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850-
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750-
Growing Consumer
Reliance on Credit Cards
Banking Development Districts
Offer Access to Services
Responding to an Aging Population
Partners
I N COMM UNITY AND ECON OMI C DEVELOPMENT
VOLUME 18 • NUMBER 2
■
2008
-
750-
FEATURES
6 Growing Consumer
Reliance on Credit Cards
\I'(•< OllSll!lH'rs I11r11i11g 11\('i'(';\Slllgl_\ lo "plasti('"
as a fi11a11cial ,·0IHng 111l·cha11is11l'.'
10
Banking Development Districts
Offer Access to Services
lnc(•!lt1,,• packagps !Jan· pro\('ll su,·,·,·ssl't1! 111
IHi11gi11g i11cl11slriPs ,IIHI rdail lo 1111cl(•r-S('J'\-<•cl
,·om1111111iti('s Can tlH'.\ \\01 k !'or I,anks'.'
12
Responding to an Aging Population
TlH• pop11lal ion of I IH>Sl' m l'l" ti.-, is <".;JH'('i(•d Io
I11on· th.in dOldil,· Ii\ ~tntl. ( ailing for i11111>,alio11
111 IH111si 11g. spn H'l''-> a11d I ran-.porl al ion.
COVER STORY
New FICO Model
Changes Approaches
to Consumer Credit
14
Peer-to-Peer Lending:
A Tool for Community Finance?
Tho11gh I II(' fl(•clgling s.\ st Pill ol so('ial l(•ncli 11g is
-.till lH•111g lpsl(•d. lliilll\ lil•li,•,,• ii holds prn111is,• as
a S()(II'( (' of fill:tll('t' !'or ('()Jlll\lllllit~ cl('\ l'lop11H'llt.
16
Covered Bond Framework
Could Ease Mortgage Access
Th,· l
Shifts in FICO's assessment of creditworthiness will rule out "piggy-backing" as
a means of establishing credit, a nd some consumers may see modifications in their credit
scores. The changes come in response to
rising defaults on credit cards and auto loans.
~
Tn•as11r_\ ·s ,·mt•l'l•d lioncl fra11H·,,·ork
, ·rn llcl alt ra('I 111\ l'SI ors Io t IH· 111orl ga_g(• ma rkl'I
and 111ak(• 11Iorlgag('s nHll'l' a,·, (•ssilill'
18
Examining the Issues:
Community Affairs Adds Research Function
\ m•,1 1·,·s<•ar<'ll l(•aI1111 ill icl,·11111'., k<'\ 1·011('<•Iw,
and prm id<• in d(•plh a11al\s1s lo inl'mn1 pol1<·1l•s
;111d Jll',l<'li(·('s i11 <n•alIII,g s11stai11ahh- ('<ll!llllllllllll'S.
20
Spotlight on the District Mississippi and South Florida
FROM THE CAO'S DESK
PLANNING FOR LONG-TERM FINANCIAL SECURITY
\('('Ording
t <> t lw Bureau o f Econ omic A nalysis, p ersonal savings rat es fo r A meri -
cans have fallen from approximately 9 percent of income in the 1980s t o less than 1 percent
over th e past several years. Part of the reason m ay be that people have assumed real estate
values would con tinue t o app rec iate and coun t ed on equity in thei r homes as a primar y
form of r etirement sav ings.
However , decreasing prop er ty val ues, esp ec ially in som e mar ket s, coupl ed w it h t he
decline i n sav i ngs h ave led t o sign ificant det eri orati on in per sonal net worth for m any
Ameri cans. Some ru·e even facin g negati ve net worth conditions. Financial independence
could become a distinct challenge for many consumers as the "baby-boomer " generati on
approaches reti re ment age.
Stu dies indi cate t h at only a smal l p er centage of A meri can s fe el co n fi dent that th eir
current level of savi ngs w i ll support fin ancial i ndep endence a fter ret i re men t, and m any
adults close t o re tirement age have never started a r etirem ent savi ngs plan.
Research also reveals significant shortfalls i n th e average American 's financial lit eracy
ru1d grasp of economic concepts. Ho w closely does this kn ow ledge gap correlate w i th th e
dismal savin gs rates?
Some exp er ts believe t hat simply completi ng a fin ancial education course will not sign i fi cantly change a consu mer's behavior about per sonal fi nances. Ot hers b el ieve th at
fin ancia l education programs, which inev itably bump against oth er prior ities in schoo l
curricu lums, don't begin early enough t o have an impac t.
