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In Community and Economic Development
Federal Reserve Bank--.of Atlanta
Volume 4, Number 4


CAP Growth
Number of Loan s


Funded Annually

Federal Regulations Amended
to Allow Community Lending
By Courtney Dufries




19861987 1988 1989 19901 9911 992 1993

Michigan CAPs
Set Trend for
Small Business
By Jill Enos


n 1986, the Michigan Strategic Fund (MSF) introduced the first Capital Access
Program (CAP) in the nation .
CAPs are designed to encourage banks to make small business loans that are somewhat
riskier than conventional loans,
without compromising bank
safety and soundness standards. By creating a substantial
loan loss reserve with public and
private money , banks can be
more aggressive in expanding
their markets and supporting the
growth of businesses. The success of the program has enabled
many small businesses to obtain
access to needed debt capital.
Federal Reserve Bank of St. Louis

See CAPS, page -I

hanges in two federal
regulations will make it
possible for many banks and
bank holding companies to invest in community development
projects without first obtaining
Federal Reserve Bank approval.
These changes, effective January 9, 1995, will allow certain
financial institutions the opportunity to engage in activities that
promote community welfare projects that primarily benefit lowand moderate-income persons
or small businesses, or that meet
community needs in low- and
moderate-income areas such as
housing, services , and jobs.
A wide range of investments
are permissible under the regulations, including investments in
community development corporations and equity investments in
rental properties. However,
public welfare investments allowed by these regulations do
not automatically qualify for
Commun ity Reinvestment Act
(CRA) "credit. " [For more information on CRA, see Partners,
Volume 4, Number 3.]
Two Federal Reserve Board
Regulations , H and Y , were
amended to allow these community welfare investments. Regulation H amendments permit

banks regulated by the Federal
Reserve System to engage in
new commun ity development
activities previously unavailable
except on a case-by-case basis.
National banks regulated by the
OCC and state banks regulated
by the FDIC are not affected by
this regulation (although both
agencies have similar rules).
Regulation Y provides bank
holding companies with similar
opportunities. All bank holding
companies are regulated exclusively by the Federal Reserve
System .
See REGS, page 6


The changing demographics of
Rural America could present problems
when developing federal programs
to address housing and economic
development .......... . .. . .. . . ... .. 2


Neighborhood revitalization efforts
proceed in flood damaged Albany,
Georgia . ... . . . ... . . . . . .. . . .. . .. ... 5


Federal Reserve consumer complaint
process and consumer advisory
services explained . . . . . . . . . . . . . . . . . 11



The Diversity of Rural America
Diverse problems covering large areas can make
solutions difficult to implement
By Karl N. Stauber


ohn Kennedy's agricultural adviser argued that
American agriculture is too complex to represent with statistics
on the "average farmer". Rural
America , similarly , is complex .
What is accurate for the Delta of
Mississippi and Arkansas may
have little similarity to the Central Valley of California or to the
mountains of North Carolina.
Each of us carries around one
or two images of "average rural
America," often based on limited
experience . The diversity of
America is its great strength , but
the limited knowledge most people have of rural America's diversity makes it difficult to talk about
its future directions and formulate appropriate rural policy.
But a number of statements
can be made about rural America in the aggregate.
"The U.S. is now dominated
and defined by its suburban
communities, rather than by its
rural edge." In 1990, for the first
time in the country's history , over
50 percent of the population
lived in metropolitan areas containing over a million people.
And most of the growth that has
occurred since 1950 in these urban areas
has been
in the suburban ring not the inner city.

''Agriculture no
longer dominates
rural America ... "

" Ru r a I
America ' s
population is still declining ." As a
percent of the country's total
population , rural population has
been declining almost since the
founding of the Republic . In
1920 , urban population ex
Federal Reserve Bank of St. Louis

ceeded rural population for the
first time . By 1990, only 25 percent of the nation's population
lived in rural areas. [Editor's
Note: Rural areas, especially in
the South and West, grew by
nearly 880,000 people between
April 1990 and July 1992.)
Approximately 84 percent of
the contiguous land mass of the
U.S. is rural, according to definitions developed by the Office of
Management and Budget. Nationally , approximately 2,300
counties are rural.
"Agriculture no longer dominates rural America." In 1890,
24.8 million Americans (42.3
percent of the total population)
lived on farms. By 1990, only 3.9
million (1 .5 percent) lived on
farms. Agriculture is no longer
the major source of employment
in rural America, and it is no
longer the major source of income for the majority of farmers .
"Rural Americans are more
likely to be poor than their urban
relatives , and the gap is growing." Fifty-one percent of rural
residents fall into the two poorest
quintiles, compared with 37 percent of those in metropolitan areas. In 1987, per capita rural
income was only 73 percent of
urban per capita income, down
from 77 percent in 1979. Thirtysix percent of all rural children
live near or below the poverty
level, compared with 29 percent
in urban areas .

