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F;ederal Reserve Bank of Atlanta
Volume 10, Number 3
Solutions
We know that large-scale community development programs can make
a tremendous impact on the lives of
low- and moderate-income families
and communities. But we also
believe the axiom that "community
development occurs one deal at a
time." After all, most large-scale
programs are realJy a colJection of
smaller solutions designed to meet
loca l needs.
This issue of Partners is dedicated to
solutions. We are proud to feature
examples of organizations stri ving
to address local concerns. From
banking regulators, to nonprofit
organizations, to for-profit businesses, we all have a role to play. We
recognize that no program is perfect
and we reserve the right to criticize
even the best progra ms (including
our own). But as we begin the new
milJeniurn, we think now is a good
time to take stock of some fine programs run by good people working
to develop sound solutions for
everybody's benefit.
In our last newsletter, we focused on
problems with predatory lending
practices. We stay focused on this
important topic and present three
articles on the regulatory response to
predatory lenders. By strengthening
the regu la tions that implement the
Home Mortgage Disclosure Act
Winter 2000
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Federal Reserve Bank of St. Louis
(HMDA) and the Home Ownership
Equity Protection Act (HOEPA), we
hope to curb predatory lending
while maintaining complete access
to affordable credit. We won't pretend that these proposed regulations will be the ultimate solution to
preda tory lending, but we hope
they make a significant difference.
In addition to featuring these proposed regulations, Parh1ers presents
two sound programs designed to
address the needs of low- and moderate-income populations. TI1e
Gwinnett Housing Resource
Parmership is a nonprofit organization that provides an array of services, from affordable rental units to
bilingual housing seminars, that
provide solutions to diverse populations' housing needs. The nonprofit
implements ma ny "best practices"
and was recently chartered by the
Neighborhood Reinvestment
Corporation as a NeighborWorks
Network® member.
A second article feahires new solutions developed from the for-profi t
sector. Directo, a company headquartered in Atlanta, provides easy
to use, high-tech alternatives to
banking unbanked populations or
to wiring money to fa mily members
living outside the U.S.A. Bringing
new and innovative products to
compete with traditional money
transfer operations and check cashing programs is an exceptional
approach to serving low- and moderate-income populations.
Finally, we feahire some exciting
news from our associates in
Alabama . First, you might notice
our masthead featuring a photograph of the Federal Reserve Bank
of Atlan ta's new branch facility in
Birmingham. TI1e new building
not only provides additional space
that was sorely needed; it brings
modern services to financial institutions th rough improved automated
check, cash, and coin processing.
We are proud to have
In This Issue
Gwinnett Housing Resource Partnership is
active in creating and preserving affordable
housing ........................................................ ,.3
Alabama'sSmall Business Incubators ..........4
Tougher Regulations Proposed to Fight
Predatory Lending ........................................6
Highlights of Proposed HOEPA and HMDA
Changes ........................................................ 7
Free market solutions to banking the
unbanked ...................................................... 8
Work Opportunity Tax Credit Program offers
potential win•win•win situation .....................9
In the News.................................................. I I
Federal Reserve Bank of Atlanta
.
2
Communi ty Affairs staff housed at
the new loca tion.
In ad dition to the new bra nch
fa cility, we present h-vo interesting
articles from our associates in
Alabama that offer exciting inves tment opportunities: small business
incubators and work opportuni ty
tax credits.
We designed this issue to present a
range of opportunities and ideas
fo r you r consid eration. Together,
by sha ring the best we have to
offer, we hope to contribu te to
your own local solutions - one
deal at a time.
Editor
Partners in Community
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Meadowview Conference Resort & Convention Center
Kingsport, Tennessee
April 26,2001
This important con ference is designed to provide practical models and
tools th at can be used to find and create jobs that are a "right-fit" for rural
commu niti es. Participants will be introduced to strategies for developing
a ready workforce to fill these jobs . It is no secret that workforce development ski ll s are fundamentally important in maintaining competitiveness
in an increasingly technology-based worl d economy.
A survey completed by the National Commissio n on Entrep reneursh ip
cited "access to top qu ality personne l as the sing le most important factor
to sta rt or expand a company in the region ." Rural commun ities are
often at a disadvantage when competing with the amenities of urban
areas that attract a younger and more technologically ski ll ed workfo rce.
In addition , infrastru cture concerns are frequent ly seen as obstacles to
compan ies considering relocating.
Practitioners from universities , nonprofit organizations , and micro-enterprise and techno logy fields wi ll present practical mod els and strategies
for workforce development and sustainabl e com munity bu il ding during
the day.
Sponsored by the Community Affairs Offices of the Federa l Reserve
Banks of Atlanta , Cleveland , and Richmond , this conference has been
rescheduled to better meet your needs.
For more information , call Sibyl Howell at (404) 589-7242
and Eco110111 ic Development
3
Every now and then, our
Community Affairs team encounters a nonprofit organization that
provid es exceptional service to
low- and mod erate-income populations. On occasion, we are
pleased to fea ture examples of
these organiza tions in our Parh1ers
newsletter. The fo llowing article
presen ts an example of one of the
many nonprofit organizations
w hose staff and expertise provid e
best practices we can all appreciate.
