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Community Investments Vol. 9, Issue 4
Moving Out of the Ivory Tower: The Role of
Academia in Community Development
Author(s): Michael Verchot, Director, Business and Economic Development
Program, University of Washington School of Business
Fall 1997
"American colleges and universities possess a wealth of intellectual and
economic resources that they can bring to bear on the problems of our
cities. As centers of research and scholarship, institutions of higher learning
can focus their academic energies to address some of the urban problems
that lie just beyond their gates. As major economic entities, universities can
create job opportunities for local residents, provide contracts for local
businesses, invest in low-income housing, and provide other forms of
economic lift to their surrounding communities."
-Henry G. Cisneros, former Secretary of Housing and Urban Development,
January 1995
Cisneros, in his paper The University and the Urban Challenge, articulates a
role for higher education institutions in regional economies. He also proffers
a challenge to colleges and universities to become more involved in
addressing the tough issues faced by residents and business owners in
economically distressed communities. While Cisneros' focus is on urban
America, the need for college and university involvement in rural America is
equally important.
If Cisneros is right that America's institutions of higher learning are crucial in
the fight to save our cities, then those who are involved in economic

development, including financial institutions, must know how to build strong,
strategic alliances with these institutions.
An Historic Opportunity
Historically, higher education institutions have addressed issues of poverty
by focusing on the symptoms. To be fair, some colleges and universities
have provided much-needed assistance in addressing the health and welfare
needs of residents in distressed communities. But few schools, with the
possible exception of Historically Black Colleges and Universities (HBCUs),
have adopted a dual mission of educating students and meeting the broader
development needs of the communities they serve.
In this post-cold war era, however, higher education institutions are actively
assuming economic development roles within their communities. This
evolution is the result of several factors:

Universities are now encouraged to privatize the results of their
scientific research which is leading to an increase in the number of
businesses started from technology transfer.


As this nation's cities and rural communities struggle through another
decade of disinvestment and the flight of manufacturing jobs, many
colleges and universities find themselves physically surrounded by
communities that are increasingly poor. Because of the significant
capital investment in their campuses, colleges and universities aren't
likely to pack up and move.


The shift to a knowledge-based economy is increasing the ties
between research universities and private industry which is
intensifying the focus on the practical business applications of


As colleges and universities fight for private and public dollars, they
must demonstrate their benefit to society beyond the education they
provide to enrolled students.

When approaching a college or university, it is important to first understand
at least a little bit about the world of academia.
The Nature of Academia
Generally speaking there are four types of colleges and universities:
Research Universities conduct, as one of their primary missions, groundbreaking scientific research. Faculty are promoted based on their research,
teaching and community service. But ultimately, their careers are built on
research. Thus, junior faculty (assistant and associate professors) face a
crucial "publish or perish" mandate. While Full Professors have tenure, their
salary remains tied to their publishing ability. Examples of research
universities include the University of Washington and the University of
California at Los Angeles.
Land Grant Universities provide, as one of their primary goals, on-going
education to farmers and business owners in rural communities. Faculty are
evaluated and promoted based on their work in research, teaching and
community service. But because of their land grant charter, these
institutions devote resources, including staff and students, to agricultural
extension programs. Land grant colleges will be likely allies in developing
and expanding small business assistance programs that target distressed
communities. Examples of land grant universities include Arizona State
University and the University of Nevada at Reno.
Teaching Colleges focus on undergraduate education and meeting the needs
of a region or a community. Faculty at these institutions are motivated by
teaching and there is less emphasis on research and publishing than at
research and land grant universities. Examples of teaching colleges include
Occidental College in California and the University of Alaska, Southeast.

Community and Technical Colleges provide education for high school
graduates and worker retraining for people seeking to re-enter the workforce
or acquire new skills to be more competitive in a changing economy. These
institutions may be the most receptive to becoming involved in economic
development due to their established focus on worker retraining. At the
same time, many faculty are paid only for the courses they teach, not for
research or service they conduct. Thus, there are significant time constraints
on faculty at these institutions. Examples of community colleges include
Seattle Central Community College and City College of San Francisco.
For those of us in the West, it is important to note the growing presence
of Tribal Colleges located on reservations. These colleges are an important
entry point for Native peoples seeking higher education and resources for
educating workers and managers in tribally-owned businesses. Examples of
tribal colleges include Northwest Indian College and Dine College in Arizona.
Identifying Shared Interests
Having determined that the local college or university has resources to help
reach your economic development goals and armed with an understanding
of the mission of the institution, the next step is to formalize an alliance
through which to build a program. This process follows five general steps:
1. Identify a key decision-maker at the college or university with whom
to work;
2. Articulate benefits and goals for each party in the alliance;
3. Gain broad-based internal and external support;
4. Obtain high-level support from a Dean or President; and
5. Marshall the resources to launch the project.
Some institutions may want to improve the physical appearance and
personal safety of their surrounding community. Others may want to provide
students with real-world business experience. Still others might view

involvement as part of their public institution mandate to serve all segments
of the community.
At the University of Washington, a shared vision for a program grew from an
alliance which included the Business School, community-based organizations
and the Greater Seattle Chamber of Commerce. Tenured faculty were among
the leaders of the alliance which recognized that Seattle's small business
owners in economically distressed communities needed assistance in
obtaining advanced business education and technical assistance. In
conducting an assets analysis to address this need, the University of
Washington recognized its strongest asset of all — its business school
Once a vision was developed, based on the creation of a student/small
business mentoring program, the alliance expanded to include financial
institutions, insurance companies, private industry leaders, government
officials, small business owners and other community-based organizations.
The Dean of the Business School, William Bradford, was a key leader in
expanding the alliance and formalizing the vision. This process took more
than a year to complete but we needed the time to build a strong, long-term
The significant level of external involvement in the alliance will be key to
sustaining the Business School's efforts. Corporate and community support
ensures access to the resources we need to be successful. The program is
primarily funded by the private sector to ensure that we maintain the
balance between meeting our educational and the community's economic
development objectives.
As a strategic alliance is built, it may be helpful to examine models that are
emerging in cities across the nation from which to form a base for local