Four Views of Rural
Rural America can be seen as
containing four kinds of counties ,
depending on their concentration of natural resources and ag-


riculture, manufacturing , poverty, and population . While
some counties may fall into more
than one category and other
categorization schemes could
be used, these four views are
useful frameworks for examining
the various opportunities and
needs of rural communities.
Natural resource- and
ag-focused areas include the
agriculture-dependent counties
that are located mainly in the
Great Plains (with smaller
concentrations in the lower
Mississippi Delta and parts of the
intermountain West) , and the
105 mining-dependent counties
that are concentrated primarily in
the middle Appalachian region .
The rest are spread throughout
the country with clusters in the
West. This category also
includes a number of timber- and
recreation-dependent counties .
The outlook for these counties is mixed. Natural resourcedependent communities that are
near urban areas have substantial opportunities to increase
tourism and specialized valueadded food and wood processing. At the same time, these
areas are likely to experience the
greatest conflict over differing
environmental values . Suburban people, who are now the
majority in the U.S., are likely to
be highly suspicious of assurance by farmers, forest products
companies, and others that have
traditionally controlled much of
rural development in these areas.
While demands for more environmental regulation continue ,
See RURAL, page 3

Rural America: Persistent Poverty Noted in Parts of the South

these rural areas will continue to
be exposed to many issues
reaching well beyond the farmstead and the woodlot. Tax policy, trade policy, and monetary
policy will have much to say
about the economic viability of
natural-resource-dependent areas in the next year and the next
Manufacturing-focused areas
cover the largest part of rural
America. About 945 counties
(approximately 40 percent of rural America) fall into this category . These counties are
located largely in the eastern
two-thirds of the country, with a
small concentration in the Northwest.
This part of rural America includes a mixture of businesses
that are based on cheap labor
and those based on some other
competitive advantage. Rural
communities that depend on low
labor costs are not likely to fare
well in the increasingly competitive global market. Rural manufacturing areas must compete
based on quality and other competitive advantages, not tax giveaways and poor-quality jobs. As
with the natural-resource-dependent areas , tax policy , trade
policy , and monetary policy will
have a substantial impact on the
economic viability of rural manufacturing areas.
Persistent poverty areas include about 500 counties clustered in the deep South, the
southern two-thirds of Appalachia , parts of the Ozarks ,
and in the western areas with
significant numbers of Native
American or Hispanics. In many
of these areas , farming is not
currently a major source of personal income, and these areas
are less affected by shifts in the
international marketplace.
Past economic development
efforts here have been largely
Federal Reserve Bank of St. Louis

unsuccessful. If these areas are
to experience increased economic opportunity, it will require
increased, highly strategic efforts involving all levels of government. Without such targeted
investments , these areas are

"Past economic
development efforts
fin poverty areas/
have been largely
likely to continue to be pulled
down by persistent poverty and
lack of opportunity.
Low-density areas exist almost entirely between the 100th
Meridian and the eastern slope
of the Pacific coastal mountain
range . This is the area that Rutgers University researchers
have called the "Buffalo Commons." Forming the heart of this
low-density region are the 396
counties of the Great Plains. In
this area , people have been
moving from rural counties to urban areas for almost every decade since 1930.
This region, highly dependent
on agriculture and energy, has
the potential to slide into longterm economic difficulty . Simply
relying on the marketplace is not
likely to help this region of the
country during the next year or 5
years. New government initiatives will be required to ensure
the economic viability of much of
this part of rural America . The
further an isolated county is from
an urban concentration , the
more fragile its economic future .

The diversity of rural America
represents a major challenge to
the Federal government and to
USDA in particular in 1994. The
n atu ra I-reso u rce-depe ndent

parts of rural America will experience continuing pressure over
environmental concerns . In
general , however, these regions
are well positioned to compete in
an increasingly competitive
world , especially if there is a
"level playing field ". The parts of
rural America with the most scenic natural resources and special
recreational and retirement
amenities are likely to experience substantial growth and
Manufacturing-dependent areas include highly competitive
individual firms but also some
that are not likely to prosper.
Government investment, tax,
and capital policies can do much
to help these parts of rural America.
Two sectors of rural America
need special attention and assistance from the Federal government and USDA: the persistent
poverty regions and the lowest
density regions . The approaches to these special needs
should be cooperative and tailored to the local situation and to
market opportunities. Finally,
some parts of rural America will
experience dramatic humanmade or natural structural shifts.
The Department needs to be
ready to assist these areas. ♦

Mr. Stauber, Vice President of
Programs at Northwest Area
Foundation , was recently appointed to Acting Deputy Undersecretary at the United States
Department of Agriculture.

lh 1s e,cerpt
11 ith pernw;sion from
( )111/ook. p11bhsl ed h) ti .:
I cono1111c RcsearL11 \c•n Ki:

at the l S Department ul
,\ 11 r Icu It u rc


CAPs: Flexible and Non-Bureaucratic


Contmuedfrom page I

The CAP is based on a portfolio insurance concept, rather than
a loan-by-loan guarantee. When
a participating bank makes a loan
under the program , a special reserve fund is set up to cover loan
losses the bank may incur. The
reserve fund is owned and controlled by the MSF , but is earmarked in the bank's name and
is deposited at the participating
bank. A bank may withdraw
funds from its reserve only to
cover loan losses it incurs under
the program.