Gwinnett County, Georgia, continues to experience an incredible
population boom, with the Census
Burea u estimating that well over
half a million people had settled
into the area by the middle of 1999.
This 55'7r increase over the past 10
yea rs has transfom1ed the county
from a bedroom community providing homes fo r Atlanta's metropolitan economy, to it's own
vibran t comrnwuty where over
half the people who live there,
work there. Of course, w ith
growth this rapid, problems will
arise.
emergency shelter; 266 people
were kept off the homeless rolls;
874 received housing counseling;
28,080 received affordabl e housing
referrals and information; 8000
received community educa tion;
and 99 people attended Spa nish
homebuyer classes.
GI-IRP ad ministers 12 unique programs. These programs cover a
wid e range of needs, including
emergency shelter; homeless prevention; transitional housing;
rental properties; downpay ment
assistance; Individual
Development Accounts (IDAs);
homeowner and homebuyer edca-
Marina Peed & Jim Beaty of GHRP
Fortunately, since it's foundin g in
1993, the Gwinnett Housing
Resource Parh1ersl1ip (G HRP) has
grown with the community and
now provides an array of hou sing
services for Gwinnett's low- and
moderate-income populations.
tion programs; and housing counseling and referra ls, to name but a
few. GHRP also works hard to
leverage resources with the private
sector. For example, the emergency shelter program provides
homeless families, seniors, and disabled persons sa fe rooms through
parh1erships with local hotels.
Beginning with an initial $25,000
grant in '1993, GHRP's ann ual bud get now exceeds $2 million and
reflects a w ide range of programs
and services. The numbers are
staggering, as GHRP provided
direct or indirect services to nearly
100,000 people last yea r. A review
of just a few of the 1999 statistics
revea ls that 507 people received
In 1995, the nonprofit completed
an extensive renovation of
Bradford Gwinnett Aparh11ents, a
196-wut affordable housing complex it owns that provides affordable rental housing for families
and se11iors. GHRP also owns and
manages 12 units for transitional
housing to help homeless families
transition to self-sufficiency. In
Winter 2000
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Federal Reserve Bank of St. Louis
1998, the nonprofit developed the
expertise to change from using a
contracted property management
company to creating an in-house
asset ma nagement deparhnent.
Seven staff manage a nd mai ntain
GHRP's 214 housing units. TI1e
change helped improve conditions
on the property and strengthen
relationships with the residents
and the surrounding community.
In 1996, the United Wa y of
Metropolitan Atlanta sponsored an
IDA program with the nonprofit,
and two yea rs later, the first IDA
participant purchased a home.
lDAs provide matching fund s fo r
low- and moderate-income homebuyers. In this case, working
through the G HRP, United Way
matches $4 for every $1 the homebuyer saves. GHRP provides 10
classes on money management,
financial planning, homebuyer
ed ucation, and homeownership.
In addition, they offer cred it counseling and support to about 50
IDA prog ram participants each
yea r.
Success such as this does not go
unnoticed . Recently, the
Neighborhood Rein ves h11ent
Corporation (N RC) chartered
GHRP as a "NeighborWorks®
Network" affiliate, a designa tion
reserved for 202 nonprofits active
in more than 1400 communities
across the nation. The RC designation strengthens organizations
by providing access to additional
training, technica l assistance, and
fund ing.
For more information on this quality program, ca ll GHRP at (770)448-0702.
Federa l Reserve Bank of Atlanta
4
Small businesses have been one of
the leading contributors to this
country's economic success.
According to the Small Business
Administration, small businesses
with fewer than 500 employees created 76% of new jobs between 1990
and 1995. Recogniz ing the va lue
of small businesses, some communities have discovered that Small
Business Incubators are becoming a
more practical and fund amental
approach to creating jobs and stimulating economic development.
Incubators take small young businesses and help them grow during
their start-up period, the times
when they are most likely to fa il .
ll1ey offer shared office space,
access to equipment, flexible leases,
techn ica l assistance, and a number
of business services under one roof.
The goal is to stay in this environment 3 to 5 yea rs and grad uate to
its own facility. Graduation is also
achieved when the business is sold
for a reasonable return.
colleges, and local governments
throughout the coun try started taking an interest in them. TI1e NBIA
estimates that there were onl y 12
incubators in the coun try in 1980
compared to 800 toda y.
According to trad consultant,
Frederick Burger, of the many
kinds of incubators, mixed-use
incubators are the most popular
and are primarily crea ted by local
govenm1ents to spur economic
growth and crea te jobs.
Technology incuba tors focus on
enhancing research and development in high-tech, rapid-growth
industries that have a good chance
of attracting capital and can have a
long-term impact on spurring economic growth and crea ting jobs.
A third type, targeted incubators,
focus on assisting start-up companies in a specific industry, such as
food production, arts, fashion, biomedical, etc. Empowerment or
micro-enterprise incubators target
low- and moderate-income communities as a means of assisti ng in
revitalizing efforts. And fina lly,
manufacturing and service incubators house similar types of businesses in order to benefit from cost
savings through shared equ ipment,
services, and a tailored facili ty
design.