Developing Projects and Programs
Examining models to develop new programs is important, but it is equally
important to recognize that each city and region has a different mix of
resources and challenges. There is no "one-size-fits-all" approach. Yet, there
appear to be two general trends emerging through effective, successful
programs: 1) the provision of direct, long-term technical assistance to small
business owners and community-based organizations; and 2) policy analysis
and development.
Long-term technical assistance programs work with businesses from three
months to many years. The Small Business Administration funds Small
Business Development Centers (SBDCs) that are housed at colleges and
universities across the nation. Washington State University has a contract
which allows it to staff nearly 30 SBDCs in cities and towns across the state.
Businesses can receive assistance for several years through these centers.
At other universities, such as Yale and the University of Texas, one faculty
member runs a semester-long class in subjects such as business planning
where students write a plan for an existing, perhaps struggling, firm. Our
program at the University of Washington Business School sends graduate
school students to work with inner-city businesses for a period of three to
nine months. And Tuskegee University in Alabama is expanding their
technical assistance to include financial assistance through grant and loan
A policy analysis and development approach has been adopted by the
University-Oakland Metropolitan Forum. This is a partnership of the
University of California, Berkeley; California State University, Hayward; Mills
College; Holy Names College; and the Peralta Community College District.
The Forum has focused on designing an improved labor force preparation
system and conducting research on transportation issues for community-

based organizations. The Forum works primarily with government agencies
and business associations.
An approach that combines technical assistance and policy analysis might
look like the program at the University of Nevada, Las Vegas which compiles
econometric and market research data. They make the data available to
policy makers, individual businesses, and industry associations who need it
for use in planning local business development.
Colleges and universities, like financial institutions, have multiple functions.
Financial institutions accept deposits, make loans, and serve as a medium of
exchange. Colleges and universities provide education, conduct research,
and are centers for theoretical debate. The type of alliances and the
programs that are developed in each community will reflect the unique
needs and resources of the region. But through alliances to support
economic development, institutions, individuals and the entire region will
benefit from the increased economic strength within its distressed

About the Author

Michael Verchot is the founding director of the
University of Washington's Business & Economic Development Program. This
program supports private sector economic development initiatives through

consulting services to small businesses and research and analysis of
economic development strategies. Michael has spent 15 years working in
small businesses with a focus on marketing, public and government
relations, and general management. Michael received his undergraduate
degree from Springfield College and his MBA from the University of
Washington. He currently serves on the Board of Directors for the
Technology Access Foundation which provides education and internships for
students of color and on the Advisory Board for the Millennium Fund, a
community development venture capital fund.
For further information on the small business technical assistance program
at the University of Washington, please call Michael Verchot at (206) 5439327. Or, you can e-mail Michael at

Community Investments Vol. 9, Issue 4
“Unbanked” Citizens Draw Government
Author(s): William Sessums, Project Manager, Financial Management
Service, Department of Treasury
Fall 1997
The Debt Collection Improvement Act of 1996 (Act), requires the
government to deliver all payments except federal tax refunds using
electronic funds transfer (EFT) by January 1, 1999. The expanded use of EFT
means that millions of individuals who receive federal benefits will be
brought into the banking system for the first time. The Treasury
Department's Financial Management Service (FMS) would prefer that these
federal recipients become "banked," through the establishment of accounts
at financial institutions. This makes direct deposit of federal benefits a viable
payment option. But if recipients remain "unbanked," the government will
pursue other options which can accommodate EFT payments. Without such
options, unbanked individuals cannot meet the EFT payment requirement,
and millions of people may continue to conduct their financial affairs in ways
that compromise their financial safety. The Treasury Department is currently
seeking industry ideas for how these EFT options will operate and how they
will be offered at a reasonable cost through a proposed rule (31 CFR Part
208) which was published on September 16, 1997.
After the public comment period, which ends on December 16, 1997, the
rule and compliance measures will be finalized. Until 1998, one can only
speculate how the government will make electronic payment options
available to federal recipients who lack bank accounts. However, Treasury