Loan Loss Reserves
When a bank makes a loan
under the program , premiums
are paid into the reserve fund .
The borrower pays a premium
between 1.5% and 3.5% of the
amount of the loan . The bank
matches that amount, and the
MSF matches the sum of the two.
For example, if the borrower pays
a premium of 2.5%, the bank
pays another 2.5%, and the MSF
contributes 5%, for a total contribution to the reserve of 10%.
This amount is added to the
bank' s existing CAP reserve
fund , increasing the total reserves available for all loans
made under the program . The
bank is allowed to recover their
premium from the borrower
through up-front fees or higher
interest rates . Premiums and
fees may be financed as part of
the loan .


Every time
makes a loan ,
the reserve increases; the
full amount in
the reserve account can be
used to cover losses on any loan
made in the program . If loans are
repaid without any loss, the reserve funds stay in the account.
However, if the loan losses exceed the reserve amount, the
bank is fully liable for the excess

decisions are
determined by
the bank ... "
Federal Reserve Bank of St. Louis

loss. Although the CAP is designed to encourage banks to
make somewhat riskier business
loans, the liability also creates an
incentive for banks to be prudent. As a result, most loans are
to marginal borrowers, not high
risk borrowers.
The Michigan CAP has been
able to leverage a relatively large
amount of private dollars with a
relatively small amount of public
dollars. The current leverage ratio is 23 to 1. The popularity of
the program has increased since
its inception . In 1986, 11 loans
were made totaling $1 ,574 ,600;
by 1993, the number of loans
made for the year had risen to
707, for a total of $34,589 ,274.
The chart on page 1 depicts the
loan growth.

Bank Participation
Banks are willing to participate in the program because of
its flexibility and non-bureaucratic nature. A substantial
amount of freedom is given to
the bank in lending under the
program . To enroll a loan , minimal paperwork is required . A
bank files a one page Loan Filing
Form within 10 days .af1fil the
loan is made. Underwriting decisions , including the interest
rate , term of maturity, collateral
requirements, and other conditions of the loan are determined
by the bank. Half of the interest
earned on the reserve account
deposited at the bank is added
to the reserve; the other half
goes to the MSF. 60 Michigan
banks , representing 85% of
statewide commercial banking
assets, have enrolled loans under the program .
Some limitations exist on the
eligibility of loans and borrowers .
Loans can only be made for business purposes in Michigan ;
See CAPs. page 8


The Department of Energy
will provide $900,000 to minori ty - owned banks in Dade
County, Florida , as part of the
federal Bank Financial Assistance Program , which can then
be loaned by the ban ks at low
cost to minority and femaleowned businesses . Florida
banks rece iving the money are
Capital Bank, Continental National Bank of Miami , First Florida Savings Bank, Gulf Bank,
Hamilton Bank N.A. , lnterAmerican Bank , Peoples National
Bank of Commerce , TransAtlantic Bank and Metro Savings
First Union Corporation
and the Congress of National
Black Churches have formed a
six-year partnership to address
the needs of African-American
churches and their surrounding
communities. The initiative is
being targeted in eight pilot cities
in the southeast: Washington ,
DC; Richmond , VA; Raleigh and
Durham , NC ; Columbia , SC ;
Jacksonville , FL; Atlanta and
Savannah , GA. A specific community development project will
be tested in each of the cities,
and will include affordable housing , small business development ,
educationa l
seminars .
The Jackson/Hinds Minority Capital Fund provides financing
assistance to minority-owned
businesses in Hinds County ,
Mississippi. With over $2 million
available to lend, the program
began accepting applications in
February 1994. Since then ,
seven loans totaling $496,397
have been approved . The fund
was establ ished uti lizing city,
county, state , and private funds .
Banks involved include Trustmark National Bank, Deposit
Guaranty National Bank, Bank
of Mississippi , and SunBurst


Successful Partnerships Pay
Dividends in Albany, Georgia
Local government, nonprofit, college, and banks
leverage their resources
By Hank Helton


he substantial losses inlar duplexes in the same neighborhood .
curred by homeowners
and small businesses as a result
Upon completion , the project
of the 1994 summer floods in
will have transformed an entire
south Georgia have intensified
the demand for community
development lending .
Fortunately, several creative and successful partner"''./
• I
ships have been formed in
Albany , Georgia , to address many of these needs.
Security Bank and Trust
Company, the City of Albany's Community Development
Department ,
Second Mount Olive Baptist Church , and Albany
State College, are working
together to create new
Ongoing neighborhood revitalization efforts
housing opportunities and
in Albany, Georgia
revitalize distressed areas.