According to the Na tiona l Business
Incubator Association (NBIA) the
concept of the small business incubator has been around since 1959
when Charles Mancuso & Son Inc.
of Batavia, New York, purchased
an 850,000 square foot multi-story
building for its real estate investment holdings. After failing to find
a tenant that would agree to lease
the entire building, he decided to
lease small pieces, hoping to find
enough tenants to get an acceptable
return. Allowin g tenants to share
the expense of various office services is now a fundamenta l incubator concept.
Small business incubators typica lly
don' t become involved in retail,
construction contracting, or with
businesses involving commissioned
sa les. or are they involved in
professional counselor fields such
as accou ntants, attorneys, and
financial planners.
The number of incubators has
increased significantly since the
ea rl y 1980s, w hen communities,
Although most small business
incubators come with much the
same design and structure ele-
Partners in Community nnd Economic Development
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ments, such as low-cost office
space and shared expenses, an
incubator's success is measured by
its own goa ls and objecti ves. For
example, a mixed-use incubator
that is established for job creation
should not be compared to one
established for technology or
empowerment.
In recent years, Alabama has had
an incubator boom: 14 incubators
have created over 346 new companies and 4,232 jobs, according to
Wilson Harrison, chairman of the
Alabama Business Incubator
etwork, the state association for
small business incubators.
Birn1ingham's Technology
Incubator
Harrison is also the director of the
Office fo r the Advancement for
Developing Industries (OA D!), a
technology incubator sponsored
by the ni versity of Alaba ma in
Birmingham. OA DI, fow1ded in
1986, has graduated 37 companies
employi ng 1,400 people. Twelve
firms have either been sold or
merged with other firms, and only
h-vo firms have gone out of business.
"We have a 70-to-S0o/c success rate
rather than a 70-to-80% failure
rate," according to Susa n Matlock,
presid ent of the Entrepreneurial
Center, a small busin ss incubator
loca ted in downtown
Birmingham, Alabama. Ma tlock
describes the businesses in the center as a mixture of service, light
manufacturing and softwa re. "We
wa nt businesses tha t can bring
new growth into the area, and
new employment. "
The Entrepreneurial Center has
been awarded the 2000 National
Business Incubator of the Year by
the NBIA. The incubator operates in a 48,000 square-foot facility, housing 30 small businesses,
and generating revenue to support about 80% of its own
expenses. Matlock's fundraising
efforts from the community provide the other 20%.
Montgomery Area lncubabor
The Montgomery Alabama Small
Business Incubator is unique
because it has four major anchor
tenants that are a resource for
many of the small business tenants. The anchor tenants are the
Auburn University Montgomery
Center for Business & Economic
Development, Alabama State
University Disadvantaged
Business Enterprises; Alabama
State University Business and
business start-ups came, but many
failed . Because local and state
governments had funded many of
those failures, public funding
sources had become scarce.
However, attitudes changed as
community benefits proved to
outweigh risks that can now be
better mitigated.
The facility should require minimal overhead costs.
♦ The incubator should begin with
at least one strong anchor tenant.
♦ The incubator's business plan
should target self-sufficiency in
order to limit dependency on external funding.
♦ Businesses should have an
Sources from NBIA say that there
are no national statistics on how
many incuba tors have failed, but
many believe that most of the failures come from poor management
and failure to match the type of
incubator with the available
resources and needs of the community. The academic community
and the U.S. Department of
Commerce are calling for more
research to study the success rates
and to analyze the fa ilures.
approved comprehensive business
plan prior to moving in.
♦ Businesses should maintain
sound financial recordkeeping that
is accessible to regular managerial
inspection.
♦ The incubator should have an
emergency contingency plan, such
as access to a revolving loan fund,
to assist businesses with small emergency cash flow needs.
♦ The program should promote networking opportunities between the
tenant businesses.
♦ The program should include
strong internal small business edu-
Ms. Sonya Buckner, vice president
of the Montgomery Area
♦
r------------------------•
Technology Center; and
Troy State University at
Montgomery. Because
of the strong partnership with these four
organizations, the incubator is able to provide
the most up-to-date
information and advice
to small businesses at
all stages of development. The incubator
currently holds 17 businesses and is completely self- sufficient, relying on no outside funding. In addition, there is
an open-book monitoring program where the records of the
businesses are reviewed on a regular basis.
cation.
TYPES OF INCUBATORS
Sow1dly structured small
business incubators have
proven to play a meaningful
■ Ml>ced Use· Cl%
role in economic develop■ Technology- 25'11a
ment. Not only are many
■ Manufaeluring . 10%
viable businesses generated,
□ Targeted- 9%
some go on to realize
astounding growth and prof■ Service - 6~
itability. And in turn, incubaEffliowerment · S'll>
tors themselves can be prof□ Other• 2%
itable. According to the
NBIA, 25% of all incubators
are now for-profit. "Venture
*Source: NB IA
Capital Small Business
Incubators," for example,
Incubator, noted that incubators
give entrepreneurs a monetary
are more than just four walls - it
return in exchange for an ownership
takes an experienced staff with an
interest in the business, and the
understanding of the specific
incubator monitors operations until
needs of the community and the
the company is large enough to go
start-up businesses in order to suepublic or be sold to another compaceed. Today, wilike the 1980s,
ny.
there are hw1dreds of successful
From all indication, it appears that
templates of small business incuthe small business incubator conbators. The following list highcept
is here to stay. As more publight common features of many
lished
data becomes available on the
successful small business incubasuccess of these incubators, it is certors.
tain that more state and local gov♦ The type of incubator must
ernments and communities will
meet the needs and match the
take a closer look at small business
resources of its community.
incubation being a viable option to
♦ The incubator 's management
economic development.
should be experienced.
