-income families with
credit that helps them achieve their
dreams, not destroy them.

Dede Myers

...continued from page 1

national task force on the topic.
Members of Congress on both sides
of the aisle have bills that limit
predatory practices.
The ultimate difference between
subprime and predatory lending
comes back to the competitive assumptions. If one is a market optimist and believes that both lenders
and borrowers are rational and
well-informed, then subprime credit
markets with proper rate differentials will open up. If one is a market
pessimist and believes that borrowers are not well-informed and may
not be fully rational, then some
lenders will have opportunities to
exploit these borrowers with predatory practices. Distinguishing positive subprime lending from negative predatory lending is obviously
important, particularly for regulators trying to encourage one type of
2

Governor Edward Gramlich that
describes just how difficult it will be
to legislate a solution without eliminating the positive expanded credit
opportunities provided by subprime lenders.
Regardless of whether there is a
legislative solution, it is clear that
many consumers are unfamiliar
with standard financial services and
cannot determine what fees and
terms are appropriate. The need for
financial literacy continues despite
efforts over the past decade to expand credit availability to low- and
moderate-income communities. At
the Fed, we will continue to support
financial literacy through the Greater Philadelphia Urban Affairs Coalition and Jump$tart programs sponsored by the banking departments
in this District.
We also need a solution for the
families victimized by predatory
lenders. In Chicago, Neighborhood
Housing Services stepped to the
plate and helped 300 families avoid
losing their homes through foreclosure. Now a group of bankers in
that city is bringing its resources to

lending and discourage the other.
Who Does Subprime or Predatory
Lending?
Subprime lending tends to be
done primarily by nondepository institutions, either finance companies
or mortgage companies that are not
subject to routine regulatory compliance audits and connected with regulated financial institutions. These
subprime lenders generally raise
money directly from bond or equity
markets and make subprime loans.
In the mortgage market relatively
few of these loans are for first-time
mortgages—mostly they are for
mortgage refinancings, second
mortgages, or consolidating debt.
Often these loans are securitized
and sold to investors such as insurance companies and pension funds.
HUD compiles an annual list of

the subprime lenders that report
data under the Home Mortgage Disclosure Act (HMDA). For 1998, this
list showed 239 subprime lenders, of
which 168 were regulated only by
the Federal Trade Commission
(FTC). Thirty-six of these institutions were banks or subsidiaries of
banks and savings and loans that
were regulated, and the remaining
35 were banks or subsidiaries of
bank holding companies, where the
holding company was regulated but
the subsidiary operated with some
freedom from the holding company
and its regulator.
As mentioned earlier, one distinguishes predatory lending from
subprime lending by the features of
the loan and, importantly, by
whether the borrower understands
the terms of the loan. Thus, there is
no ready way to distinguish preda-

tory from subprime lending, to
identify predatory lenders, or to
measure amounts. Yet most anecdotal reports or legal cases against
predatory lenders have involved
subprime lenders, and it is certainly
logical to expect these practices to
flourish where the regulators are
more remote. And the numbers given above suggest that most
subprime lenders are reasonably
sheltered from the normal bank regulatory apparatus.
What Do Predatory Lenders Do?
Predatory lending is made possible by inadequate information or,
in technical jargon, asymmetric information held by lenders and borrowers. The fundamental weakness
is the desire of low-income, uneducated borrowers for cash up front.
In part, this desire reflects the everpresent needs of these low-income
borrowers for cash, often for badly
needed home repairs. In part, it reflects what might be called myopia,
the illogical balancing of relatively
small up-front amounts compared
with huge downstream borrowing
costs. In part, it reflects the lack of
understanding of complex credit
terms or conditions in which insurance is and is not needed. In part, it
reflects bargaining imbalances
where borrowers are subjected to
outright fraud, falsifications, and
even forgery.
A significant component of
predatory lending involves outright
fraud and deception, practices that
are clearly illegal. The policy response should simply be better enforcement. But the harder analytical
issue involves abuses of practices
that do improve credit market efficiency most of the time. Mostly the
freedom for loan rates to rise above
former usury law ceilings is desirable, in matching relatively risky
borrowers with appropriate lenders.
But sometimes very high interest
rates can spell financial ruin for borrowers. Most of the time, balloon
payments make it possible for
young homeowners to buy their first

house and match payments with
their rising income stream. But
sometimes balloon payments can
ruin borrowers who do not have a
rising income stream and are unduly influenced by the up-front money. Most of the time the ability to refinance mortgages permits borrowers to take advantage of lower mortgage rates, but sometimes easy refinancing means high loan fees and
unnecessary credit costs. Often
mortgage credit insurance is desirable, but sometimes the insurance is
unnecessary, and sometimes borrowers pay premiums up front
without the ability to cancel the insurance and get a rebate when the
mortgage is paid off. Generally advertising enhances information, but
sometimes it is deceptive. Most of
the time disclosure of mortgage
terms is desirable, but sometimes
key points are hidden in the fine
print.
Apart from outright fraud, these
are the fundamental characteristics
of predatory lending. Mortgage provisions that are generally desirable,
but complicated, are abused. For
these generally desirable provisions
to work properly, both lenders and
borrowers must fully understand
them. Presumably lenders do, but
often borrowers do not. As a consequence, provisions that work well
most of the time end up being
abused and hurting vulnerable people enormously some of the time.
Similarly, lenders outside the bank
regulatory system may help improve the economic efficiency of
low-income credit markets most of
the time, but act as unregulated
rogue elephants some of the time.
Both factors make the regulatory issues very difficult. Again, apart
from outright fraud, regulators and
legislators feel understandably reluctant to outlaw practices, if these
practices are desirable most of the
time. Lenders can sometimes be
brought into the bank regulatory
system, but others always could
spring up outside this system. The
FTC is there to regulate trade prac-

tices in general, but that agency has
a huge job in policing all loan contracts.
What Can Be Done?
In response to earlier reports of
fraudulent lending, the Congress in
1994 passed the Home Ownership
Equity Protection Act (HOEPA).
HOEPA defined a class of “high
cost” home purchase loans, loans
that charge closing fees of 8 points
or more, or have an annual percentage interest rate (APR) 10 percentage points above prevailing Treasury rates for loans with comparable
maturities. For these HOEPA-protected loans there are thorough disclosure requirements and prohibitions of many practices. There can
be no balloon payments in the first
five years of a loan. Certain prepayment penalties are prevented, as are
negative amortization loans and
some advance payments. While
most analysts consider HOEPA to
have been effective, we hear reports
of lenders skating just below the
HOEPA requirements and still engaging in egregious practices.
The logic of HOEPA is that in
this high-cost corner of the mortgage market, practices that are generally allowable are not permitted,
because the possibilities of abuse are
too high. Most present attempts to
deal with predatory lending try to
broaden the HOEPA net, by lowering the threshold cost levels and by
preventing more practices. On the
Democratic side of the political aisle,
Senator Sarbanes and Representative LaFalce, from neighboring Buffalo, broaden the HOEPA definition
of high-cost loans to those with an
APR 6 points above Treasury rates
for comparable maturities and
[those that] prevent life insurance
that is paid for with a single upfront premium. On the Republican
side, Representative Ney from Ohio
broadens the HOEPA definition to
loans with an APR 8 or 9 points
above Treasury rates and tightens
the rules on prepayment penalties.
There are several other bills, gener...continued on page 4