Bank, City, and Church
Revitalize Neighborhoods
One partnership , among the
bank , the city , and the church ,
began in 1993 when bank officials presented a community development lending seminar with
Mount Olive's Outreach Center.
The Center is the City of Albany's
Community Housing Development Organization (CHOO), and
is charged with developing affordable housing .
After establishing a relationship with the CHOO , Security
Bank and Trust committed to
lend the organization $20,000 in
April 1994 to purchase four duplexes in a designated redevelopment area. The Department
of Community Development had
pledged to the CHOO a $140 ,000
HUD grant for the rehabilitation
of four duplexes. The City already owned and was in the
process of rehabilitating 12 simi-
Federal Reserve WINTER
Bank of St. Louis

city block that was previously
filled with condemned or nearly
condemned buildings into affordable housing units for resi dents of Albany .
This development will be similar to another successful development called Hampton South
(see Partners Vol.2 , No.2) and
will feature approximately 100
new homes for first-time purchasers, 50 duplexes for low- to
moderate-income individuals
and families, and a community
recreation center. Simi lar to the
financing for Hampton South ,
Security Bank will provide the
first mortgage to qualified purchasers with the City of Albany
providing a second mortgage.
Construction is expected to begin in the summer of 1995.
"It was time to do more than
just talk about it," said Mitch Everett, Vice President of Security
Bank and Trust. "As a result of
the flood in July, affordable
housing is now more of a critical

issue than ever." Approximately
80 percent of the flood ing occurred in south Albany. He estimates that 60 percent of the
housing units destroyed by the
flood were affordable rental units.

Bank and College
Form Local CDC
Security Bank and Trust
is also assisted by Albany
State College (ASC), an
historically black college ,
in the formation of the ASC
Inner-City Development
Corporation , a local CDC
designed to address
neighborhood revitalization and small business
development needs in
neighborhoods surrounding the college . Mr. Everett
serves as the treasurer of the
CDC board of directors .
The corporation recently received a $600,000 funding commitment from SEEDCO , a
national non-profit that specializes in financing and providing
technical assistance to CDCs .
The commitment is intended to
provide both operating and program funds for three years, and
will help the CDC leverage additional loans from local lenders
and others for housing and small
business development needs.
Although the recently formed
CDC has not yet developed specific plans to utilize this large
funding commitment, the partnership between the bank, CDC ,
and SEEDCO will surely pay
dividends for the surrounding
community. ♦

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Regs: Restrictions Eased on Bank and BHC Investments
Continued from page I

Bank Holding Company
A bank holding company
(BHC) is generally defined as
any company that has direct or
indirect control of a bank and
includes those companies that
own, control, or have power to
vote 25 percent of more of a
bank's stock. The Board of
Governors of the Federal Reserve System issued Regulation Y to define BHCs and to
regulate their activities, as provided by section 4(c)(8) of the
Bank Holding Company Act.
Because banks are now allowed to make certain community welfare investments without
prior regulator approval , Regulation Y was amended to allow
bank holding companies similar
Once regulator approval has
been obtained for a particular
community welfare investment,
any other investment defined by
the new regulation may be
made without prior approval if
these investments, when aggregated with similar types of investments made by depository
institutions owned by the BHC,
do not exceed five percent of the
total consolidated capital stock
and surplus of the BHC . After
the first approval , BHCs may directly, or through a whollyowned subsidiary , engage in
any activity allowed by the Federal Reserve Act (paragraph 23
of section 9) , allowed by national banks (as determined by
the Office of the Comptroller of
the Currency), or allowed by the
Community Development
Banking and Financial Institutions Act of 1994 (see Partners ,
Volume 4, Number 3].
In addition, BHCs may directly or through a subsidiary:
1) invest in, finance, develop,
rehabilitate , manage, sell , and
Federal Reserve Bank of St. Louis

rent residential property if a majority of the units will be occupied
by low- and moderate-income
persons , or if the property is a
"qualified low-income building"
as defined by the Internal Revenue Code;
2) invest in, finance, develop,
rehabilitate , manage, sell, and

Higher investJnents
are permitted on a
rent nonresidential real property
located in a low- and moderate
income area if the property is to
be used primarily for low- and
moderate-income persons;
3) invest in and provide financing for one or more small
businesses located in a low- and
moderate-income area to stimulate economic development;
4) invest in, finance, develop,
and otherwise assist job training
and placement facilities or programs designed primarily for
low- and moderate-income persons;
5) invest in and provide financing to an entity located in a
low- or moderate-income area if
that entity creates long-term employment opportunities, a majority of which (based on full time
equivalent positions) will be held
by low- and moderate-income
persons ; and
6) provide technical assistance, credit counseling, research,
development assistance to lowand moderate-income persons ,
small businesses, or nonprofit


corporations to help achieve
community development.