--------------------------1
Lessons Learned
Of course, not all incubators are
successful. In the 1980s, many
local governments and nonprofit
organizations created small business incubators in hopes of stimulating jobs and economic development in their communities,
identifying with the phase from
the movie Field of Dreams, "If you
build it, they will come." Many
incubators were built and many
Winter 2000
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Federal Reserve Bank of St. Louis
Federal Reserve Bank of Atlanta
5
6
Tougher Regulations Proposed to Fight Predatory Lending
The Federal Reserve Board has proposed amending two of its regulations in an effort to crack down on predatory lending practices.
Proposed Changes to Regulation Z (Truth in Lending), which implements the Horne Ownership and Equity Protection Act (HOEPA) of
1994, and to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), have been published in the Federal Register.
Both proposals solicit public comment.
HMDA
HMDA requires depository and certain for-profit, nondepository institutions to collect, report, and disclose data about originations and purchases of home mortgage and home improvement loans. Institutions must also report data about applications that do not result in originations. The proposed amendments are designed to strengthen efforts to combat predatory lending by requiring additional disclosures and
reporting requirements. Institutions, examiners, and others can use the information to track the level, trend, and underwriting characteristics of high cost mortgage loans covered by HOEPA.
According to the federal register notice, "the HMDA amendments sin1plify the definition of a "refinancing," require lenders to report
requests for preapproval, simplify the definition of a reportable home improvement loan, require lenders to report home-equity lines of
credit, expand coverage of nondepository lenders, and require lenders to report the annual percentage rate of a loan, w hether the loan is
subject to the Horne Ownership and Equity Protection Act, and whether the loan or application involves a manufactured home. The Board
also proposes to reorganize the regulation and to make other changes."
HOEPA
In 1994, Congress enacted the Home Ownership and Equity Protection Act (HOEPA). HOEPA amended the Truth in Lending Act (TILA) to
impose substantive limitations, such as restrictions on short-term balloon notes and prepayment penalties, and additional disclosure
requirements for closed-end, home-equity loans bearing rates or fees above a certain percentage or amount. These limitations were
designed to help reduce and perhaps eliminate predatory lending practices. The Board held hearings this summer in Charlotte, Boston,
Chicago, and San Francisco on possible ways to curb predatory lending using its regulatory authority. In addition, the Board solicited public comments on possible changes to HOEPA to combat predatory lending practices. The proposed changes are result of the Board's analysis following these public hearings and written comments.
Under the rate-based test, a loan is covered by HOEPA if the annual percentage rate (APR) at the time of consummation exceeds by more
than 10 percentage points the yield on Treasury securities having a comparable maturity. Under the fee-based test, a loan is covered if the
total points and fees exceed 8% of the loan amount, or $400, w hichever is greater. HOEPA authorizes the Board to adjust both triggers. The
10% APR trigger may be increased or decreased by two percentage points, but not more often than every two years. The fee-based trigger
may be adjusted by including additional fees, not by adjusting the percentage. The act also authorizes the Board, for all mortgage loans, to
prohibit specific acts or practices that are unfair, deceptive, or designed to evade HOEPA. For refinancings, the Board is authorized to prohibit acts or practices associated with abusive lending practices or that are otherwise not in the borrower's interest.
The proposed amendments would broaden the scope of loans subject to HOEPA's protections by adjusting the price triggers that determine
coverage under the act. Interest rate triggers would be lowered by two percentage points and the fee-based triggers would now include
optional insurance premiums and sinular credit protection products paid at closing.
Certain acts and practices in connection with home-secured loans would be prohibited, including a rule to restrict creditors from engaging
in repea ted refinancing of their own HOEPA loans over a short time period w hen the transactions are not in the borrower's interest.
HOEPA's prohibition against extending credit without regard to a consumer's repayment ability would be strengthened by requiring creditors generally to document and verify income for HOEPA-covered loans. HOEPA disclosures would include the total amount of money
borrowed.
The term "preda tory lending" encompasses a variety of practices. Often homeowners in certain communities-particularly, the elderly and
minorities-are targeted with offers of high-cost, home-secured cred it. The loans carry high up-front fees and may be based on the homeowners' equity in their homes, not their ability to make the scheduled payments. When homeowners have problems repaying the debt,
they are often encouraged to refinance the loan. Frequently this leads to another high-fee loan that provides little or no economic benefit to
the borrower.