3

Predatory Lending

...continued from page 3

ally taking similar approaches to the
problem.
Many states have also attempted legislative remedies. Last July,
North Carolina enacted amendments to its usury laws that also
broaden the HOEPA net. North
Carolina’s law prohibits prepayment penalties, loan-flipping, and
single-premium credit life insurance
on most home loans. For high-cost
loans, defined as loans with up-front
fees greater than 5 percent of the
loan or an APR of 10 percentage
points above the comparable Treasury rate, the law requires borrower
counseling before closing and prevents a number of practices: balloon
payments, negative amortization,
lending without consideration of the
ability to pay, and financing of upfront fees or insurance premiums.
Many other states are now using
this North Carolina legislation as a
model for statutes of their own. The
list includes Illinois, Kansas, Maryland, Minnesota, Missouri, South
Carolina, Utah, and West Virginia.
One such bill has been introduced in
New York State, but here the primary focus has been regulatory. Last
year the State Banking Board approved a regulation patterned after
HOEPA. It would apply to homeimprovement loans and have lower
APR and point thresholds than the
federal statute has.
Other federal statutes address
predatory lending less directly. The
Truth in Lending Act requires all
creditors to calculate and disclose
costs in a uniform matter. Under
this statute, lenders must disclose
information on payment schedules,
prepayment penalties, and the total
cost of credit, expressed as a dollar
amount and as an APR. The Real Estate Settlement Procedures Act prohibits lenders from paying fees to
brokers that are not reasonably related to the value of services performed by the broker. The Equal
Credit Opportunity Act prohibits
discrimination in lending on the basis of a number of “prohibited basis
characteristics” such as age and
race. The Federal Trade Commission Act prohibits unfair and decep4

tive practices.
And yet, with all this legislation,
predatory lending seems to go on.
Struck by these potential weaknesses in the regulatory nets, the Federal
Reserve last fall convened a nineagency working group to come up
with other approaches or common
approaches. The relevant agencies
are the five that regulate depository
institutions (the Federal Reserve, the
Office of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, and the National Credit
Union Administration), two that
regulate housing (HUD and the Office of Federal Housing Enterprise
Oversight), and two that regulate or
prosecute deceptive trade practices
in general (the Department of Justice and the FTC). The complete regulatory net of these agencies would
cover all predatory lending, though
the FTC, for example, might be hard
pressed to go after all lending operations outside the primary depository institution net. The aims of the
group are to tighten enforcement of
existing statutes, to identify those
predatory practices that might be
limited by tightened regulations or
legislative changes, and in general
to establish a coordinated attack on
predatory practices.
HUD has also recently announced a task force to combat
predatory lending. HUD administers RESPA and may be envisioning
tightening its procedures. HUD’s
Federal Housing Administration
(FHA) has also recently started requiring mandatory testing of real estate appraisers and an assessment of
the physical condition of properties
in its own lending programs.
Secondary mortgage institutions
such as Fannie Mae and Freddie
Mac also plan to enter the subprime
business. If Fannie and Freddie were
merely to buy subprime loans without added inspection, these secondary market institutions could actually subsidize predatory lending. But
if Fannie and Freddie were to inspect the practices of subprime lenders from whom they purchase loans,
or to limit purchases of certain types

of loans, they might effectively extend the domain of subprime regulations.
A final factor is consumer education. Predatory lending would not
exist, or would be relatively rare, if
prospective borrowers understood
the true nature of their loan contracts. The Neighborhood Reinvestment Corporation has an active borrower education program to promote just that type of understanding, and many other public and quasi-public agencies are thinking of
following suit. To this point, efforts
to extend consumer financial education into high schools have proven
very disappointing, but there have
been some successes with stock
market simulation exercises. Perhaps some of these efforts could be
extended to predatory lending
issues.
Conclusion
Predatory lending is a difficult
issue. It causes obvious difficulties
for borrowers, it is difficult for enforcers to track down, and it is difficult to regulate. So far as we can tell,
predatory lenders generally operate
outside the main financial regulation network. These lenders are
sometimes fraudulent, but probably
more often they take advantage of
loan terms that are useful for many
borrowers but can become destructive if misunderstood by some borrowers. They also take advantage of
low-income and less-educated borrowers who need cash up front and
are unlikely to understand the provisions. When and if borrowers default, they can either lose their
house or be induced to sign up for
still more exploitative terms.
Because predatory lenders are
less regulated and predatory loans
are often difficult to identify and define legally, it becomes both a regulatory and an enforcement challenge
to stop predatory practices. Currently, nine agencies are meeting to design a coordinated attack on the
problem, and a number of legislative options are under consideration
in both the federal and state legislatures. The goal is to eliminate or

limit some sorry practices that are
the unfortunate byproduct of recent
efforts to democratize credit
markets.

(Editor's Note: See the article on
pages 13-15 for information on ways
to combat abusive lending
practices.)

Does a Consortium Make Sense?

S

everal months ago, a group of
bankers in the Federal Reserve’s
Third District asked the Community
and Consumer Affairs staff to help
them understand how loan consortia work and what the advantages
or disadvantages may be. At the
same time, in another part of the
District, a government economic-development official was discouraged
that his local lenders were not interested in a countywide consortium.
Why the difference in opinion?
Loan consortia exist in many
communities across the country.
They were created to respond to a
variety of local credit needs: first
mortgages to low- and moderate-income families; small-business loans;
equity investments in low-income
rental housing; construction loans;
and permanent loans for multifamily or commercial projects. What
makes some consortia work and
others not? Why do lenders concur
in one location, but not in another?
The answer lies in why and how.
The most successful consortia
have been created to address an unmet credit need by sharing risk. In
New York City, for example, multifamily properties, particularly occupied buildings in need of rehabilitation, pose the biggest challenges.
Some 30 years ago, the Community
Preservation Corporation (CPC) set
out to solve this problem of credit
need by setting up a consortium of
lenders, and it has since become the
acknowledged leader in lending for
this type of property. While CPC
started as a consortium, it soon
evolved into a nonprofit mortgage
company that has lines of credit
from more than 100 financial institutions. It has succeeded because it
identified a credit need, determined
how to underwrite the risk, and

*Federal Reserve System Board of
Governors. Governor Gramlich made
these remarks in a speech to the Fair
Housing Council of New York,
Syracuse, New York, April 14, 2000