State Member Bank
Commercial banks regulated
by the Federal Reserve , called
state member banks (SMBs) ,
are allowed by the Depository
Institutions Disaster Relief Act
of 1992, to make investments
designed primarily to benefit the
public welfare to the extent permissible under state law and as
allowed by federal regulation.
Regulation H permits SMBs to
make certain public welfare investments without any prior
regulatory approval required ,
and other investments when
specific approval has been obtained . The regulation now
contains a new section, entitled
Community Development and
Public Welfare Investments, to
facilitate this amendment.
SMBs now have the opportunity to purchase, sell, underwrite
and hold investment securities,
many of which were only allowed on a case-by-case basis
before, if certain provisions are
met. The investments must be
designed to promote the public
welfare , must not violate any
state law, can not expose the
bank to unlimited liability, and
when aggregated, must not exceed the sum of five percent of
the bank's capital stock (paid in
and unimpaired) and five percent of its unimpaired surplus
fund .
The Federal Reserve Board
may allow higher investments,
up to 10 percent of this calculated stock and surplus , on a
case-by-case basis. The regulation limits any single investment without prior approval to
not more than two percent of a

See REGS, page 10

Mark your calendars and plan to attend our

~aissance of ~ a ( -7'\.merica Conference
Designed for financial institution officers, government officials, and business, community and nonprofit
organization leaders interested in rural community and economic development lending.
March 7-8, 1995
Memphis, Tennessee
The Peabody Hotel

hosted by
Federal Reserve Bank Presidents
Robert P. Forrestal, Federal Reserve Bank of Atlanta
Robert D. McTeer, Jr., Federal Reserve Bank of Dallas
J. Alfred Broaddus, Jr. , Federal Reserve Bank of Richmond
Thomas C. Melzer, Federal Reserve Bank of St. Louis
For registration information, call Dianne Rawls at (404) 589-7307.


SHOP: The Card You Pick Can Save You Money, 17 pps., Federal Reserve System , provides a
convenient summary of terms and conditions of credit card plans offered by financial institutions. For
free copies, call (404) 589-7307.


Detecting Discrimination by the Numbers, speech by Lawrence B. Lindsey , Governor, Federal Reserve
Board, June 7, 1994. Governor Lindsey discusses the pros and cons of statistical analysis and credit
scoring systems to combat lending discrimination.


State Financing Programs for Housing and Community Development Compendium, available for
Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee , compiled by the Community Affairs
section of the Federal Reserve Bank of Atlanta. These compendiums provide complete information on
state-funded programs that community groups and lenders can utilize to finance local development and
rehabilitation programs . If you are looking to form public/private partnerships, don't overlook these
opportunities! Includes contacts and 3-year fiscal information. For copies, call (404) 589-7307 . $2.50


Closing the Gap: A Guide to Equal Opportunity Lending, 27 pps., Federal Reserve Bank of Boston ,
provides a comprehensive list of suggestions and practices to ensure loan applicants are treated fairly
and to expand markets for banks. A must for lenders! For copies , call (617) 973-3459. Also available
on videotape from VIDICOPY . Call 800-708-7080 for pricing and availability information.


The Credit Process: A Guide for Small Business Owners, 26 pps ., Federal Reserve Bank of New York,
provides detailed information for small businesses on potential methods and criteria to obtain credit from
financial institutions. For free copies , call (404) 589-7307 .


Directory of Bank Holding Company Community Development Investments, 79 pps. , Federal Reserve
System , July 1994, provides a directory of approved community development investments in the U.S.
For free copies call (404) 589-7307.


Community Development Financial Institutions: Investing in People and Communities, prepared by
Woodstock Institute provides an overview of the entire range of CDFls by describing the various types
of CDFls, the roles they play In meeting credit needs, examples of specific lending programs , capital
needs of CDFls , and relationships between CDFls and conventional financial institutions. For a copy ,
call (312) 427-8070 or write to Woodstock Institute, 407 South Dearborn , Suite 550 , Chicago , Illinois


Housing Characteristics of Rural Households: 1991, Bureau of the Census, prepared by Jan S. Tin ,
Current Housing Reports , Series H121/93-5, U.S. Government Printing Office, Washington , D.C., 1993.
This study presents demographic information on the social , physical , and economic characteristics of
rural households. For free copies, call Mr. Tin at (301) 763-8376

Copies of materials produced by the Federal Reserve System can be obtained by writing or calling the
Community Affairs section at (404) 589-7307.
Federal Reserve Bank of St. Louis


CAPs: Improved Access to Business Loans
Contmuedfrom page 4


loans cannot be made for housing, passive real estate ownership, situations which present
bank conflicts of interest, or for
refinancing prior debt which is
not in the CAP program. However, CAP permits funding lines
of credit ,
loans to
ions, and
prior CAP
loan refinancing.

co111petition and
CRA have kept
costs down ... "