To l earn more about t he most effec t ive way t o educat e peopl e about fin ances, t he
Atlanta Feel will undertake two significant proj ec ts over the nex t several years. The first is
development of an adult fi nancial educati on program that focuses on long-term financial
stability. In p ar tn er ship w it h th e F DIC, th e Federal Rese r ve Ban k o f Atl anta is creat i ng a ser ies o f modu l es in th e Mo ney Sm art c urricu lu m des igned to prov ide li f e-l ong
fin an ci al pl anning education .
Tailored for lower-income consumers w ho al ready have access to mainstream fi nancial
products and serv ices, the new prog ram w ill add ress issues well beyond ma intaini ng checking and savings accounts. The six-course curriculum is scheduled for completion this fa l l.
The A tlan ta Feel will also be observing the impact of fma.ncial ccl uca t ion courses to sec
w hich features work best to promo te w ealth creati on and personal fin an cial fitn ess and
w hich aspects ar en't as effective. Over th e next. few years, we w ill collaborate w it h th e St.
Louis Feel to eval uate the impac t of several frequently used finan cial ru1cl economic ed ucati on programs. T his initiative w ill help us identify best practices and all ow us to modify
fin anci al and economic educati on programs to achieve th e best results for pru"ticipants,
esp ecially lower-income families.
I'm personally very proud o f these t wo initiatives and th eir pot ential to help secure a
stro nger finan cial futu re for th e next generation of Am eri cans.
Juan C. Sanchez
Vice President and
Co mmunity Affa irs Officer
New FICO Model Changes
Approaches to Consumer Credit
The shift comes
i n r esponse to recent jumps
in cre dit card and auto loa n defau l ts. In the fourth
quart er of 2007 de! i nquenc i es rose to th eir hi gh est
lcvC'I since Hl92 accordin g to a st atisti cs from t he A merica n Ban kers Assoc iation.
PICO 08, as the n ew model is calle d , will no longer
al low authoriz ed users of existi ng credit cards to
bui ld credit based on th e origi n al ca rd holder 's
trac k record. It wi l l also r ecalibrate th e
impact of payment delinquencies
on credit scores . The goa l o f
th e re vision is to offe r bett er
predictions of the li kelihood
a cust omer wi ll fail to repay
co nsum er loan s. Pai r I saac
estimat es that com panies switching to the new system will cut default
rates by 5 to 15 pC'rcent.
Tlwse modi ficat i ons rC'p r ese nl th e first o,·erhaul to
F I CO sta nd a rd s in 10 yC'a rs . Established i n 1956, th e
F air Isaac Co r po r ation is an ind ustry leader in cr edit
score modeling, deci si on management platforms , fraud
det ectio n, and ncd it scoring ser\'ices. About 90 perce nt of' all large le nders re ly on PICO scoring model s
in add it i on to othe r scoring models when making deci si ons about credit ap pli cations .
THE FAIR ISAAC CORPORATION IS MAKING
CHANGES TO ITS FICO CREDIT SCORING
MODEL THAT WILL AFFECT NOT ONLY CONSUMERS' CREDIT SCORES, BUT ALSO HOW
PEOPLE GO ABOUT ESTABLISHING CREDIT.
2
No more credit boost for authorized users
RC'cent ch anges to th e PICO scoring model wi l l n o
l onger recognize auth orized user accoun ts in determinin g an indi\' idu al's cr ed i t score. Pre,·iously if a par ent ,
say, wante d t o help a college stu dC'nt establi sh a good
credit rati ng, the stud ent cou ld be added t o th e parent 's
VOLUME 18, NUMBER 2
account as an aut horized user and
user system int o a loophole for those
benefit from the par ent"s good cre di t.
with poor credit ratings by se lling
The new mod el will prohibit an indi-
the trad e lines ofa consumer with
v idu al from re ce iv i ng a boost i n their
good cr ed it hist ory t o a co nsumer
cr edit sco re by being an auth ori ze d
with bad crcclit hi st or y. This prac-
user on an account that maintains a
tice, which im·ol\-cs indi\·idual s who
good payment history.
This shift came partly in response
clon't know each ot her, i s ca ll ed
" piggy backing."
Figuring Your
Credit Score
Fair Isa ac is changing how it
fi gures your FICO credit score.