By Dede Myers*

then created
products and a
process that were
acceptable to borrowers and lenders alike. CPC’s
success led to the
creation of a similar entity, the
Community Investment Corporation, in Chicago.
Similarly,
several decades
ago, a group of
lenders in California agreed to
This multifamily complex, Christina Farms, Newark,
make mortgages
Delaware, was funded by DCIC.
to low- and moderate-income families. These days,
mining which credit needs they will
that may seem like ordinary fare,
meet, consortium participants must
since first-mortgage loans to lowdecide how to operate. Will there be
and moderate-income families now
predetermined or a limited list of
account for more than 40 percent of
products with identified underwritHMDA-reporting originations. But
ing and terms? Who will meet with
at the time, this market was virtualthe customer, who will present the
ly unknown to bankers and was
deals, and who will close and serconsidered high risk. Eventually, the
vice the loans? A very significant
California consortium became so
question is: should participants essuccessful in identifying customers
tablish a delegated pool and give a
and underwriting the risk that its
loan committee the authority to demembers competed with it. Sensing
cide whether to fund deals, or
it had outlived its original purpose,
should participants make the deciit moved on to new territory: lowsion case-by-case? Also, if there are
income rental housing that needed
staff members, how will they be
equity and long-term debt. It bepaid?
came the forerunner of similar conIn the late 1980s, eight financial
sortia established in other states
institutions agreed to make smallacross the country. Locally, the Delbusiness loans in the city of Camden
aware Community Investment Corto business owners who did not
poration responds to the same type
meet conventional bank standards.
of credit needs (low-income rental
They lent their funds in participahousing) with funds provided by 30
tion with the Cooperative Business
banks and other corporations.
Assistance Corporation (CBAC), a
How a consortium is structured
nonprofit lender now certified as a
to operate is another feature critical
community development financial
to its success. In addition to deter...continued on page 6

5

Does a Consortium Make Sense?
institution. CBAC funded its share
of each loan with public dollars
raised for that purpose and took a
subordinate position to the bankers’
share. The bankers agreed they
would consider all requests, but
only those approved by all participants would be funded. Although
the process sounds cumbersome,
success was possible because of the
staff's expertise and the commitment of the lenders.
CBAC’s success led a variety of
other local communities to create
small-business loan consortia. Despite a similar public-private partnership participation, many did not

...continued from page 5

thrive because their creators could
not or did not clearly identify a market—customers who were unbankable by normal standards, but acceptable on a shared-risk basis. Or
the process was too involved for the
small volume of loans and the size
of individual loans. For example,
eight lenders considering four loans
totaling $100,000 could expect, at
best, $12,500 in originations after
spending a morning considering the
deals.
Despite the operational issues,
many consortia have evolved and
become sophisticated in responding
to low- and moderate-income com-

munities’ credit needs. Consortia
can be a sensible means of meeting
community-development objectives
if the market is clearly defined, a
product line is developed accordingly, the underwriting is predetermined, and the customer contact,
loan presentation, closing, and servicing are handled by experienced
staff. Once a consortium’s objectives
are clear, both borrowers and lenders will be clear on the opportunities
and the risk.
*Dede Myers is vice president and
community affairs officer, Federal Reserve Bank of Philadelphia.

Pennsylvania Utilities Form Renewable Energy Funds
By Sally Burke*

T

he issue of clean, renewable energy has been on the agenda of
environmentalists for a long time.
And now that utilities in Pennsylvania, like those in many other states,
have been deregulated and have restructured the way they deliver
power, renewable energy has
moved further up the national
agenda.
In fact, deregulation in Pennsylvania caused a coalition of environmental and consumer groups
(known as “The Environmentalists”)
to intervene in five utilities’ cases for
restructuring: PECO, Allegheny,
Duquesne, PPL, and GPU. In the
end, Pennsylvania’s Public Utility
Commission (PUC) issued orders
for restructuring, but unhappy with
the terms, four of the utilities (Duquesne accepted the orders) appealed the PUC’s order to Commonwealth court. The Environmentalists
intervened. Finally, in 1998, PUC
Chairman John Quain asked the disputing parties in the PECO case to
negotiate and reach a settlement.
One by one, each of the other utilities also settled.
As a result of these separate settlement agreements, four renewable
energy funds were established. Each
fund is governed by a board com-

6

posed of six members from among
the Environmentalists and one from
the utility. The mission of these four
funds is to develop renewable and
advanced energy technologies and
to support businesses that design,
manufacture, install, or service these
technologies. Three of the power
companies—PECO, PPL, and
GPU—are in the Third Federal Reserve District. These sustainable energy funds, supported by a small
surcharge on consumers’ utility
bills, basically have the same mission: to promote the use of renewable-energy and clean-energy technologies and energy conservation
and efficiency.
In Philadelphia, PECO Energy’s
fund has several projects under
way. The Reinvestment Fund (TRF),
a Philadelphia-based community
development financial institution,
has been selected to manage that
fund. In Allentown and Harrisburg,
PPL’s and GPU’s funds, although
still in the early stages, hope to have
specific projects selected by the end
of the year. The PPL Sustainable Energy Fund has hired Thomas Tuffey
as executive director. The GPU fund
has set up an advisory board, and
its bylaws were approved by the
PUC in April.

PECO Energy: Sustainable
Development Fund
The most active fund right now
is TRF’s Sustainable Development
Fund (SDF). Under the original
agreement between the PUC and
PECO, the fund would receive a total of $11.2 million over seven years.
In 1999, the SDF received $1.6 million in initial funding. Now that
PECO has announced a merger with
UNICOM, the Chicago-based parent
of Commonwealth Edison Company, the terms of the agreement may
change, and the SDF may receive a
lump sum payment instead.
Primarily, the SDF will fund
loans or grants to companies whose
principal business is energy or to
nonenergy companies or organizations that install or purchase energyconservation systems for their
projects. Some of these loans may be
eligible for SBA guarantees, as well.
As of June 2000, the SDF had approved five loans and six grants (see
box). In addition, the SDF will also
consider near-equity or equity financing arrangements as well as
royalty financing.
PPL: Sustainable Energy Fund
Although this $20-million fund
had its bylaws approved by the

PUC just this past June, it is already
actively looking for projects and
partners. Investment targets are
comparable to those of The Reinvestment Fund’s SDF.
Executive Director Tuffey hopes
to get some projects rolling soon. He
says that at least 5 percent of PPL’s
money will go to grants, and approximately 70 percent will be loans
of different types. The rest will be
split between equity and royalty financing. Other areas that Tuffey
finds particularly promising include
fuel cells, wind farms, green buildings, and solar energy.
PPL’s fund would also like to finance redevelopment of brownfields (environmentally damaged
land) or grayfields (former mining
land). Tuffey envisions what he calls
“brightfields,” reclaimed land on
which PPL’s Sustainable Energy
Fund can help manufacturers of
new energy technologies expand. If
successful, these efforts could bring
jobs to Pennsylvania’s Lehigh and
Susquehanna valleys.
The fund offers attractive incentives but also demands a return designed to recycle money into new
ventures for many years.