Over the past eight years ,
CAP funding has been made
available to nearly all sectors of
Michigan industry, with the largest number and amount of loans
going to retail trade and to service industries. CAP lending by
industry has been representative
of the distribution of industry in
Michigan. For example, the largest Michigan industries (by number of persons employed) are
retail trade and service industries, and the largest number of
loans were made to entrepreneurs in these industries. The
chart on page 8 depicts these

businesses and businesses with
sales under $100,000. The chart
on page 10 presents this breakdown .
In order to allow banks as
much independence as possible
and to reduce reporting requirements, the MSF does not estab1ish interest rates , impose
underwriting conditions , or monitor past due rates . To monitor
the reserve accounts, the MSF
keeps record of the total loans
made and the number of claims
filed . As of June 30, 1994, 2,913
loans had been made totaling
$150.1 million. Claims had been
filed on 151 loans (5.2% of total
loans) for a total of $4.8 million
(3.2% of total dollars actually
funded) .
The CAP has become increasingly popular since Michigan launched the first one in
1986. The following states have
also implemented similar CAPs:
Arkansas, Colorado, Connecticut , Indiana , Massachusetts,
New Hampshire, Oklahoma,
Oregon , Vermont , and West Virginia. In addition, city wide programs are being implemented in

Milwaukee, Wisconsin, Akron,
Ohio, and New York, New York.
In September 1994, Congress
passed legislation providing federal support for state capital access programs; however, the
recommended allocation of $50
million for the program is still
The structure of CAPs varies
from state to state. Michigan
currently receives its funding
from oil and gas leases on state
owned property. Other states
obtain funding from sources
such as state economic development councils , fees from services, state revenues, or state
bonds. Some programs have
slightly different eligibility requirements and may not allow
refinancing . Colorado, for example, makes loans only up to
$100,000, with special incentives for banks to loan to womenowned , minority-owned , and
businesses .
Though the programs vary
slightly from state to state , they
maintain a common purpose of

See CAPs, page JO

Competition and CRA
Help Control Costs

Michigan Capital Access Program

Borrowing money through the
CAP may be more expensive
than a conventional loan for a
business owner due to the premium charged to the borrower
for the loan loss reserve. However, the MSF assumes that
bank competition will limit the
number of borrowers referred to
the CAP to only those borrowers
whose needs cannot be met
through conventional financing.
In addition , competition among
banks for loans such as these
that can help meet Community
Reinvestment Act obligations
has kept costs down . Since
1986, CAP loans have ranged
from as small as $400 to as large
as $2 ,028,100, with the largest
number of loans made to start-up

Loans Made vs. Relative Size of Industries
Reserve Bank
St. Louis

CAP Loans
by Industry

Michigan Employment
by Industry


29 3%

15 5%

4 4%

Employment by Industry data from Bureau of Econom~ Ana~ss, May 1993



Nel\S You Can Use


National Nonprofit Announces Rural Initiative


he Local Initiatives Support Corporation (LISC)
has announced a $101 million
program intended to provide support and training to 48 community
development corporations working in rural areas across the
country . This four-year effort will
focus on improving the capacity
of these CDCs to better respond
to the needs of their respective
communities .
A CDC 's eligibility for this program will not be solely based on
experience , but on a comprehensive vision of, and commitment
to , community change that empowers low-income residents .
Of the 48 CDCs chosen , 12 will
be new or "emerging" and 36 experienced or "mature" CDCs.
An experienced CDC is defined
as having been incorporated for
five years or longer. LISC will
make their determination based
on the CDC's community development strategy , experience ,


and record of meaningful development projects and activities
that benefited their constituency .

LISC must also determine
whether the CDC's target area is
eligible as "rural ". There are
many definitions of "rural" used
by private and public policy-makers ; however, the most commonly used definition is "those
communities with populations
less than 50 ,000." USC will also
consider the target area's economic conditions , resource
availability, and population
trends. Exceptions may also be
made if the community can demonstrate that specific trends or
circumstances will satisfy USC's
definition of rural.
Although a limited number of
CDCs will receive the increased
financial assistance offered
through the program such as
grants, pre-development and de-

velopment loans, bridge financing , equity, and secondary market resources , other CDCs will
also benefit. The program is
also intended to reach a larger
number of CDCs by delivering
services such as technical assistance , training , and public
policy support.
USC has already distributed
over 1,500 Request for Qualifications since November. The
deadline to submit the applications is January 31 , 1995, which
marks the beginning of the subsequent review by LISC staff
and outside consultants . The final decision for the 36 mature
CDCs will be announced in April
1995 and the 12 emerging
CDCs in June 1995.
For more information about
USC's Rural Development Program , please call LISC at (202)
785-2908. ♦

Fed Agency to Require Consolidated Plan


he U.S. Department of
Housing and Urban Development (HUD) is introducing
a new Consolidated Plan that
will combine the planning, application , and reporting requirements for:
(1) the one and five year
Comprehensive Housing
Affordability Strategy
(CHAS) ,
(2) HOME program description ,
(3) Emergency Shelter Grant
(ESG) ,
(4) Housing Opportunities for
(5) Community Development
Block Grant (CDBG) , and
(6) Community Development