A copy of the proposed regulations is available by calling the Reserve Bank's Community Affairs section at (404)-589-7242. The HMDA and
the HOEPA comment periods expire March 9, 2001.
in Community
Partners
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Federal Reserve Bank of St. Louis
and Economic Development
7
Highlights of Proposed
HOEPA Changes
Highlights of Proposed
HMDA Changes
Congress enacted HOEPA in 1994 as a means to address predatory lending practices. HO EPA requires certain disclosures of high cost loans secured by home mortgages. Because these loans carry substantial costs (typically higher interest rates
and fees), additional consumer protections and disclosures are required. In addition,
given the potential for abusive lending practices and the possible loan performance
volatility, HOEPA loans have increasingly limited liquidity. The proposal to
increase disclosures, combined with additional regulatory and market pressures is
designed to combat predatory lending practices.
HMD A requires certnin lending institutions to collect, report, and disclose data
about loan originations and purchases of
home mortgage a11d home i111prove111e11t
loans. It also requires reporting of loans
t!,a t do not resu lt in originatio11 s, such as
loan denials or witl,drawn applicatio11s.
HMD A can be used to help deten11i11e
wl,ether institution s are serving t!,e housing
needs of their co1n111u11ities; it l,elps public
officia ls target invest111e11ts; a11d it assists in
identiftJing possible discri111inatory le11di11g
patterns. The proposed changes are
design ed to help combat predatory lending
practices.
Expanding Coverage of Loans Subject to HOEPA
♦Adjust the APR trigger from 10 percentage points to 8 percentage points
above the rate for Treasury securities having a comparable maturity, the
maximum amount that the trigger may be lowered by the Board. Adjust the
fee-based trigger to include amounts paid at closing for optional credit life,
accident, health, or loss-of-income insurance, and other credit protection
products such as debt-cancellation coverage.
Increased Prohibitions against "Flipping"
♦Address some "loan flipping" within the first 12 months of a HOEPA loan
by prohibiting the creditor or assignee (or an affiliate) that is holding the
loan from refinancing it unless the refinancing is in the borrower's interest.
♦Prohibit refinancing in the first five years of a zero interest rate or other
low-cost loan (carrying a rate two percentage points or more below the yield
on Treasury securities with a comparable maturity) by creditors seeking to
replace that loan with a higher-rate loan, unless the refinancing is in the
interest of the borrower. This rule is designed primarily to protect zero interest and other low-cost home loans offered through mortgage assistance programs that provide home loans to low- and moderate-income borrowers.
♦ Prohibit creditors from including "payable on demand" or "call provisions"
in HOEPA loans, unless the clause is exercised in connection with a consumer's default.
♦ Prevent evasions of HOEPA, by prohibiting creditors from documenting a
mortgage loan as open-end credit if it does not meet Regulation Z's definition for open-end credit. (HOEPA covers only dosed-end credit transactions.) For example, a high-cost mortgage could not be structured as a homesecured line of credit to evade HOEPA if there is no reasonable expectation
that repeat transactions will occur under a reusable line of credit.
Tougher Stance Against "Equity Stripping"
♦ Create a rebuttable presumption that a creditor has engaged in a pattern
or practice of making HOEPA loans based on homeowners' equity without
regard to repayment ability, if the creditor generally does not document and
verify consumers' repayment ability.
Improved Disclosures
♦
Revise the HOEPA disclosures to alert consumers in advance of loan closing that the total amount borrowed may be substantially higher than the
amount requested due to the financing of insurance, points, and fees.
Winter
2000
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Identify ing Subprime Lend ers
Addi tional data items will be collected
to help id enti fy institutions engaged in
subprime lending. These ad ditional
fie ld s includ e ann ua l percentage interest
rates (APR), a nd manufactured home
loans or applica tions. Further, lenders
must identify and report all loans subject to HOEPA .
Expand ing Coverage to includ e
more Nondepository Lend ers
Ba nks, thrifts, cred it unio ns and o ther
depository institutions are widely covered by HMDA. Und er the proposal,
nondepository lenders, particularly
those that are active in the subp rime
marke t, w ill be subjec t to HMDA
reporting because the regula tion adds a
dollar volu me threshold w hereby
lenders whose loan activities exceed $50
million must file HMDA reports.
Reporting "Preapprovals" and
"Home-Equ ity Li nes of Cred it"
Lend ers are cu rrently not requ ired to
repor t preapprovals, and reporting
home-equity lines of credit was optional. Und er the proposed regu lation, both
wou ld be mand a tory.
D efin ing "Refinance" and "Home
Improvemen t Loan"
The current d efinition s offer lend ers
several reporting o ptions. The proposed simplifications wou ld a pply to all
lenders, a nd ensu re more complete a nd
consistent da ta .
Federa l Reserve Ba11k of Atlanta
8
This article represents the Community Affairs section's continued effort to presen t innovative products that seek to address
the depos it and credit needs of low- and moderate-income individuals. Th is article is for informational purposes only and is
not an implied or direct endoresemenf of the company or ifs products.
Banki ng the nearly 12 million
unbanked household s in the U.S.
has been elusive or even avoid ed
by most financial institutions.