GPU: Sustainable
Energy Fund
Following a
seven-month
wait for its bylaws to be approved, GPU Energy’s Sustainable Energy
Fund is now up
and running. The
fund money has
been transferred
to two regional
administrators:
$5.7 million to
the Berks County
Community
Solar houses use clean and renewable energy technologies.
Foundation and
$6.4 million to
the Community
investments or as loans; grants will
Foundation for the Alleghenies. A
also be awarded. Several proposals
business plan, which is being put
are under consideration.
into final form, will outline opportunities consistent with the purpose of
Economic Development
the fund: the development and use
How do these funds promote
of renewable energy and clean enereconomic development? Roger
gy technologies, energy conservaClark, TRF’s manager for Technolotion and efficiency, sustainable energy and Policy for the Sustainable
gy businesses, and projects that imDevelopment Fund, states that reprove the environment in GPU Ennewable and more efficient energy
ergy’s Pennsylvania service territowill allow businesses and families to
ry. Funds may be invested as equity
...continued on page 9

Loans and Grants Approved by the Sustainable Development Fund
Loans
• Resources for Human Development (passive solar townhouses in West Philadelphia)
• Horizon Signal Technologies (solar photovoltaic-powered road signs)
• Glenmar Manufacturing (geothermal ground-source heat pump system for a manufacturing plant)
• Energy Unlimited (predevelopment costs for a wind energy project in Hazleton)
• Solar Energy/Energy Star (consumer loan program)
Total
Grants
• Resources for Human Development (contingency fee for solar townhouse development)
• Community Energy, Inc. (wind energy marketing business plan)
• Energy Coordinating Agency (energy conservation/solar business plan)
• The Enterprise Center (high performance green building design)
• Philadelphia Municipal Energy Office (high performance green building blueprint
manual)
• Intelligent Buildings, Inc. (motor controller test equipment)
Total

$250,000
$ 50,000
$ 70,000
$ 250,000
$ 500,000
$ 1,120,000

$46,759
$22,650
$ 15,000
$25,000
$20,000
$25,709
$115,118

Source: The Reinvestment Fund/Sustainable Development Fund (approvals as of June 2000)

7

Social Compact Develops New Tools for Analyzing
Urban Neighborhoods By Keith Rolland*

S

ocial Compact, a coalition of
business leaders who recognize
and help bring about business success in underserved communities,
has pioneered an innovative series
of market analysis tools designed to
unveil business opportunities in inner-city neighborhoods. Lynn
Whiteside, president and CEO of
Social Compact, will discuss these
tools at a Federal Reserve Bank of
Philadelphia conference on minority
entrepreneurship on September 27.
Social Compact, headquartered
in Washington, D.C., tested and
launched its market profiling tools
in three Chicago neighborhoods.
Whiteside said that over the past
year, Social Compact’s work has resulted in comprehensive demographic and economic profiles that
dramatically challenge traditional
market analysis.
She explained that fundamental
to Social Compact’s success is the
degree to which it integrates a spectrum of data sets, creating excellent
information at the market and
household levels, and the extent to
which it continually adapts the best
of private-sector market analysis
tools to respond to the realities of
the inner city.
Whiteside said that Social Compact is expanding its work beyond
Chicago to serve selected parts of
Harlem and selected neighborhoods
in Houston and Washington, D.C.,
and expects to add two markets in
the coming year. She said that Social

Compact is typically retained by local collaboratives of banks and other
corporations and government agencies. She said that the communities
selected for this early rollout of Social Compact’s work are prototypical of neighborhoods across the
country and that Social Compact’s
objective is to create methodologies
and to report findings that are applicable to many other communities
with similar characteristics.
Social Compact’s Emerging
Neighborhood Markets Initiative,
launched in Chicago in 1997, views
lower income and underserved
neighborhoods as competitive
emerging markets in which to do
business. It uses business data to
identify indicators of market
strength and potential with the goal
of attracting sustainable investment
and financing for commercial, retail,
and home-ownership development.
It sizes markets in terms of concentrations of consumers with similar
demographic and behavioral characteristics, natural and man-made
boundaries, and nontraditional
views of trade areas and market
flows. Some main features of this
process include identifying natural
and distinct market clusters; understanding customers within the market area in terms of ethnicity, age,
and household formation patterns
as well as the size and growth of the
population; and analyzing consumer buying power and the cash economy.

For 10 years, Social Compact
has sponsored awards that recognize successful business performance and investment in the country’s underserved neighborhoods.
More than 20 corporations and
organizations have been supportive
of the initiative, and many are providing relevant data for the initiative. They include Ameritech; Applebee’s; Bank of America, N.A.;
Blockbuster Video; Burrell Communications Group; Commonwealth
Edison; Chase Manhattan Bank,
N.A.; The Consumer Bankers Association; Delray Farms; Deutsche
Bank; Dime Bancorp, Inc.; Fannie
Mae; First American Real Estate Information Services; Harris Bank;
Home Depot; Inner City Entertainment; Mortgage Bankers Association of America; PMI Mortgage Insurance; Principal Financial Group;
The Prudential Insurance Company
of America; State Farm Fire and Casualty Company; and Walgreens.
For further information, contact
Lynn Whiteside, President and
CEO, Social Compact, 5225 Wisconsin Avenue, N.W., Suite 204, Washington, DC 20015, 202-686-5161; fax:
202-686-5593; e-mail:
lynn@socialcompact.org.; web site:
www.socialcompact.org.
*Keith Rolland is a community development advisor in the Community
and Consumer Affairs Department of
the Philadelphia Fed.

Bank, CDFI Form Economic Partnership

B

lue Ball National Bank, a community bank in Blue Ball, Lancaster County, Pennsylvania, has
presented a check for $125,000 to
Community First Fund, a community development financial institution.
Community First, central Pennsylvania’s only community development loan fund, will use the money
for economic development in Lancaster and Berks counties. In particular, Community First will use the
8

money from its partnership with
Blue Ball to expand technical assistance and loans to entrepreneurs in
the two counties.
Community First also works to
improve the quality of life in central
Pennsylvania by helping to create
and retain jobs and by offering social services and affordable housing
to members of underserved communities.

Blue Ball National Bank has 15
offices and more than $872 million
in assets.
The bank and the CDFI were
originally brought together at a
meeting of the Federal Reserve Bank
of Philadelphia’s South-Central
Pennsylvania Council of Community Affairs Officers.