Federal Reserve Bank of St. Louis

According to HUD, Consolidated Plans are designed to create a coordinated process that
generates strong citizen involvement, improves accountability,
reduces unnecessary pape~
work , ensures public housing
needs are included in community planning, and helps communities achieve a comprehensive
vision and strategy for community development.
Local jurisdictions are required to consult with other private and public agencies ,
including public housing authorities , when developing the plan.
Provisions of the plan to ensure
citizen participation require that
the proposed plan is published,
that citizens are notified of any
amendments and performance
reports , and that 30 days are

provided for comment. Additional requirements compel jurisdictions to provide access to
records , provide technical assistance to low-income persons
that request assistance in developing proposals, hold at least
two public hearings , consider
any comments , and publish a
summary of comments with the
final document.
These new one-year plans
will be effective in FY 1995, and
must be submitted to HUD at
least 45 days before the start of
the program year. For more information, contact HUD or your
local planning office. ♦


CAPs: Increasingly Popular State-Funded Program
Continued from page 4

furthering small business development by providing greater access to capital. ♦

Capital Access Program
Number of Loans by Sales of Borrower
1986 - September 1994

Sales of Borrower


$0 [Start-up I


Less than $100,000

Jill Enos is an assistant examiner at the Federal Reserve Bank
of Atlanta. For more information
on capital access programs,
contact the Federal Reserve
Bank's Community Affairs section, or call Karen Ammarman at
the Michigan Strategic Fund at
(517) 373-7551 .


$100,000 - $199,999


$200,000 - $299,999


$300,000 - $399,999


$400,000 - $499,999


$500,000 - $749,999
$750,000 - $999,999



$1,000,000 - $1,999,999
over $2,000,000









Number of Loans

Regs: H and Y Amended
Contmuedfrom page 6

bank's capital stock and surplus.
To make these investments
without prior regulator approval,
a SMB must be at least adequately capitalized, rated at least
"satisfactory" at the last consumer compliance examination,
and have been rated composite
CAMEL of "1" or "2." CAMEL
composite ratings are confidential ratings assigned by regulators as one indication of the
bank's overall safety and soundness condition. Also, the bank
must not be subject to any written agreement, cease and desist
order, capital directive, or
prompt corrective action directive issued by the regulators , to
have the right to invest in these
projects without prior approval.
In addition to the bank holding
company investments listed
above, SMBs may also invest in
any corporation, limited partnership, or other entity permitted by
the OCC for national banks , or
where that entity is a community
development financial institution .
As a result of these changes,
a wide variety of investment op
Federal Reserve Bank of St. Louis

portunities are available, including investments in low- and moder ate-income
nonresidential real-estate development in a low- or moderate-income area that primarily benefits
low- and moderate-income persons; small business development
moderate-income area; job training or placement for low- and
moderate-income persons; job
creation in a low- or moderate-income area for low- and moderate-income persons; and
technical assistance and credit
counseling to benefit community

Reporting Requirements
For any preexisting investments made before January 9,
1995, that would qualify under
the amendments made to Regulations Hand Y, the SMB or BHC
should notify the Reserve Bank
of the investment by March 10,
1995. If the investment is not
specifically permitted under
these new amendments, the
SMB or BHC should request Reserve Bank approval within one
year of January 9, 1995.


For any permissible investments made after January 9,
1995, that do not require prior
regulator approval, the SMB or
BHC should notify the Reserve
Bank within 30 days of the investment the amount of the investment and the identity of the
entity in which it was made.
For any investment not specifically permitted by the amendments, the SMB or BHC should
file an application with the Reserve Bank. The Board of Governors will normally either act
directly on the application or
delegate to the Reserve Bank
the right to act on it within 60 days
of the receipt of the completed
application. However, longer
time periods may be required for
more complex applications. ♦

For a free copy of these
amendments, please call Dianne
Rawls, Federal Reserve Bank of
Atlanta, Community Affairs, at
404/589- 7307.




he Federal Reserve System has responsibility
pursuant to Regulation AA for any
complaint by a consumer against
a state member bank. The Federal Reserve Bank has estab1is h ed a team of consumer
examiners and specialists that
help the System safeguard consumers' rights against banks'
noncompliance with applicable
laws and regulations and unfair
banking practices as well as to
ensure that consumers receive
prompt and responsive action
about their complaints. The Reserve Bank also provides advisory services to bankers and the
general public on consumer protection statutes.