Here are so me hypoth etical
examples of how th e changes
could affect scores:
to a credit-repai r strategy known as
To illustrate, a creel it r epa ir com-
"p iggy back in g," which allows indi-
pany would arrange a r enta l transac-
Scenario 1
\·iduals with damaged cre clit t o si gn
t ion in which a co ns umer purchases
Al icia and Jose, higher risk consum -
on to acco unts of those with excellent
the ri ght to lwco mc an autho r izC'd
ers, each have 10 accounts and at
credit. For a price, a consum er w ith
usn on accou nt s wit h good credit,
least one maior account delin-
a checkered credit history could use
thereby ar tifi cia lly boosting tlwir
quency. Their current FICO scores
this strategy to impro\·e his or her
cred it scor es. In many cases, such a
are 625.
credit ratin g.
Loss o f the authorized use r strategy
w i ll make it harder for fami ly members
rC' ntal tran sac ti on would raise a credit
sco re more than 100 points.
FICO 08 Change:
Alicia's sco re rises to 650 . Jose's
T he indiv idual who rents the traclc
to help build a credit history for a child ,
line i s paid based on th e qua l it y of
spouse or others in th e household who
their credit. The arnrngcmen t cl o(' S not
drops to 600.
Why the different outcomes?
would benefit from this approach. The
allow the authorized user to make' pur-
More of Alicia 's accounts are
lack of a so lid cred it score typically
chases on the ca.rel nor does the aut ho-
open and in good standing. She
influences the cost of creel it , vehicle
rized user ha\·e access to any of the
also has a mix of credit types.
insurance r at cs, utility depo ·it s and
personal information assoc iated wit h
Jose has more accounts that have
employer hi rin g decisions.
the account. Al"tcr a couple of months,
been closed, and a narrow mix of
the owner oft he tracle Ii ne r emo\·cs
credit types.
Whil e the affec t ed cons um ers ar e
11011·
faced with building tlwir credit
the authori zed user from the account
history from the ground up, ha\·ing
and resells il to anoth er indj\iclual \1-ilh
Scenario 2
a joint account to build a credit file
problem credit.
Isabel and Fred are active credit
rem ain s an option. Howeve r, j oi nt
Credit repair compan ies have aclve,
0
seekers, wi th as ma ny as 20
accounts come with add ition al risk
Lisee! that those with excellent creel it
accounts each. Their FICO scores
because both co nsu mers ar0 equal ly
can make as much as $10,000 per month
are 725 , considered prime.
liable for the debt. Also, the only way
for renting th eir trade lines for HO clays,
to r emove a joint holder from the
according lo a column by Kenneth H.
account is to dose it.
I larney in the .June Fi, :2007 edition of
FICO 08 Change:
Isabel's score rises to 745. Fred 's
drops to 705.
Tlw Washing/011 Post .
"Piggy Backing" makes
rating credit harder
Th e Fair Credit Reporting Act ancl
Why the different outcomes?
privacy laws proh i bit lender s from
Isabel uses less of her ava ilab le
find i ng out additional i nformati on
credit and has nea rly paid off an
traditionally ha\·e been fam ily mern-
about authorized user s on accounts,
auto loan. She applied for credit
bers assisting other family members to
so it is difficult to distinguish legit i-
more often , but FICO 08 penalizes
build or improve a credit file through
mate aut hori zed users from credit
her less for this.
leverage of th eir good payment history.
repair customers. FICO 08 w ill stop
Fred carries higher card ba lances
However, in recent yea rs, CTCdil r epa i r
pi ggy-bac ki ng schemes fro m cl istorl-
and hasn't made much progress in
compan ies ha\·e turned the authoriz ed
ing credit ratin gs.
repayi ng an auto loan .
A uthorized users on cred it accounts
FEDERAL RESERVE BANK OF ATLANTA
3
Delinquencies
ChangC's brought about by FICO 08
will also afTC'cl how thC' scoring agC'ncy
[)('cause the new formul a accounts for
how borrowers managC' 1·arious lypC's
of credit.
accounts for delinquencies. lndi\'iduals \\'ho arC' late with their paynwnls -
The new FICO formul a is dC'signed to
distinguish the dC'grC'C' of risk among
especia lly l hose who are more I han PO
consumers with troublNI or thin
days lalC' in making a paymC'nl on an
c-rl'dit h istories, !hos<' who arl' acti,·ely
account - will see a change in how the
seC'king credit, and "piggy backers."