currently sponsors two programs designed to provide EFT account services.
One is the Direct Payment Card pilot in Texas; the other is the Benefit
Security Card® program that is available in eight southeastern states.
Different from these government-sponsored approaches (but designed to
indirectly expand direct deposit participation among unbanked recipients) is
Treasury's promotion of its Direct Deposit Too concept.
The government is moving boldly to convert federal benefits such as Social
Security to EFT. A major challenge: the estimated 10% of check recipients
that lack bank accounts. Treasury is encouraging all financial institutions to
expand the use of direct deposit by offering accounts that are more
"unbanked friendly." Still, a national strategy to provide banking services for
recipients that remain unserved is being defined. It's unclear what the final
plan will look like, but Treasury's FMS has been offering basic banking
services to a limited target audience since 1992.
Banking Services Through the Private Sector
Direct Deposit Too (DD Too)
Direct deposit is the most popular form of payment by EFT and is currently
the method used for approximately 55% of federal benefit payments.
Converting the remaining payments to EFT could save taxpayers roughly
$500 million over the next five years, while enhancing safety, reliability, and
convenience to consumers. However, if federal benefit recipients lack bank
accounts, direct deposit does not work. There are many reasons why
individuals lack basic bank accounts, but DD Too responds to many of the
problems commonly linked to checking accounts. Specifically, improper
account reconciliation, bounced checks, and penalty fees may create feelings
of uncertainty and anxiety plus added cost to some bank customers. This
increased cost often surpasses the price of cashing checks and purchasing
money orders at non-depository institutions.

Government research indicates that 60% of federal benefit recipients cash
their monthly benefit checks at financial institutions. FMS is asking financial
institutions to serve recipients by adopting the Direct Deposit Too model.
DD Too is a bank account model that any financial institution may adopt. DD
Too is NOT a government product where account features and fees are
regulated. However, if the DD Too model is widely adopted, it increases
direct deposit potential for any payor including the federal government. FMS
markets the DD Too model to all financial institutions in an effort to increase
the availability of "risk free" and "penalty free" accounts for unbanked
federal benefit recipients. This expands consumer choice, and brings more
benefit recipients into mainstream banking. Some financial institutions are
adopting the DD Too concept by permitting direct deposit of recurring
payments plus an over-the-counter deposit feature for infrequent payments.
These same financial institutions often supplement on-line debit with overthe-counter access features. Treasury applauds such efforts and is pleased
that the four banking regulatory agencies consider accounts based on
the DD Too model eligible for credit under the Community Reinvestment Act
Eighty-eight percent of all Treasury-disbursed benefit payments (EFT and
checks) involve programs administered by the Social Security
DD Too's Suggested Standards
Payments: Direct deposit of federal benefits into a consumer-owned and
consumer-established bank account offered by private sector financial
Access: No checks, no potential to overdraw, no minimum balance
requirements, and reasonably priced services. Card/PIN access to accounts
by on-line debit is generally suggested.

Government-Sponsored Bank Accounts
Direct Payment Card
FMS's Direct Payment Card pilot in Texas is a banking service where account
features and fees are uniform since they are defined by government. In
1992, Citibank was competitively selected to provide account services as the
Treasury Department's agent. These accounts are recipient-owned and are
"prefunded" because federal benefit payments are delivered through the
Automated Clearing House (ACH) network on the appropriate payment date.
No other deposits are permitted into the account. Recipients access their
federal payments at existing ATMs and at retail point-of-sale (POS) terminals
using a standard Citibank issued on-line debit card and a personal
identification number (PIN).
The Comptroller of the Currency and the three other federal regulatory
agencies conclude that DD Too would receive favorable consideration as
either a community development service-low cost account that improves
access to low-moderate income persons, or as an alternative delivery
system, for delivering retail banking services.
Payment access is fully compatible with private sector requirements since
transactions are routed through regional and national financial networks.
Recipients pay a reasonable fee for services, but unlike most basic accounts
that are available through the private sector, the Direct Payment
Cardaccount cannot be overdrawn, has no minimum balance requirements
and there are no "penalty fees" due to the risk-free nature of the account.
FMS markets Direct Payment Card services directly to check recipients in
Texas, targeting recipients who lack bank accounts. Citibank enrolls
recipients, issues cards/PINS, trains recipients, and handles customer
service inquiries via a toll-free phone line. Recipient participation in
the Direct Payment Card pilot is voluntary and FMS pays Citibank an

additional subsidy since the pilot nature of the program limits payment
volume and client participation.
Benefit Security Card®
The Benefit Security Card® program is an EFT application that is rolling-out
across eight southeastern states, known as the Southern Alliance of States
(SAS). This effort is a partnership between the federal government and SAS,
and marks the only instance where state-administered welfare benefits and
federal benefits are either mutually or singularly available using a single
debit card. Among SAS states, this EFT service is referred to as Electronic
Benefits Transfer (EBT). Although EBT services appear identical to benefit
recipients, the federal approach for servicing these accounts is
fundamentally different from the states' approach.
Within the SAS, both federal and state recipients access their benefits using
the Benefit Security Card® at ATMs and retail point-of-sale outlets. However,
unlike state benefits, all federal benefits via EFT must be deposited into a
consumer-owned account. Unlike federal benefits, SAS recipients who
receive only state administered benefits do not receive Regulation E
protection and the banked or non-banked status of the SAS state recipient is
not generally relevant. Most states have, or will soon have, EBT systems in
place, but many do not contract with financial institutions to provide EBT
services. In the SAS, however, a financial institution must be the primary
service provider because federal payments are a part of the Benefit Security
Card® program. All other aspects of the federal approach in the Benefit
Security Card® program, including voluntary participation by federal
recipients, are similar to the Direct Payment Card program except there is
no federal subsidy to the financial institution.
The Search for Broad-based Solutions
EBT represents state initiatives where paper payments such as checks and
food coupons are permanently replaced by Electronic Funds Transfer. FMS