Although representing a significant market potential, this population often opts not to use traditional banks or is declined banking services because of a previous history of mishandling
accounts. However, an innovative product developed by
Directo, Inc. (Directo), a fo r-profit company in Atlanta, may serve
as an inexpensive alternative to
turning these potential customers away.
Demand Deposit Accounts for
Unbanked
Directo offers two distinct
d emand deposit account produ cts for the unbanked customer
- Direct2Cash and Acce$o card s.
Direct2Cash is a debit ca rd
account that provid es an inexpensive way for indi viduals to
access cash w ho may be accustomed to pa ying the often exorbitant fees charged by check
cashing outlets. The only
requirements are that the customer be employed and that the
employer offers direct deposit
for payroll checks. A significant
benefit to the employer is that
the acco unts help to decrease
p ayroll costs by increasing its
workforce par ticipation in direct
deposit.
Partners in Community
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Federal Reserve Bank of St. Louis
Bank Advantages
Directo markets the Direct2Cash
produ ct to banks as an alternati ve to declining a potential customer w ho does not qualify to
open a checking account because
of a record on Chex Systems or
d erogatory credit history.
There is nominal risk to the bank
since Directo actually owns the
relationship and the funds are
held at its correspondent bank,
Cardinal Bank in Fairfax, VA.
Also, the potential for fraud is
significantl y mitigated because
the account is on ly accessible by
ATM or point-of-sale terminals,
and the account can not be overdrawn .
Essentially, the participating
bank acts as a referral service for
Directo in providing the
Direct2Cas h accounts. However,
the bank receives monthly fee
income and retains the option to
cross-sell other banking services
to the cus tomer. Another benefit
to the bank is being able to
reduce its lobby congestion by
the number of individuals w ho
previously cashed their payroll
checks who will now be paid
electronically.
In addition, the bank may graduate Direct2Cash account holders
to conventional products once
the account has been handled
satisfactorily for a period of time.
Although on the surface this may
appear to be counterproductive
and Economic Development
for Directo, the company's ultimate objecti ve is to train the
unbanked to become bankable
customers.
Significant Savings on Wire
Transfers
The Acce$o card is considered a
companion card to the
Direct2Cash account. The card
ca n be given to a spouse or family
member and is treated as a subaccoun t to the "master"
Direct2Cash card. The primary
account holder p redetermines the
amount that will be made ava ilable on each Acce$o card (up to
10 sub-accounts) tied to the
account.
This product was initially d eveloped in response to a rapidly
growing Hispanic population
working in the United Sta tes who
were experiencing difficulty opening checking accounts and were
paying significant fees to wire
money to family members in
Latin America.
With the Acce$o ca rd , the worker
can designate the amount of the
paycheck that can be withdrawn
at an ATM by the com panion
cardholder. Fami ly members ou tside of the country ca n access
cash using ATMs at a nominal fee
versu s incurring high money
transfer and currency conversion
fees.
(See Directo, continued on page 10)
9
Work Opportunity Tax
Credit Program
By J. Paul Compton, Jr.
Banks searching for innovative ways
to meet their Community
Reinvesb11ent Act (CRA) obbgations,
particularly under the invesbnent
test, may have a new alternative to
the tried and true approaches of
affordable housing supported by
low income housing tax credits,
municipal bonds, and micro-enterprise equity.
The staff of the Board of Governors
of the Federal Reserve System has
detemuned that an invesbnent in a
limited liability company that would
engage in the business of hiring,
trai11ing, and leasing out the services
of persons who are members of "targeted groups" under the provisions
of the Internal Revenue Code for
work opportunity tax cred its is a
"listed pernussible activity"
under Regulation Y. Opinion
letter to J. Paul Compton, Jr.,
dated January 29, 1999 (reproduced in CCH Banking L Rep. 'l[
80-284).
The program i11itiated by
Financial Investors of the South,
Inc., Bimungham, Alabama, and
its wholly-0W11ed subsidiary,
Bank of Alabama, a State member
bank, melds together potentially
attractive after-tax invesbnent
returns, reinforces partnerships with
local nonprofit institutions, and provides job traiiung for disadvantaged
persons.
Recognizing that busmesses employ
resources for the purpose of earning
a profit and that the attamment of
some public goals are inherently
unprofitable, the government subsidizes these activities with tax credits.
Work opportu11ity tax credits
(WOTCs) under Section 51 of the
Internal Revenue Code are intended
Winter 2000
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
to provide an iI1centive to comparues
for lurmg disadvantaged workers
such as recipients of food stamps.
Credits are based on a graduated
scale. After 400 hours are worked,
the credit is equal to 40% of total
wages paid. The maximum credit is
equal to $2,400 per worker.
The WOTC mcentive works like
other busmess tax credits, such as
low income housing tax credits
w1der Section 42 of the Internal
Revenue Code, iI1 that a dollar of tax
credits offsets a dollar of federal
income tax liability. The Section 51
credit, which previously had a oneyear sunset, was extended by
Congress m 1999 until 2004.
Banks historically have not been permitted to be equi ty investors in real
.... ' ..
estate developments. At the same
time, government saw a need for
affordable housing managed and
financed through the private sector.