Consumer Complaint
This functional area responds
to telephone or written inquiries
from consumers with complaints
about various banking and financial su~ects. Consumer complaint specialists act as mediators
between the complainant and the
financial institution while investigating the consumer's particular
concerns. The complaints range
from serious allegations about
credit discrimination, to minor
misunderstandings about banking practices, and everything in
between .
When processing a complaint,
consumer complaint specialists
generally request the complainant to provide information in writing , particularly when the
complaint involves loan or deposit disputes. If an inquiry is
simple, a phone call may be sufficient. Consumers' complaints
are required to be acknowledged
within 15 business days from receipt. At the same time , financial
institution personnel are inter
Federal Reserve Bank of St. Louis

viewed and asked to respond to
the complaint within 10 business
days . Because some complaints require extensive investigation, the financial institution
may be given additiona l time to
respond or the on-site review
may be extended ; however,
complaints are generally not al. lowed to remain outstanding for
more than 60 days.
Many of the complaints received involve factual disputes
or legal matters that cannot be
resolved by the Reserve Bank.
The Reserve Bank's charge is to
confirm that financial institutions
comply with consumer protection laws and regulations ; howev er, we cannot legally
represent the consumer in these
matters. Nevertheless, filing a
complaint with our office will provide assurances that the institution
responsibilities under our enforcement jurisdiction and ensures that communication
channels are open .
All complaints and inquiries
received by our office are not
investigated by this office. If a
consumer has a complaint about
a financial institution that is not
supervised by the Federal Reserve Bank of Atlanta , the cons um er is advised of the
appropriate federal agency responsible for complaint handling. For example, a complaint
against a nationally chartered
bank will be referred to the Office
of the Comptroller of the Currency .

Advisory Services
In addition to processing consumer complaints , consumer examiners and specialists answer
questions from and provide tech-

nical support to financial institutions and the general public
about the 17 consumer protection laws and regulations enforced through our examination
prog ram . These laws and practices include the Equal Credit
Opportunity Act, the Fair Housing Act, the Fair Debt Collection
Practices Act, municipal securities and transfer agent regulations , bank services and
procedures , or any other action
or practice not covered by existing rules or regulations but
which cou ld be considered unfair or deceptive.
Most inquiries are initiated by
telephone and can be answered
immediately. However, complex questions can require investigation and research ,
including consultations with the
Federal Reserve Board staff,
before a response is provided. It
is helpful if more complicated inquiries are presented in writing
and accompanied by supporting
documents. This treatment allows the facts to be better understood and should facilitate
quicker processing .
Questions unrelated to consumer lending and deposit regu1a ti on s are referred to the
appropriate Reserve Bank area
for response.
The Federal Reserve Bank of
Atlanta has a consumer inquiry
line that directs consumers to
various Reserve Bank services ,
including a direct link to consumer special ists for complaints
or advisory services. The number, (404) 589-7315 , is available during regular business
hours . ♦


11 ill
feature articles
pn:pan::<l b)
Consumcr ,\ffairs cxamincrs lrom the
I \:deral Rcscn e Bank of
Atlanta. lhis
issuc features
an art 1c le by
left l'auL sen10r compliance
c:-.amincr. on
tiling consumcr complaints and on
obta1111ng ad11cc on consumer




National Association of Development Companies, January
23-25. Basics of SBA 504, Orlando, FL. Contact: (703) 8129000.

provided 011
events of
other orga11izatio11s should
be viewed as
strictly i11for111atio11al and
not as llll endorsement of
their actfrities.

Neighborhood Reinvestment
Corporation, January 23-27.
Neighborhood Reinvestment
Training Institute, San Francisco, CA. Contact: (202) 3762642.
Federal Reserve Bank of San
Francisco, January 24. Lending
to Small Businesses, Honolulu,
HI. Contact: (415) 974-2978.
National Association of Development Companies, January
26-27. Loan Services and Portfolio Management Forum , Orlando , FL. Contact (703)
The American Association of
Retired Persons, January 2627.
Expanding Housing
Choices for Older People Conference , Washington, DC . Contact: (202) 687-3200.

National Association of Development Companies, January 2628 . Fundamentals of 504 Credit
Analysis, Orlando, FL. Contact:
(703) 812-9000.

Neighborhood Reinvestment
Corporation , March 5-8. Community Lending Institute, Washington , DC . Contact: (202)
Federal Reserve Bank of Atlanta; Federal Reserve Bank of
Dallas; Federal Reserve Bank of
St. Louis ; and Federal Reserve
Bank of Richmond , March 7-8.
Renaissance of Rural America
Conference , Memphis , TN .
Contact: (404) 589-7307.
SEEDCO, March 28-31. Fifth
Seedco/HBCU Conference ,
Memphis , TN Contact: (212)

National Council for Urban Economic Development, April 2326. CUED Annual Conference ,
Dallas, TX . Contact: (202) 2234735.

Partn ers
Ron Zimmerman
Cynthia Goodwin
Courtney Dufries
Free subscnption and additional copies are
available upon request to Community Affairs,
Federal Reserve Bank of Atlanta, 104 Manetta
St., NW , Atlanta, Georgia 30303-2713, or call
404/589-7307, FAX 404/589-7342 The views
expressed are not necessarily those of the
Federal Reserve Bank of Atlanta or the Federal Reserve System. Material may be reprinted
or abstracted provided that Partners Is credited
and provided with a copy of the publication
7jpe.\ ellmK & Lt1yo111 by

Fm 7jpt• Computer Senr,ce.\




• .

Community Affairs
Federal Reserve Bank of Atlanta
104 Marietta Street, NW
Atlanta , Georgia 30303-2713
Reserve Bank
St. Louis