has piggybacked on states' efforts, but unlike EBT, the federal program is
offered to unbanked recipients on a voluntary basis. In addition, the federal
recipient receives deposit insurance and Regulation E protection since, unlike
EBT, payments to a federal recipient must be deposited into an account at a
financial institution.
The government continues to be concerned that roughly 10 million federal
benefit recipients conduct their financial affairs in ways that compromise
safe and sound practice. Mr. John D. Hawke Jr., Under Secretary of the
Treasury for Domestic Finance, echoed this concern in his American
Banker article:
"...At a time when the complexity of our economy makes it unthinkable for
most people to conduct their daily affairs without a bank account, it has
been estimated that as many as 20% of American families — including
almost one-third of minority group families — have no such accounts. Many
of these families...rely on check cashers, pawnbrokers, money transfer
agents or local merchants to cash their payroll or benefit checks, frequently
at a high cost."


The Debt Collection Improvement Act will significantly impact federal EFT
activity. Treasury encourages financial institution officials to assertively
market direct deposit to existing customers, and to actively offer the DD Too
model to potential consumers that are currently unserved.
The Treasury Department continues to build momentum for financial
institutions to offer reasonably priced accounts based on the DD Too model.
This is because everyone gains when "unbanked" recipients are presented
with competitive account choices that are easy-to-use, reasonably priced,
and available through neighborhood financial institutions. However, if there
are voids in private sector availability, and given Treasury's mandate to
expand EFT participation by January 1999, Treasury will seek-out additional

EFT options and target services to Federal benefit recipients who lack bank
accounts. How closely such account services will be modeled on FMS's Direct
Payment Card and Benefit Security Card® programs is speculative at best.
But stay tuned...early in 1998, Treasury will begin to lay a framework for a
national strategy to deliver federal benefits to a constituency that remains

FMS's proposed rule, 31 CFR Part 208, is available for public comment
through December 16, 1997. Before any final decisions are made as to the
attributes of a federally-sponsored, consumer-owned card/PIN account,
Treasury is asking stakeholders to comment. Immediate access to the
proposed rule is available on the Internet:


For a copy of the full written opinion regarding DD Too's applicability to the

CRA, contact the Federal Reserve Bank of San Francisco's Community Affairs
Department, or contact FMS at (202) 874-6540.

"New Law Means Millions of New Customers," American Banker, November

6, 1996.

About the Author
William Sessums is responsible for managing the U. S. Department of
Treasury's Direct Deposit Too Project in the Product Promotion Division of
the Financial Management Service (FMS). He created Treasury's Direct
Deposit Too model and is the primary coordinator of FMS's Direct Payment
Card program. Prior to joining FMS, Mr. Sessums held positions with the
State of Maryland, Department of Human Resources.

Community Investments Vol. 9, Issue 4
Building Healthy Communities
Author(s): Jack Richards, Community Affairs Manager, Federal Reserve Bank
of San Francisco, in cooperation with Tyler Norris, President, Tyler Norris
Associates; Tom Mitrano, Vice President & Manager, Communications and
Community Services, Bank of Hawaii; and Joel McCabe, Executive Director,
Sunnyslope Village Revitalization and Community Development Coordinator,
John C. Lincoln Hospital
Fall 1997
Today's definition of community reinvestment has expanded beyond jobs
creation and the development of affordable housing. Successful community
reinvestment programs approach community development using holistic
applications that take into account, in addition to jobs and housing, other
components of healthy communities which include education, transportation
and health care. These reinvestment programs are successful because
community participants with diverse interests and skills work together to
identify issues, seek solutions and measure progress. They do this to foster
an improved quality of life within a geographically defined area. Participants
in these "healthy community" partnerships may include financial institutions,
community-based organizations, local governments, hospitals, businesses,
academic institutions and local citizens.
Through their CRA and community development strategies, financial
institutions play a critical role in improving the overall health of their
communities. By building long-term partnerships with local organizations,
banks can leverage their efforts and ensure the creation of community
initiatives which have measurable, tangible results. Partnerships among
financial institutions, community-based organizations and local governments

are already addressing the need for safe, affordable housing and adequate
employment, both of which are components of healthy communities.
Success in these areas can be tracked and demonstrated through the
establishment and review of specific benchmarks. Developing "community
benchmarks" is essential to ensuring that participants with diverse ideas
agree on common goals and share the responsibility for attaining these
Tyler Norris, executive director of the Coalition for Healthier Cities and
Communities, defines health as "the product of both individual genetic
factors and factors related to people's living and working environments." The
factors that create health, and therefore healthy communities, include
education, adequate housing, meaningful employment, job-skills training,
efficient public transportation, recreational opportunities, clean physical
environments, and health education and prevention services.
To effectively build healthy communities, Norris says communities must
continually develop ways to link information streams, establish priorities and
assess resources. For example, in Columbus, Ohio, the Together 2000
Healthy Communities Initiative established a set of long- and short-term
community priorities and then sponsored more than 30 community-based
initiatives to address the identified local and regional issues. Similarly, the
Healthy Detroit Initiative brought together leaders from health care,
government, business and neighborhood groups to identify community
health issues and develop a plan for improving Detroit's quality of life.
Several major healthy cities initiatives, including most notably those in
Jacksonville, Pasadena and Seattle have developed quality of life
benchmarks that measure changes affecting these communities. These
benchmark indicators vary depending on the focus of each initiative and on
the needs of each community. For example, Seattle's "sustainable
indicators" track everything from population shifts to the number of salmon