Philadelphia Fed to Host Minority Entrepreneurs Conference
By Keith Rolland*

A

n all-day conference dedicated
to capital needs of minority entrepreneurs will take place September 27, 2000, at the Federal Reserve
Bank of Philadelphia.
The conference responds to minority business owners’ long-held
concerns that they cannot obtain
needed financing. It is designed for
new and would-be entrepreneurs
seeking information about available
financial and technical resources
and for businesses and financial institutions looking for new markets
and customers. Dick Vermeil, chairman of the Advisory Committee of
Bridge Tech Partners, L.P., and retired head coach of the Philadelphia
Eagles and the St. Louis Rams, will
introduce an equity fund for minority-owned technology businesses.
Other speakers will discuss equity programs, including those that
can be used by entrepreneurs in
low- and moderate-income communities; small-business loan products
and services of banks and community development financial institu-

tions; research by Social Compact on business opportunities
in inner-city neighborhoods;
federal, state, and local business assistance programs; business incubators; technical assistance providers; training programs; and franchise business
opportunities.
Organizations involved include Bridge Tech Partners,
L.P.; Chase Manhattan Bank,
N.A.; Social Compact; GE Capital Corporation; GS Capital,
L.P.; Local Initiatives Support
Corporation; New Jersey Economic Development Authority;
Pennsylvania Department of
Community and Economic Development; The Enterprise Center; The
Reinvestment Fund; Small Business
Development Centers; and U.S.
Small Business Administration.
The conference, which is being
organized by the Community and
Consumer Affairs Department of
the Philadelphia Fed, will be held
from 8:30 a.m. to 5:00 p.m. Space is

limited. Inquiries about the conference may be directed to Betty Carol
Floyd by telephone at 215-574-6458
or e-mail: betty.c.floyd@phil.frb.org.
*Keith Rolland is a community development advisor in the Community
and Consumer Affairs Department of
the Philadelphia Fed.

Pennsylvania Utilities Form Renewable Energy Funds ...continued from page 7
cut utility expenses, thereby leaving
more money for other items. Furthermore, funding companies that
produce or support clean or renewable energy technologies could well
mean expanded businesses, new
businesses, and new jobs. “The creation of jobs is not an explicit goal of
SDF,” Clark adds, “but building a
sustainable energy future is certainly a necessity if we are to enjoy longterm economic development—and
jobs—in this region.”
For more information about
these sustainable energy funds, con-

tact Roger Clark, Sustainable Development Fund (PECO Energy), Philadelphia, at 215-925-1130, ext. 227, or
clarkr@trfund.com; Tom Tuffey,
PPL Energy Fund, Allentown, at
610-740-3182, ext 482, or
Tomtuffey@aol.com; or Chuck
Mowbray, GPU Fund, Reading, 610921-6903. Also for the GPU fund,
contact Kevin Murphy, Berks County Community Foundation, 610-6852223; or David Kraybill, Community
Foundation for the Alleghenies, 814536-7741.

*Sally Burke is senior editor and
publications manager in the Research
Department of the Philadelphia Fed and
the editor of Cascade. She thanks Ned
Raynolds and Chuck Mowbray at GPU
and Tom Tuffey of PPL’s fund for their
generous assistance in preparing the article. Special thanks go to Roger Clark
of the Sustainable Development Fund
for his time and input and for his patient answering of many questions.

9

State Tax Credits Proposed for Building Affordable Housing,
Revitalizing Neighborhoods in New Jersey By Carlos Peraza*

P

reserving and revitalizing lowand moderate-income communities is a major challenge for the
state of New Jersey. Residents and
community groups in many such
neighborhoods have struggled to
develop and implement strategies to
improve the quality of life for themselves and their families.
Unfortunately, the gap between
the resources needed for improvement and those available has remained stubbornly wide. Funds are
needed not only to rehabilitate or
create new housing and re-energize
commercial corridors but also to
provide amenities such as parks and
open spaces that will fill other holes
in the fabric of these neighborhoods.
Creating a targeted funding
source to help restore the vitality of
these neighborhoods would go a
long way toward improving residents’ quality of life and reversing
deterioration and its companion,
suburban sprawl.
Solution Proposed in New Jersey
The Housing and Community
Development Network of New Jersey (CDN, formerly the Affordable
Housing Network of NJ), the New
Jersey Multi-Cities Local Initiatives
Support Corporation (LISC), and
key private-sector and nonprofit
leaders have spearheaded a twopart initiative. This initiative offers a
potential solution to the problems of
housing and neighborhood blight
through the establishment of a
Neighborhood Revitalization State
Tax Credit Program (S.1138/A.2592)
and a New Jersey Multi-Family

Housing State Tax Credit Program
(S.1137/A.2591).
A state neighborhood revitalization tax credit program would allocate $10 million in state tax credits
annually for corporations to leverage $20 million in private dollars to
help nonprofits serving low- and
moderate-income neighborhoods in
which an overall neighborhood
preservation or revitalization plan
or program is already in effect. Under the proposed legislation, private
corporations would make financial
contributions to qualified nonprofits
in exchange for a 50 percent tax
credit against its state corporate-tax
liability. This money would also
qualify for federal tax deductions as
charitable contributions.
These funds could be used to
turn vacant structures into affordable rental or for-sale housing, stabilize occupied housing, revitalize
neighborhood business areas, or finance the creation of public open
spaces and community facilities
such as playgrounds, recreation centers, and child-care centers. At least
60 percent of the funds would be
designated for affordable housing
and economic development; up to
40 percent of the funds could be
used by the nonprofit for other
neighborhood revitalization activities.
A New Jersey multifamily housing state tax credit program, which
would be similar in concept to the
successful federal low-income-housing tax credit program, would create
a stable source of funding for the
production of affordable rental

housing, allocating an additional
$10 million in tax credits annually
for this purpose. The New Jersey
Housing and Mortgage Finance
Agency (HMFA) would administer
the program.
Legislation Has Broad-Based
Support
The coalition leading the effort
to pass the state tax credit bills includes many partners from both the
private and the nonprofit sectors.
The legislation has been endorsed
by trade and corporate partners
such as the New Jersey Bankers Association, the New Jersey Chamber
of Commerce, First Union National
Bank, Fleet Bank, PNC Bank, Prosperity New Jersey, and PSE&G, as
well as nonprofits such as the American Association of Retired Persons
(AARP), the New Jersey Catholic
Conference, and the League of
Women Voters.
Both pieces of legislation, which
are being treated as a package, have
moved steadily through the legislative process. The coalition is optimistic that the bills will be signed
into law sometime this fall. In June,
prior to the legislature’s summer recess, the New Jersey Senate’s Budget and Appropriations Committee
unanimously released S.1137 and
S.1138 from committee. The bills
now head to the full Senate for a
vote.
The bills will be heard before
the Assembly’s Housing Committee
this fall. If released as anticipated
...continued on page 11