c-rC'dil scoring model ,ie,,·s !hr associ-
Ac-cording to Tom Quinn, \ ' icC' Pr0si-
ated c-rrdil risk.
dent of Global Scoring Solutions for
FICO 08 will be more forgi,·ing
Fair Isaac, m ·erall mon' (·onsumers will
to l hos<' w ho are deli nquenl o n onC'
sc'e their FICO sco rrs innPasC' sligh tly
account but current on all I lwi r ol lwr
th an wi ll see I heir sc-orps d<'<TC'aSC'.
ac-counls as opposed to those' wh o
sho\\' pal tC'rns of late paympnl s in
Implementing FICO 08
In 2006, \ 'antagPScorC' Solutions LLC.
mulliple accounts. According to Fair
I saac , consumers may experi('ncC'
a joint ,·enture bet,H'C'n lhC' lhrC'C'
a 20 to 2-> point adjustment lo I hPir
major credit reporti ng agPnC-iC's, imple-
c-rC'd ii score.
lll C'nted Vant ageSco re lo compC'te with
I lw FICO scoring sys I c'm. Fair I saac
Impact on Consumers
has a pending law sui t against tlw lhree
BC'sidPs the effect on chi ldrC'n
c-redit reportin g agC'nciC's - Equifax ,
,,·ho \\·ould benefit from the help of
Experian, and Transl ·nion - accusing
a parPnt in building credit. womC'n
I hC'm of unfair and ant icompC'liti,·0
arC' likely lo feel a disproportionately
practices that coul d harm the FICO
npgatin' impact. According to a sur-
brand. Cu rrC'ntly, ExpC'rian and Trans-
1·py concluctC'd by .Jo hn UzlwinH'r or
l ' nion ha,·C' slarlC'cl using lhC' FICO 08
c-rC'dil.c·om , women are morC' lik ely
scoring mocl l'l. Equifax has optC'd to
than mpn to be designated as an
wait unt il thC' pending laws ui t has
authorizC'cl uspr. As noted , a joint
bC'l'n resoh·C'cl .
Additionally, soml' JpndPrs may
account is a mitigating option. Also,
SC'curC'd CTC'dit cards and subp rinH'
lakC' more tim C' lo tC'sl llw syslC'm lo
(risk-pric-C' d) credit products ca n hC'lp
Sl'C' how it works w ilh tlH'ir bu sin C'ss
c-onsunwrs build cred it history.
In addition to assessing dPlinquC'ncies diffNC'ntly, FICO 08 \\·ill bring
aboul ol hN shift s in ho\\· t hp c-rC'dit
scorC' is ca lcu latecl. Applying for ,ww
m odel and loan port folios. In many
cast's, implementation can take 12 to
2.J
months. ■
, art,c ,. wr t, 1y c,, iyl S1<•t
eg,on.il
rnr'n1un1ty developm, rt 111,111;,g.( r ' tie All, , t,1 F d
CTC'dil acco unt s may hurt less. lla\'ing
high balanc-C's on credit cards could
hurt morC'. Ac-ti,·ely using C'xisting
nC'dit ac-counls may be important.
llm·ing both re,·ol,·ing and installmpnt accounts may help credit scores
4
VOLUME 18 , NUMBER 2
National Average
Credit Scores
Credit Scores Below the National Average
Texas
Louisiana
New Mexico
South Carolina
North Carolina
Arizona
Washington , DC
West Virginia
Tennessee
California
666
672
676
673
680
682
682
685
687
691
Mississippi
Nevada
Georgia
Alabama
Oklahoma
Arkansas
Florida
Kentucky
Alaska
671
672
676
678
681
682
685
687
688
Credit Scores Above the National Average
Missouri
According to Experian,
Colorado
Indiana
the national average credit score is 692.
Maryland
New York
Only 13 percent of the nation's popula-
Utah
Oregon
tion boasts credit scores above 800,
Pennsylvania
New Jersey
while 15 percent registers a credit
Washington
Hawaii
score below 500. About 58 percent of
Iowa
Wisconsin
the U.S. population has a credit score
New Hampshire
Massachusetts
above 700.