spawning in their native beds. Each indicator has a different community
health implication, but each is vital to the ongoing health status of the city
and residents of Seattle.
Healthy community initiatives are not limited to cities, since "community"
may be defined in numerous ways. Initiatives might occur on the
neighborhood level, as in Oakland, California, where activity is focused on
improving the health status of the San Antonio neighborhood in east
Oakland. Initiatives can be broad, as in Oklahoma City, where a
collaborative has been formed which includes four counties and 30
municipalities. A healthy community might even result from the initiative of
only one organization, such as Riverside Hospital in Columbus, which has
developed a menu of over 150 diverse indicators for measuring the overall
health of the communities it serves.
Norris also notes that increased consolidation within the health care industry
has accelerated the process of building healthy communities. Recent
partnerships among hospitals, HMOs and other insurance providers are
resulting in integrated delivery systems which merge diverse interests and
require greater consensus within the health care industry. Insurance
providers, who traditionally focus on long-term prevention and investment
are now partnering with health care providers, who tend to focus on shortterm critical care issues. To stay competitive, hospitals and insurance
providers are increasingly seeking competitive advantages including an
emphasis on preventative measures to improve the health of community
members and therefore reduce health care costs. These measures
increasingly include the improvement of a community's economic health as
an integral part of this prevention process.
Consolidation within the banking industry has also created opportunities to
improve banking services and reduce costs, with an eye toward improving
the economic health of the communities in which they do business. Tom

Mitrano, communications and community services manager for Bank of
Hawaii, believes financial institutions can benefit by combining a focus on
long-term investment in the economic health of their communities with the
flexibility to meet short-term needs. Mitrano introduced an "assets planning"
strategy at the bank which brought him to the attention of the Coalition for
Healthier Cities and Communities. This strategy insists that community
reinvestment activities produce measurable economic results. Mitrano says
"the key to success is to agree on specific, measurable ways a community
can be better off, then to structure lending, service, and investment
opportunities to deliver those results."
An example of Mitrano's assets planning approach is demonstrated through
an agreement that was structured with a local nonprofit to provide job
training and life skills for unemployed Hawaiians. In addition to helping the
non-profit launch this particular program, the Bank of Hawaii stayed
committed to the organization and its long-term goals. It lent bank staff to
help the non-profit develop sound financial practices and reduce their
reliance on public and private grants. To complete the process, the bank
provided targeted investment funds to support these newly created
This results-oriented approach has also worked in the Sunnyslope
neighborhood of northern Phoenix, where financial institutions have relied on
Joel McCabe to help define measurable goals and identify investment
opportunities in the area. McCabe, who heads a community development
corporation called Sunnyslope Village Revitalization, Inc., has an interest in
building a healthy community in part due to his dual role as CDC director
and as community development coordinator for John C. Lincoln Hospital,
which is located in Sunnyslope. McCabe says the hospital hasn't promoted
good health "if it treats someone in its emergency room or outpatient clinic,
just to return that person to unhealthy living conditions in the surrounding

community. The hospital believes in preventive medicine for people and
As director of the CDC, McCabe initially commissioned an Arizona State
University community needs assessment for Sunnyslope. Using this
document as a blueprint, and through its support of the CDC, the hospital
has subsequently been instrumental in the acquisition and development of
vacant properties for both commercial and multi-family use. The CDC has
partnered with local nonprofits to create a home rehabilitation program in
the area, and with the City of Phoenix, local banks, and the Arizona
Department of Commerce, has created an in-fill housing program. The Local
Initiatives Support Corporation has also been a significant supporter of the
CDC's efforts, which are now focused on bringing a supermarket and new
businesses into the area.
As a hospital employee, McCabe focuses on community organizations
including the development of block-watch groups which have reduced crime
in the neighborhoods surrounding the hospital. He points out that there are
economic considerations for creating healthier communities. "Hospitals can't
stay in business, no matter how good their clinical capabilities, if patients are
too fearful to travel to them for services."
As people are increasingly concerned with the health of their communities,
"creating the building blocks of good health, such as strong families, good
jobs and education, lies largely outside the health care system," according to
Norris. "In healthy communities, the health status of community residents is
not the sole responsibility of health care providers."
The Healthy Communities Movement
The healthy communities movement can be traced to a 1974 Canadian
government report which concluded that environment and lifestyle
improvements would make a greater contribution to the health of Canadians

than would improvements to the health care system. This report led to a
full-scale effort by the World Health Organization (WHO) to support an effort
to improve quality of life in 34 European cities in the mid-1980s. The
movement has since spread to more than 1,500 communities in more than
50 countries around the world.
The U.S. Department of Health and Human Services embraced the concept
in 1989 when it asked the National Civic League to help launch the U.S.
Healthy Communities Initiative, which served as a resource for communities
Support for healthy communities projects is available from the WHO Healthy
Cities Collaborating Center at Indiana University in Indianapolis as well as
from organizations including the American Hospital Association's Hospital
Research Trust in Chicago and the Healthcare Forum in San Francisco.
For more information on the Coalition for Healthier Cities and Communities,
call Tyler Norris at (303) 444-3366. Information about Sunnyslope Village
Revitalization, Inc. is available by calling Joel McCabe at (602) 997-4310.
About the Authors