The renovation of this building, called Magnolia Mall, in northern New Jersey was made possible in part by federal tax credits for lowincome housing. Brand New Day, Inc. oversaw the renovations, which include rental housing on the second floor and retail space at
10 street level.

from the Housing Committee, the
bills will proceed to the Assembly’s
Appropriations Committee, then to
the full Assembly for a vote.
Other States Offer Useful Models
A number of other states have
Neighborhood Assistance Programs
(NAPs), which, like the proposed
Neighborhood Revitalization Tax
Credit, rely on partnerships between
the public and private sectors and
encourage corporations to make
contributions to nonprofits for community-redevelopment work in exchange for tax benefits.
At least 12 states now have
NAPs: neighboring Pennsylvania
and Delaware, Connecticut, Florida,
Illinois, Indiana, Kansas, Maryland,
Missouri, Nebraska, Virginia, and
West Virginia.
In addition, at least seven other
states—Arkansas, California, Hawaii, Massachusetts, Missouri, Utah,
and Virginia—have enacted low-income-housing tax credit programs
to augment the federal program.
Tax Credits Bring Benefits to New
Jersey
Housing built with the help of
federal low-income-housing tax
credits serves households in more
than 60 communities throughout

New Jersey, from large cities to suburban towns. New Jersey housing
tax credits would follow the same
model and would be open to communities statewide.
An economic analysis by Dr.
Donald Scarry of New Jersey Economics reveals that if the MultiFamily Housing State Tax Credit is
enacted, New Jersey can expect to
reap the following benefits in the
first year:
•
Tax credits will make possible
the creation of up to 2700 additional affordable rental units
for lower income working
families, the elderly, and disabled people earning less than
$30,000 per year.
•
The tax credit program will
create more than 2500 jobs for
New Jersey residents and generate $87 million in new wages. These will be good jobs,
each paying in excess of
$34,000 a year.
•
The tax credit program will increase regional business
sales more than $192 million.
Similarly, if the Neighborhood
Revitalization Tax Credit bill is enacted, $20 million in new private resources will be made available each
year for revitalizing struggling New

Jersey neighborhoods. Funds would
be flexible and tailored to the needs
of local communities. A contribution of $250,000, for instance, could
help fix up 10 run-down houses, get
a neighborhood grocery store under
construction, or provide the equity
to develop a much-needed community center with a staff person who
would work with neighborhood
youth.
Dr. Scarry’s analysis shows
that in the first year the Neighborhood Revitalization Tax Credit will:
•
create up to 1100 new jobs;
•
generate up to $31 million in
wages; and
•
increase regional business
sales up to $63 million.
These bills represent an important step in addressing a pressing
need for revitalizing New Jersey’s
low- and moderate-income communities and providing decent affordable rental housing for low- and
moderate-income families throughout the state.
For more information, please
contact Arnold Cohen of CDN at
(609) 393-3752 or Carlos Peraza of
LISC at (609) 392-4300.
*Carlos Peraza is program director,
New Jersey Multi-Cities LISC Program, Trenton, New Jersey.

Identity Fraud, Microenterprise Are Topics of Fed Videos

T

he Federal Reserve Banks of
Boston and San Francisco have
released a video on identify theft,
entitled “Identity Theft: Protect
Yourself.” The video, which was
produced by Richard Walker, vice
president and community affairs officer at the Boston Fed, was developed in conjunction with the interagency Identity Fraud Task Force.
The video details how easily personal financial information can get
into the wrong hands, allowing
criminals to unlawfully obtain credit in an unsuspecting consumer’s
name. It also outlines what to do if a
consumer suspects that he or she
has been a victim of identity theft.
Copies of the video are available in

VHS format for a charge of $7.50
each. Videos can be ordered through
the Federal Reserve Bank of Boston
by calling 1-800-409-1333 or writing
to: Public & Community Affairs Department, Attention: Identity Fraud
Video, P.O. Box 2076, Boston, MA
02106-2076. Please make checks or
money orders payable to the Federal
Reserve Bank of Boston.
The Federal Reserve Bank of
Cleveland has created a concise and
simple microenterprise training kit
designed for trainers and technical
assistance providers to use during
business orientation and instruction
sessions. The training package includes one 12-minute videotape featuring three microentrepreneurs

who share details of their real-life
experience, an instructor’s guide, 10
student workbooks, and one diskette that can be used to reproduce
extra workbooks. The video, entitled
“I Love Being Self-Employed,” can
be used to stimulate discussion,
challenge assumptions, and provide
motivation or to educate bankers or
others about microenterprise.
Each training package costs
$25.00. Mail payment to: Federal Reserve Bank of Cleveland, Attention:
Community Affairs Department,
P.O. Box 6387, Cleveland, OH
44101-1387. The Cleveland Fed cannot accept credit cards or cash. If
you have questions, please call
Laura Kyzour at 216-579-2846.
11

Financial Resources for the Environment (FRE) Develops Mission
Statement

P

revious articles in Cascade have
described the proposed brownfields financing fund in Pennsylvania. Recently, the bankers and industry and government representatives participating adopted the following mission statement:
FRE will serve as a new, dedicated, and self-sustaining source of
private-sector financing to fund
community land restoration efforts
in the Commonwealth of Pennsylvania. By recycling back into fuller
productive use land whose redevelopment is hindered by real or perceived contamination, FRE will
achieve four equally important and
interrelated goals:
• Community and Economic Development: revitalizing and stabilizing neighborhoods by
growing and attracting new
businesses, creating or retaining
jobs and job training opportunities, providing affordable housing, supporting community services, and supporting related
community development efforts;
• Sustainable Growth: promoting
economic development that
uses and upgrades existing infrastructure or impaired lands,

•

•

while discouraging sprawl
growth, thereby preserving
open space and protecting natural resources;
Public Health and Enviromental Protection: reducing or
eliminating environmental risks
to communities and the environment through site assessment, characterization, and remediation, thereby allowing
people to live and work in a safer and cleaner environment;
Economic and Environmental
Stewardship: supporting cleanup and redevelopment efforts in
disadvantaged areas, minority
communities, low- and moderate-income neighborhoods,
and/or areas targeted for redevelopment by federal, state, or
local governments.

Objectives
FRE will achieve these goals by
meeting the following objectives:
• Providing an innovative financing mechanism that enables financial institutions, corporations, and public entities to fund
land recycling projects that
would not otherwise be served,
consistent with safe and sound

NJRA Issues Request for Proposals

12

•

•

•

•

business practices;
Operating a financially sound
program that provides reasonable returns to participants and
a permanent source of dedicated capital for the community;
Offering a vehicle that works in
partnership with a broad range
of private, public, and nonprofit
interests to balance the diverse
financial, regulatory, and community needs associated with
environmentally impaired
lands;
Providing a model in Pennsylvania and nationally for financial institutions, corporations,
and public entities to expand
their financing of environmentally impaired lands in the
mainstream marketplace;
Developing and presenting information in support of projects
to redevelop particular environmentally impaired lands.