Recognizing the opportunity for
banks to fulfill some of their obligations under the CRA, regulators have
permitted banks to become equity
investors in projects supported by
low income housing tax credits. In
the early 1990s, many banks overcame the cultural gulf of being a real
estate investor in affordable housing
and now actively make equity
invesm1ents in low- and moderateincome housing supported by the
low income housing tax credit.
The key ilrnovation of Bank of
Alabama's WOTC program is the
combiI1ation of employee trai11ing
and nonprofit organizations. Tlus is
similar to the case of the low income
housmg tax credit, which establishes a preference for nonprofits servmg as the general partner of the
partnership owning the low-mcome
housing development. The !muted
parb1er of the same partnerslup is a
for-profit entity with a substantial
tax burden that can use the credits.
Tims, the estabbslm1ent of publicprivate partnerships is encouraged.
The parallel continues iI1 that a tlurd
party may provide administrative
services for the WOTC in much the
same way that a property manager
provides management for a low
income housiI1g tax credit development.
Here's how the program
would work iI1 a typical situation. The bank agrees to pay
the wages and trailm1g costs iI1
a qualifying employee situation arranged by a nonprofit.
In tum, the bank receives a tax
credit. The employer, nonprofit, or an outside party provides
the actual employee traiiung for a
fee paid by the bank. Tl1e dollar
outlay of the final wage itself is
reimbursed to the bank by the
employer. The incentive to the bank
is that the value of the tax credit
exceeds its net unreirnbursed costs,
mcluding any fees paid to the nonprofit beyond training costs. T11us,
the bank is able to combine an existiI1g business practice iI1 a way that
creates an innovative, profitable,
and commwuty service oriented
program. This program is not wi thout risks, but there appear to be
viable routes to mitigate these risks.
Key advantages are that the pro-
Federal Reserve Bank of Atlanta
IO
gram is portable - meaning that a
bank's investment in WOTC programs can be targeted to almost
any urban ma rket - and scalable meaning that the amount of investment may be as small or as large as
desired by the bank. It is limited
onl y by tra nsaction costs and the
nu mber of qualifying workers
available in the targeted locale
(which number in the millions
na tionally). WOTCs are not
restricted on a per capita basis or
subject to allocation, unlike the low
income housing tax credit.
Directo
Continued from page 8
Benefits to Banks and Unbanked
Directo initially recruited employer participa tion in the program
and curren tly has 19 m ajor corporate accounts, including Georgia
Pacific and OneSource
Corporation. These companies
represent thou sand s of employees
who instead of receiving p ayroll
checks are having their funds
deposited in a Directo accou n t.
Each em p loyee is issued a d ebit or
Direct2Cash card that can be used
to access their fund s a t ATMs and
reta il poin t-of-sale outlets. Th e
ca rd s can also be u sed to m ake
recurring, preauthorized bill payme.nts.
Although the Federal Reserve generally doesn't address w hether specific investments will qualify under
the lending, investment, or service
tests under the CRA, the Federal
Reserve's authorization letter cited
the community development activities section of Regulation Y. The
program, as structured by Bank of
Alabama, involves an investment
in training and, depending on the
training, might qualify under the
CRA service test by providing
fina ncial skills training to the
employee as well.
This multi-faceted program offers
the possibility of a win-win-win situation for banks, nonprofit organizations and employers, and especially, disadvantaged workers. ♦
]. Pn11/ Co111pto11, Jr., is Oil nllomey will, Bradley
Amill Rose & White, LLP, Bim1illglm111, Alnbnllm.
He is tlte Alnbmnn Cltn ri111nn of the Anwricm1 Bar
Associntio11 Forn111 Oil Affordable Ho11sillg nlld
Co1111111111ity Oevelop111e11f Lnw.
Partners in Community
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Ci tizens Trust Bank of Atlanta was
the first bank to distribute
Direct2Cash ca rds, and four additional ban ks have signed on subsequentl y. Directo provides ex ten-
sive training and support to ba nk
personnel o n how to g uide the
custom er throu gh the process.
In addi tion, Directo offers a tollfree cu stomer service number to
its cardholders as well as a
monthl y sta tem ent of their
accounts.
Most financia l institu tions have
stru ggled to accommod a te the
growing number of u nbanked
households w ho typica lly represent high-volume accounts with
low balances and low profitabili ty.
Consequentl y, many of these ind ividuals are disconnected from the
traditional banking system and
are relegated to check cashi ng
outlets with fa r more exp ensive
fee stru ctures. The Direct2Cash
and Acce$o cards represent a w inw in situation for the bank and the
cu stom er by provid ing a less
expensive, risk-free account that
w ill help to tra nsition ma ny
household s into mains trea m
ba nkin g . ♦
CHANGING
FINANCIAL MARKETS &
COMMUNI TY DEVELOPM ENT
·na Plmu.u. Raszavr Snnu.t·s SECOI-."D
CoaortrNTrr AnAlllB R.Ell!AJlCH Co.--n UNCJl
Keynote spnker:
Chairman Alan Gtemspan
Papen pttsenttd and topics discu.s1ed1
• fa-.:ilu=t.ing CR.A
• Predatory lending
• Cre<lit S..-oring vs. Judgment
•
We.11th Cn'.lt!on/~ Bu~
• l: nb&nkf<I & Altemat.t\~ FIDU1ch1l Sm1ett
Save the date: April 5-6, 2001
The Capital l lllron
W.ash.ingtoo. D.C.
and Economic Development
I I
In the News
SBA
On December 22 , 2000, the federal government appropriated $901.5 million for SBA agency programs , and provided
funds for $10.4 billion in Section 7(a) guaranteed loans, $3.75 billion in Certified Development Company loans, and
nearly $2.7 billion in venture capital assistance , including $152 million for the New Markets Venture Capital companies .