Jack Richards is Community Affairs Manager for the
Federal Reserve Bank of San Francisco. As manager, Jack oversees
Community Affairs staff working with financial institutions and communities
in the nine western states that comprise the Federal Reserve's Twelfth

District. Previously, Jack worked as a commercial lender, a CRA and fair
lending consultant, and as a CRA officer. He is a fellow of the W.K. Kellogg
Foundation National Fellowship Program.
Tyler Norris conducts community-based planning and capacity-building
processes around the world as Executive Director of the Coalition for
Healthier Cities and Communities and as President of Tyler Norris Associates,
a consulting firm. Previously, he directed the Civic Assistance and United
States Healthy Community Programs for the National Civic League in Denver
and the Connections Program for the Windstar Foundation in Snowmass,
Colorado. He is also a fellow of the W.K. Kellogg Foundation National
Fellowship Program.
Tom Mitrano is Vice President and Manager of Communications and
Community Services for Bank of Hawaii. Tom has worked as a legislative
advocate and heads the strategic planning committee of the Hawaii
Community Foundation.
Joel McCabe is Community Development Coordinator for John C. Lincoln
Hospital and Executive Director for Sunnyslope Village Revitalization, Inc.
His role is to serve as the hospital's liaison in the immediate vicinity of the
hospital and to improve the economic health and well-being of residents in
the Sunnyslope Village Revitalization area.

Community Investments Vol. 9, Issue 4
SBICs: More Than An Equity Investment
Author(s): Sarah Bennett, Community Affairs Intern, Kennedy School of
Government, Harvard University
Fall 1997
There's good news for financial institutions seeking ways to earn investment
test credit under the new, performance-based CRA. In addition to earning a
healthy return on capital, investing in a Small Business Investment Company
(SBIC) offers a unique opportunity to serve the equity needs of emerging
small businesses while receiving favorable consideration under the CRA
investment test. Under the new CRA, a qualified investment must have
community development as its primary purpose. The regulation defines
community development to include the following provision related to SBICs:
"activities that promote economic development by financing businesses or
farms that meet the size eligibility standards of the Small Business
Administration's Small Business Investment Company programs." According
to the Federal Financial Institutions Examination Council (FFIEC), examiners
"will now presume that any loan to or investment in a Small Business
Investment Company promotes economic development."1 Small business
and banking experts expect that these recent regulatory changes will
generate new interest in SBIC investments among financial institutions.
SBICs are privately-owned venture capital funds licensed by the Small
Business Administration (SBA) to invest in the long-term debt and equity
securities of small businesses. These businesses possess generally less than
$18 million in net assets or $6 million in annual net income and are
represented in a variety of industries such as manufacturing, services and

wholesale trade. Almost 75 percent of the small businesses funded by SBICs
are non-technology businesses.2
Banks can establish their own SBICs, work in partnership with other banks
to develop a joint SBIC, or invest in an existing SBIC. Currently, 73
commercial banks own and manage their own SBICs while 12 banks invest
in but do not manage SBICs (i.e. bank associated SBICs). These bankowned or bank-associated SBICs provide $3.3 billion or over half of the $6
billion in capital under management by all SBICs. The remaining $2.7 billion
in capital is generated by more than 200 non-bank SBICs nationwide.
The Benefits of SBIC Investment
Through SBIC investments, financial institutions can realize a number of
potential benefits and regulatory easements not otherwise permitted. For
example, banks will find a safe harbor from Glass-Steagall Act restrictions
that have traditionally separated commercial and investment banking. In
addition, banks are allowed to own more than five percent of a company,
thus making equity investments that would otherwise be prohibited by
banking statutes. Keep in mind, however, that banks are not permitted to
invest more than five percent of their capital and surplus in any one SBIC or
multiple SBICs.
The SBIC program also offers leverage options, such as raising capital
through the sales of SBA-guaranteed certificates, yet few banks utilize these
options. If a bank chooses to use SBA leveraged capital, it would have to
repay it with interest and in some cases, pay a percentage of its profits
before the bank could receive a return on its original investments. Not
surprisingly, most banks find it more profitable to use their own capital
rather than leveraging SBA-guaranteed securities. Of the $3.2 billion in bank
capital, only $19 million is leveraged.

Of course, money motivates. One of the primary reasons financial
institutions are attracted to the SBIC program is the opportunity to make
equity investments with healthy returns. An example is Wells Fargo Equity
Capital, Inc., an SBIC established by the bank-holding company of Wells
Fargo Bank in 1995. In its early years of operation, the SBIC has invested
$26 million in 12 companies. All of its investments are either in
common/preferred shares or are subordinated debt with equity warrants.
According to Richard Green, manager of Wells Fargo Equity Capital, Inc.,
these SBIC investments make solid returns on invested capital and help
augment the bank's commercial banking business. Through its SBIC, Wells
Fargo is able to meet the equity needs of the large "middle banking" market,
such as family-owned businesses; a segment that can be difficult to serve
through conventional commercial lending products.
Given the recent implementation of the revised CRA regulation, banks have
another reason to invest in SBICs. Large banks contemplating qualified
investments under CRA might consider SBIC investment as a viable financial
instrument and an effective way to meet CRA requirements. Prior to July
1997, a bank's investment in an SBIC was considered under CRA only if the
SBIC's portfolio investments were qualified investments. Now that SBICs are
specifically referenced in the new regulation, investing in an SBIC itself is
considered a qualified investment as long as the SBIC serves some or all of
the bank's business region.
Federal Home Loan Banks Get Into the Act
Another change that could render SBICs more attractive to small banks is
the Federal Home Loan Banks' new authority to invest in SBICs. Federal
Housing Finance Board (FHFB) Chairman Bruce Morrison stated, "The
Finance Board is exploring ways to bring the Federal Home Loan Bank
System together with the SBIC program in areas where private investment
is inadequate."3 According to legislation passed in October 1996, the Federal