For additional information or to
participate, please call Keith Welks,
Phoenix Land Recycling, at 717-2309700, or Sid Johnston, The Development Fund, at 415-981-1070, ext. 12.

The New Jersey Redevelopment Authority (NJRA) is making available
a total of $15 million to 68 urban municipalities in New Jersey for acquisition, cleanup, and redevelopment of brownfield sites. Brownfields are former or current commercial or industrial sites that
are abandoned, vacant, or underused and on which there
has been or may have been a discharge of contaminants. (See photograph.)
NJRA has issued a request for proposals, and applications are being reviewed until the funds are depleted. The
agency will provide a maximum grant of $1 million per
project.
For further information,
contact David Scheck, Director
of Finance, NJRA, at
(609) 292-3739.

Financial Literacy Initiative Under Way for Underserved Communities
By Dan Shah*

F

inancial literacy has come to the
forefront of the national agenda
for encouraging economic empowerment. Amid recent high-publicity
initiatives to combat predatory lending, programs aimed at increasing
financial literacy are being promoted at the national, state, and local
levels as the most promising means
of enabling people to acquire wealth
and avoid engaging in practices that
perpetuate poverty. At the heart of
the federal government’s interest in
financial literacy is its concern with
unfair mortgage lending practices.
But financial literacy has another
important goal: savings and asset
development. In Philadelphia, we
have organized a nongovernmentsponsored, citywide initiative to
promote financial literacy.
This initiative started at a roundtable discussion that the Center for
Community Non-Profit Organizations (CCNO) at Temple University
hosted on October 29, 1999. Taking
part in the discussion were representatives from banks, credit unions,
nonprofits, and community development financial institutions
(CDFIs) from around the city.
Our goal was to bring together
participants in the financial industry—both lenders and clients—to establish strategies for developing alliances between banks and nonprofits
so that collaboratively we could
make a unified effort to enhance financial services in Philadelphia’s
underserved low-income neighborhoods.
To set the stage, Andy Frishkoff,
executive director of the Pennsylvania Low Income Housing Coalition,
presented different models for collaborations between banks and nonprofits; his presentation highlighted
the successful Delaware Valley
Mortgage Plan. The focus then
turned to an analysis of the alternative financial sector. Law students
Ted Won and Judy Lee from the
CCNO presented research showing
how the alternative financial sector
(commonly referred to as check
cashers) has grown rapidly over the
past 15 years by using techniques

such as flexible hours and quickand-easy short-term, low-principal
loans; by joining tax services with
traditional services; and by offering
personalized and pragmatic services
tailored specifically to low- and
moderate-income clients. The law
students also showed how community development credit unions
across the country had successfully
steered clients away from their alternative-financial-sector competition by combining strategies borrowed from that sector with financial literacy training.
Because financial literacy serves
the interests of banks, credit unions,
and low-income clients, supporting
this goal provides an opportunity
for collaboration between nonprofit
organizations and banks by uniting
them in an effort to eliminate a common adversary: the check-cashing
outlet. Furthermore, the opportunity
to discuss collective concerns and
priorities in breakout groups designated by professional affiliation
prompted roundtable participants to
speak honestly and openly about
their interests and “bottom lines.”
Participants also had a chance to
join forces in developing a way to
design and implement the most effective mechanisms to educate lowand moderate-income people in the
Philadelphia region about financialservice options and cultures.
From the initial meeting three
working groups were created, the
leaders of which demonstrate the
breadth of the financial industry’s
commitment to this initiative. Jose
Rivera Urrutia, executive director of
Ceiba, a coalition of Latino organizations in North Philadelphia, is
leading a group that will assess the
kinds of enhancements CDFIs need
to be more effective. Ira Goldstein,
director of Policy and Program Assessment at The Reinvestment Fund,
and I are directing a group that will
link research on predatory lending
with financial literacy in Philadelphia. Rosie Saez, senior vice president at First Union, chaired the committee that discussed the contents of
a financial-literacy curriculum.

Curriculum
Our proposed financial-literacy
training will address the benefits of
avoiding the alternative financial
sector and will teach low- and moderate-income people the skills required to avail themselves of the
services of mainstream financial institutions. Committee members, including Christine Joes, vice president and community affairs officer
at First Union, and Evette Lucas, director, Northeastern Region, Fannie
Mae Foundation, obtained the endorsement of the Community Economic Development Committee of
the Greater Philadelphia Urban Affairs Coalition (GPUAC). GPUAC
also committed part of Mary
Frances Davis’s valuable time to the
program. Davis is director of the
Delaware Valley Mortgage Plan.
In the fall of this year, phase one
of the project will get under way to
test the standard curriculum of the
literacy training modules developed
by the National Community Reinvestment Coalition. We are choosing test groups in dispersed geographic locations, guaranteeing the
inclusion of language minorities
from immigrant/new American
populations in the Latino corridor,
and ensuring that the working poor
from a large employer; very low-income, public-housing tenants; and
welfare-to-work trainees are all part
of the pilot groups. The curriculum
for the pilot phase of the project
now includes:
• Money flows and asset creation
• Basic banking
• Electronic banking and payment
of government benefits
• Credit and debt management
Trainers, consisting of housing
counselors, bankers, and people
from nonprofits who are familiar
with community-banking issues,
will work in ratios of 10 trainees per
trainer.

Research Study
The second phase of the financial-literacy initiative is a major research project scheduled to begin in
...continued on page 14

13

Financial Literacy Initiative Under Way for Underserved Communities
...continued from page 13

the spring of 2001. This project will
have implications not only for Philadelphia but for other cities as well.
This project on financial literacy is a
joint effort of the research and curriculum teams that are working together to develop tools to begin a research program in consultation with
economist John Caskey of Swarthmore College. The project intends to
create an employment-based test
group from a university, major corporation, or union to receive training during working hours. By randomly assigning some employees to
take the training and assigning others to not take it, we can eliminate
bias due to self-selection and also
establish a control group to directly
measure the training’s effect on behavior. The study will survey the
groups before any training takes
place, again after three months and
one year for short-term results, and
one more time after five years to assess long-term effects.
The CCNO is now in the process
of obtaining funding for the research project, and CCNO students
will be responsible for crafting the
survey instrument and compiling
the results. Using information from
the pilot study, we plan to tailor the
curriculum to meet community
needs. We will define the parameters of the research, including the
size of the survey sample, and hire a
survey research firm to help us develop and administer the instrument. The proposed curriculum will
include all four of the pilot project
modules and will be expanded to in-

1

clude additional modules on lifetime financial planning and fraud
prevention (including predatory
lending).