The popular SBA 7(a) General Business Loan Guaranty program wil l increase the guaranty percentage to 85% for loans
up to $150,000, and simplify the guaranty fee structure. According to the SBA, "the New Markets Venture Capital
(NMVC) program will combine venture capital investments with expert technical assistance to small businesses in lowincome urban and rural areas. This will be the first time SBA has been able to provide funding for technical assistance in
connection with a venture capital program."
.\
"Under the new program , SBA will license 10-to-20 new NMVCs to invest in these small businesses , combining
$152 million in SBA funding with $100 million in private sector funding to create an investment pool of more than
$250 million . The bill also provides $30 mil lion in matching funds to pay for techn ical assistance for small businesses ."
The appropriation increased to $1 million the maximum loans under SBA 504 programs , and increased from $25 ,000 to
$35,000 the maximum for loans under the SBA Microloan programs. It also authorized federal savings associations to
invest in small business investment compan ies (SBICs) , and increased the maximum size of surety bonds to $2 million .
For more information , visit the Small Business Administration web site at www.sba .gov.
First USA
First USA, Wilmington , Delaware, announced a proposed $40 million settlement to a class-action lawsuit that alleged it
overcharged customers late fees and finance charges on credit card payments. The suit alleged that payments were
made on time but the third party vendor used by First USA posted the payments to the accounts late, including those
posted after a 6 a.m. arrival time on the due date. The settlement includes reimbursements for late fees (reportedly
$29) , for allegedly unwarranted finance charges , for duplicate payments made on accounts , and for other related problems.
First USA denies any wrongdoing, but offered a settlement to the U.S. District Court in East St. Louis , Illinois. The court
will hold a hearing January 24, 2001 , to determine whether to approve the settlement.
First USA is a subsidiary of Bank One Corporation , Chicago, Illinois and is the largest Visa credit card issuer in the
world . In addition to the First USA card , the company offers Visa and MasterCard for consumers and businesses under
Bank One and the First Card names, and on behalf of other marketing partners (such as universities, affinity organizations , and financial institutions). First USA reports serving approximately 55 million cardmembers , with total loans as of
June 30, 2000, of $66.3 billion.
CAA Sunshine
On December 21 , 2000, the federal regulators publish ed fi nal rules implementing the CRA sunshine provisions that were
part of the Gramm-Leach-Blil ey Act approved last year. These provisions requ ire nonprofit organizations , advocacy
groups, and othe r organizations known as "nongovernmental entities or persons" along with insured depository institutions and their affiliates to publicly disclose certain agreements that are made pursuant to, or in connection with, the fulfillment of the Community Reinvestment Act of 1977 (CRA). The regulations go into effect April 1, 2001.
Generally, the rules cover agreements that involve funds or other resources of an insured depository institution or affiliate with an aggregate value of more than $10,000 in a year, or loans with an aggregate principal value of more than
$50,000 in a year.
On May 19, 2000, the federal regu latory agencies published a proposed reg ulation and solicited public comments. The
agencies collectively received more than 800 comments from the public on the proposed rule , which they considered
before adopting the final regulation .
For a compl ete copy of the regulation , visit the Federal Reserve Board web site at www.federalreserve.gov and click on
Press Releases, Board Actions , and December 21 , 2000.
Winter 2000
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Federal Reserve Ba11k of Atla11ta
FRB Sixth District States
Population Snapshots
V ICE PR ESIDE T
Ron Zimm e rm an
Source: U.S. Census Bureau
Year
2000
1990
1980
1970
1960
Year
2000
1990
1980
1970
1960
Population %+!23.5
15,982,378
32.7
12,937,926
43.5
9,746,961
37.2
6,79 1,418
4,951 ,560
ISSISSIP DI
Population %+!Year
l0.5
2,844,658
2000
2,573,216
2.1
1990
13.7
2,520,770
1980
2,216,994
1.8
1970
2,178,141
1960
Population %+/26.4
8, 186,453
18.6
6,478,216
19.1
5,462,982
16.4
4,587,930
3,943, 116
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ASSOCIATE EDITOR
Wayne Smi th
Tennessee
Georgia
Year
2000
1990
1980
1970
1960
Population %+!5.9
4,468,976
.3
4,219,973
4,206,116
15.4
11.9
3,644,637
3,257,022
Population % +/10. 1
4,447, 100
3.8
4,040,587
13.I
3,894,025
5.4
3,444,354
3,266,740
Florida
Year
2000
1990
1980
1970
1960
EDITOR
Courtney Du fri es
Louisiana
Alabama
and Economic Development
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