Home Loan Banks may now establish their own SBICs, set up SBIC
investment vehicles for small banks, or invest in existing SBICs.
Because not all banks are able to meet the $5-10 million investment
requirement without exceeding the 5 percent cap on total assets in an SBIC,
a Federal Home Loan Bank SBIC could be a wise alternative for its members
who want to make pooled, smaller investments with less risk. It is not clear
how many Federal Home Loan Banks will establish SBICs since parameters
for Federal Home Loan Bank SBIC activities have not yet been set by the
Federal Housing Finance Board. Look for more information on FHLB-SBIC
activities in the coming months.
Although investing in an SBIC is not a new idea, recent regulatory
refinements may encourage financial institutions to take a fresh look at
these innovative investment opportunities. For financial institutions
interested in learning more about the SBIC program, contact Mr. Len Fagan,
Financial Analyst, SBA Investment Division at (202) 205-7583 or visit the
SBIC homepage at
Bank-Owned SBICs
1st Source Capital Corporation
ABN AMRO Capital (USA), Inc.
Banc One Capital Partners, L.P.
Banc One Venture Corp.
Continental Illinois Venture Corp.
First Chicago Equity Corporation
Heller Equity Capital Corporation
Key Equity Capital Corp.
M&I Ventures Corp.
Norwest Equity Partners IV

Norwest Equity Partners V, L.P.
National City Capital Corporation
Peterson Finance and Investment Corp.
Shorebank Capital Corporation
United Missouri Capital Corp.
Banc One Equity Investors, Inc.
Banc First Investment Corporation
Charter Venture Group, Incorp.
CFB Venture Fund I, Inc.
CFI Venture Fund II, Inc.
First Commerce Capital, Inc.
First Union Capital Partners, Inc.
Hibernia Capital Corp.
Hickory Venture Capital Corp.
MESBIC Financial Corp. of Houston
MESBIC Ventures, Inc.
Mapleleaf Capital, Ltd.
UNCO Ventures, Ltd.
Victoria Capital Corp.
Bancorp Hawaii SBIC
Far East Capital Corp.
First Interstate Equity Corporation
First Security Business Investment Corp.
Hall, Morris & Drufva II, L.P.
Imperial Ventures
Opportunity Capital Corporation
Shaw Venture Partners IV, L.P.
UnionBanCal Venture Corporation

Wasatch Venture Corp.
Wells Fargo SBIC, Inc.
399 Venture Partners
BT Capital Partners, Inc.
BancBoston Ventures
Barclays Capital Investors Corp.
CB Investors, Inc.
CIBC Wood Gundy Ventures
Chase Manhattan Capital Corp.
Chemical Venture Capital Associates
Citicorp Venture Capital, Ltd.
Commonwealth Enterprise Fund, Inc.
CoreStates Enterprise Capital, Inc.
Creditanstalt SBIC
Domestic Capital, Inc.
First Fidelity Private Capital, Inc.
First New England Capital, L.P.
Fleet Venture Resources, Inc.
Greater Phil. Venture Capital Corp.
IBJS Capital Corp.
J.P. Morgan Investment Corporation
M&T Capital Corp.
Mellon Ventures, L.P.
NatWest USA Capital Corp.
PNC Capital Corp.
Paribas Principal Incorporated
Pyramid Ventures
RFE Capital Partners, L.P.
Sixty Wall Street SBIC Fund, L.P.
Societe Generale Capital Corp.

Toronto Dominion Corp (USA), Inc.
Triad Capital Corp. of New York
UBS Partners, Inc.
UST Capital Corp.

Bylsma, Michael, Interpretative letter regarding Lake County Integrated

Financing Program, FFIEC, May 22, 1997.

Today's SBICs: Investing in America's Future, National Association of Small

Business Investment Companies, Page 2.

Financial Institutions, New CRA Rules Open Doors for Banks, Small

Businesses, Daily Report for Executives, Lotus Notes/Newsstand, Page 2.
About the Author

Sarah Bennett is an intern in the Community Affairs
Department of the Federal Reserve Bank of San Francisco and a graduate
student at the Kennedy School of Government at Harvard University. Prior to
her work in Community Affairs, Ms. Bennett worked for Congresswoman
Anna G. Eshoo in her Palo Alto District Office and for InnVision, a homeless
agency in Santa Clara County.