Positive Outcomes
A number of Caskey’s studies
document the ways in which financial savings enable people to insure
against uncertainty and hardship, to
spend more rationally, to establish
good credit, and to avoid a perpetual state of debt from reliance on the
high-cost alternative financial sector.1 Deborah Page-Adams and
Michael Sherraden linked the relationship of savings to more intangible benefits, including personal
well-being, civic behavior and community involvement, increased
well-being of children in the home, a
higher level of social status of women in the home and community, and
reduced levels of domestic violence.2 These benefits supplement
the economic goals of current programs nationwide that focus on promoting financial literacy.
Despite the fact that a number
of studies have linked financial literacy to financial savings, the research
does not directly test to what extent
financial-literacy education results
in financial savings among low- or
moderate-income groups. So far, the
most convincing evidence of a positive relationship between financial
literacy and financial savings comes
from a study in which researchers
Douglas Bernheim, Daniel Garrett,
and Dean Maki found that individuals who went to high school in states

that mandated personal financial
courses reported statistically significant higher rates of savings and asset accumulation.3 Another study by
Sharon DeVaney et al. showed that
almost half of those people who
participated in a single financialmanagement class started an emergency savings account three months
after finishing the course.4 Yet another study by Bernheim and Garrett found that the effect of financial
education on household savings
was strongest for households with
lower overall savings.5 Therefore, it
is likely that training will have a
greater impact on folks without financial savings. This likelihood is
supported by ethnographic research
with very low-income families that
showed that people believe asset
limits for eligibility for government
transfer programs to be lower than
what those limits really are. As Caskey has pointed out, this means that
informing people about actual asset
potential raises the ceiling on what
they believe they can save.
The Philadelphia project will
build on existing research to establish the nature of the relationship
between financial-literacy training
and financial savings and all its benefits. Since no other study has attempted to establish this relationship, the results will be important
for determining the resources that
should be devoted to financial literacy; the limits of financial literacy’s
reach; which areas it does not effectively address—e.g., to what extent
is it effective in preventing predato-

See John P. Caskey, Lower Income Americans, Higher Income Financial Services (Filene Research Institute, 1997); John P. Caskey, “Beyond Cash-and-Carry: Financial Savings, Financial Services, and Low-Income Households in Two Communities,” Report for the
Consumer Federation of America and the Ford Foundation, December 1997; and John P. Caskey and David B. Humphrey, “Credit
Unions and Asset Accumulation by Lower-Income Households,” preliminary draft study for the Filene Research Institute, July
1999.
2
See Deborah Page-Adams and Michael Sherraden, “What We Know About Effects of Asset Holding: Implications for Research on
Asset-Based Anti-Poverty Initiatives,” Washington University Center for Social Development Working Paper (1996).
3
See Douglas B. Bernheim, Daniel Garrett, and Dean Maki, “Education and Saving: The Long-Term Effects of High School Financial Curriculum Mandates,” NBER Working Paper 6085, July 1997.
4
See Sharon DeVaney, et al., “Cash Flow Management and Credit Use: Effect of a Financial Information Program,” Financial
Counseling and Planning, Vol. 7 (1996).
5
See Douglas B. Bernheim and Daniel Garrett, “The Determinants and Consequences of Financial Education in the Workplace: Evidence from a Survey of Households,” unpublished manuscript, March 1996.

14

ry lending relative to litigation or
legislation—and which incentives,
such as individual development accounts, might be necessary to encourage savings. Our results will
help shape a policy approach that,
over time, will have the maximum

benefit for low- and moderate-income families. And if financial-literacy training results in lower rates of
predatory lending and housing foreclosures,6 then it may also become a
standard part of the community-development agenda.

(See box below for a list of
groups and legislation that support
financial counseling for consumers.)
*Dan Shah is director of the Center
for Community Non-Profit Organizations, Beasley School of Law, Temple
University, Philadelphia.

Financial Counseling Advocates
Following is a list of groups and legislation that support financial counseling for consumers.
• A recent HUD-Treasury report recommends changes to the Home Ownership and Equity Protection Act
(HOEPA) to inform applicants for high-interest loans of the availability of home-counseling programs to
educate consumers to make them less vulnerable to predatory lending.
• HUD is also recommending changes to the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) to improve the information provided to consumers so they can make better-informed choices regarding mortgage loans.
• The FDIC and the Office of the Comptroller of the Currency are writing guidelines to give positive Community Reinvestment Act (CRA) ratings to banks that provide consumer education about abusive practices in making home mortgage or equity loans.
• The Predatory Lending Consumer Protection Act of 2000 targets “high cost” home loans by prohibiting
lending without home-ownership counseling on the advisability of the loan and its appropriateness for
the borrower. A law recently passed in North Carolina provided the model for this act.
• In Brooklyn, the Department of Housing and Urban Development recently granted the Neighborhood
Economic Development Advocacy Project $284,000 to educate consumers on the practices of predatory
lenders to help combat those practices.
• Newly proposed federal legislation, called the First Accounts Act of 2000, appropriates $30 million to the
Secretary of the Treasury to promote access to financial services by providing financial education to lowand moderate-income people and depository institutions.

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HUD Secretary Andrew Cuomo reports that 600,000 people may lose their homes in one year because of predatory loans.

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Calendar of Events
Minority Entrepreneurs Conference
Federal Reserve Bank of Philadelphia
September 27, 2000
For information, call Betty Carol Floyd at 215-574-6458, or send email to betty.c.floyd@phil.frb.org.
Seizing Opportunities in a Changing Financial Landscape
Federal Reserve Bank of Chicago (co-sponsored by the American Bankers Association and the Federal Reserve Bank of St. Louis)
October 30-November 1, 2000
Westin Hotel, Michigan Avenue, Chicago
For information, call the Chicago Fed at 312-322-8232 or the St. Louis Fed at 314-444-8761.
National Community Capital Annual Training Conference
Philadelphia, November 1-4, 2000
For information, call Adina Abramowitz at 215-923-4754, ext. 205.
Predatory Lending Conference
November 13, 2000 - Grantville, PA
December 6, 2000 - Philadelphia, PA
For information, call Betty Carol Floyd at 215-574-6458, or send email to betty.c.floyd@phil.frb.org.
Federal Reserve System Conference: Changing Financial Markets and Community Development
Washington, D.C., April 5-6, 2001
For information, call Lynn Elaine Browne, Federal Reserve Bank of Boston, at 617-973-3091 or send
email to Lynn.Browne@bos.frb.org.

Cascade is published three times yearly by the Community Affairs Department of the Federal Reserve Bank of Philadelphia.
Editor
Designer

CASCADE
Federal Reserve Bank of Philadelphia
100 N. 6th Street
Philadelphia, PA 19106-1574

Sally Burke
Melissa Kinney

BULK RATE
U.S. POSTAGE PAID
Philadelphia, PA
PERMIT No. 529

FORWARDING & ADDRESS CORRECTION REQUESTED

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