Community Investments Vol. 9, Issue 4
Interagency Interpretive Letter Clarifies How
Investments in National Funds Are Treated
Under the Investment Test
Author(s): Shawn Elliott Marshall, Associate Editor, Community Investments
Fall 1997
Responding to concerns raised by the Local Initiatives Support Corporation
(LISC) and its subsidiary, National Equity Fund (NEF), the OCC issued an
interagency interpretive letter on September 11, 1997 which clarifies how
investments in national funds, which are then invested in low-income
housing tax credit transactions, will be treated under CRA's investment test.
The letter addressed three major areas of concern and responded to each as
1. Direct vs. Indirect Investments: The agencies clarified that the CRA
regulations do not differentiate between direct investments in specific
projects vs. indirect investments made through regional or national
funds — as long as the investments meet the definition
of qualified community development investments. Both are considered
legitimate investments.
2. Geographic Distribution: At the time limited partnerships are formed
through national funds such as NEF, financial institutions are obliged to
invest in "blind pools," since actual projects receiving committed funds
haven't yet been identified. Given CRA's focus on an institution's
assessment area, there was concern that tax credit investments made

through a national fund (such as NEF) would not receive the same
level of consideration as investments in local or regional funds.
However, NEF has reported that financial institutions
can geographically target their investment(s) to areas that correlate
with their assessment area or a broader statewide/regional area. "NEF
will provide investors a written statement that it intends to invest a
specified dollar amount in a geographical region specified by the
investor and based on the NEF regional structure. These targeting
assurances from the NEF allow a retail institution to meet its
geographic investment needs with an investment in NEF."
Furthermore, for limited purpose or wholsesale banks, qualified
investments in a statewide or regional area which includes its
assessment area will be favorably considered in the evaluation of an
institution's CRA performance. If the wholesale/limited purpose bank
has adequately addressed the needs of its assessment area(s), it may
invest in a nationwide fund without targeting its funds.
3. How Examiners Evaluate Investments in Equity Funds: A financial
institution may receive CRA consideration for its equity investment in
low-income housing tax credits at the time it makes a binding
investment commitment to the partnership; there is no need to wait
until funds have been dispersed to specific projects. Once the
partnership is formed, each investor records the promissory note on its
books and amortizes the investment over the life of the tax credit
benefit period. In each subsequent year after the initial investment,
the CRA consideration that an institution would receive for the dollar
amount outstanding would reflect the investor's accounting treatment
in that year. Thus, examiners will consider both new and outstanding
investments in their investment test determinations.

"The interpretive letter provides a needed comfort level for financial
institutions considering investing in national funds. These funds have proven
to be excellent tools for increasing investment in low-income housing."
-Ellen Lazar, Executive Director, National Association of Affordable Housing
For a complete understanding of the issues, CRA and investment officers are
encouraged to read the full text of the interagency interpretive letter. For a
copy, please contact June Yambao in Community Affairs at (415) 974-2978.

Community Investments Vol. 9, Issue 4
1996 CRA Data Now Available
Author(s): Shawn Elliott Marshall, Associate Editor, Community Investments
Fall 1997
The FFIEC has announced the inaugural release of the new CRA data which
includes 1996 information about small business and farm loans, community
development loans and institution assessment areas. All 2,078 CRA reporting
institutions should have received the 1996 data in early October. For other
organizations, the data may be obtained for $10 in two format options — a
CD-ROM software package or an individual institution or aggregate report on
The CD-ROM software package includes data for all reporting institutions
from around the country. It also includes an easy-to-use search capability
which enables users to retrieve reports in a timely and efficient manner. The
paper-based report includes an institution's disclosure or an aggregate
report for either an individual MSA or all non-MSA counties in a particular
Several key findings of the data are delineated in a September 30, 1997
press release issued by the FFIEC. Highlights of those findings include:

In 1996, 2.4 million small business loans, totaling $147 billion, and
216,629 small farm loans, totalling $10.4 billion were reported by
2,078 lending institutions. Reported loans include both originations
and purchases of loans during the year.1


Among all reported small business loans, the average loan size was
about $61,000. Eighty-seven percent were for amounts under
$100,000. The maximum loan reported was $1 million.


Among all reported small farm loans, the average loan size was about
$48,000. Eighty-eight percent of small farm loans were for amounts
under $100,000. The maximum loan reported was $500,000.


Small business lending varies by region of the country, a variance
which closely follows the differences in the number of business
establishments across regions.2 For example, New England reported 5
percent of small business loans with 5.9 percent of all business
establishments. The Pacific reported 14.7 percent of small business
loans with 16.2 percent of all business establishments. The regional
variation in small farm lending is more pronounced than in small
business lending, though this regional variation closely tracks
differences in the share of farms and share of farm sales by region.


Small business loans are heavily concentrated (about 80 percent) in
central city and suburban areas. Most small farm loans (74 percent)
are made in rural areas.


In 1996, 32,677 community development loans totaling $17.7 billion
were reported. The average community development loan amount was
$542,000, much larger than the average small business or small farm


Fifty-seven percent of reporting commercial banks and 46 percent of
reporting savings associations extended community development loans
in 1996. Eighty-five percent of all community development loans were
originated by commercial banks.

If you would like a copy of the press release which contains a CRA data fact
sheet with corresponding tables as well as a 1996 data order form, please
contact June Yambao in Community Affairs at (415) 974-2978. If you have
specific questions about the `96 CRA data or would like to place a data

order, please contact the FFIEC at (202) 872-7584. Data requests will be
filled by the FFIEC within a few days of receipt of your order.


Unlike mortgage lending, a well-developed secondary market for small

business loans does not exist. As such, only about 2 percent of small
business loans and less than 1 percent of small farm loans were reported as
purchases from another institution.

FFIEC analysis of small business and small farm data are categorized within

the following nine U.S. regions: New England, Middle Atlantic, East North
Central, West North Central, South Atlantic, East South Central, West South
Central, Mountain and Pacific.