South Dakota
,
FEDERAL RESERVE BANK OF ATLANTA
r
693
695
695
697
698
699
703
704
706
706
708
711
712
713
715
718
Michigan
Delaware
Ohio
Illinois
Kansas
Virginia
Wyoming
Idaho
Rhode Island
Maine
Connecticut
Nebraska
Montana
Vermont
North Dakota
Minnesota
694
695
696
698
699
700
703
706
706
707
709
712
713
713
717
721
•pe n ,c
5
Crowing Consumer
Reliance on Credit Cards
ARE MORE LOWER- AND MIDDLE-INCOME CONSUMERS RELYING ON THEIR CREDIT CARDS TO
COPE WITH RISING ENERGY AND FOOD PRICES?
At one time consumers
mi ght have used the
option of refinanci ng their homes or tapping a home
on prim e mortgages and a lm ost 77 pe rce nt had made
subprime mortgage standards more rigorous.
equi ty line of cred it to increase cash flow to temporarily
now turni ng in creasingly to hi gh-p riced credit card s
Credit card balances climb
Credit ca rds, once seen as a convenie nt short-term
loan or as a fall back for eme rgencies, a re beco ming
increasingly a financial coping strategy. According to the
as an a ltern ative .
2007 Demos report entitled Boi-rowi 11g lo Mak e Ends
make ends meet. But more strin gent c redi t standard s
and falling home prices have locked many families out
of that market. Some experts beli eve Ame ri cans are
A recent report by the Center for Ame rican Progress
Meet: th e Rapicl Grmcth of C1·edil Carel Debt in America ,
cites a Bos Ion Globe article that states direct mail credit
credit ca rd debt has risen 315 percent between 1989
card offers aimed at subprime customers jumped 41 per-
and 2006.
cent in the first half of 2008 compared to the first half of
As of 2006, approximat ely six out of every ten house-
2006. During the same time the Ap ril 2008 Senior Loan
holds us ing credi t cards ro ll ed forward their ba la nces,
Officer Op inion Smvey on Bank Lending Practices con-
and 35 million Americans made only minimum payments
ducted by the Federal Reserve indicates that most mort-
each month. The median household cred it card debt was
gage lending became more stringent. Abo ut 60 percent
up from $2,768 in 1989 to $5,2 19 in 2004, an increase of
of senior loan officers had tightened lending standards
89 percent (shown in 2004 do ll ars). In this period, credit
ca rd debt for lower-income h ousehold s increased four-
it's so much easier to get credit cards and use them.
fold. These households u se approximately 40 p erce nt
of th eir income to service deb t compared with average
Th e author of Going Brnke: Why Am ericans Can't Hold
On to Their Money , Co nn ec ti cut Co ll ege p sychology
cred i t card holders who u se 21 per cent.
professor Stuart Vyse, cites consumer behavior as part of
According to the Demos study, African Amer ican and
the problem. "We haYe the ability to buy t hings at home,
Hi span ic households are also more likely to ca rry cr edit
on th e Internet, through television, throu gh 800 numbers,
card debt. Compared to 54 per cent of Non-Hispanic Whi te
and with cell p hones and portable cl e\'ices, it's much
households, 84 percent of A frican-A merican and 79 p er-
eas ier to do th at. Thirt y years ago if you wanted to buy
cent of Hispanic household s carry credit card balances.
something you had to go to town and you had to have th e
White households carry higher cr edit card debt overall ,
but Afri ca n Ameri ca ns and Latino s use more of their
money," Vyse stated in an interview with ABC News.
Easier access to cr ed it is another exacerbating factor.
available credit balance. African Am ericans use 84 per-
Wh ereas in the past banks only provided cr edit cards for
cent of their available ba l ance and L atin os 79 percent
custom ers with stabl e cre dit histori es, t he industry has
compared with 53.7 percent for Whites. Higher balances
now been able to broaden access through innO\·ations in
across t he board may reflect inc reases in lat e fees and
th e underwriting of cr ed it risk.
cash-acln1.11ce surchar ges assessed on the card s: from 1989
l.Jntil recently, almost anyone could get a credit ca.rel. As
to 2004 the number of accounts accruing l ate fees o f 60
of 2004, three out of e\·ery four households had a cr ed it
cl ays past clu e or more rose from 4.8 per cent to 8 percent
card . Now th at the cr edit card market is over 20 yea rs
of total card holders.
old, lenders (not brokers as in the housing industry) have
American seniors are al so racking up cr edit card debt.
More than 35 percent of old er ad ul ts are now managing
credit card debt, and their average balances ballooned
194 percent from $1,169 in 1989 to $4,906 in 2004 (bo th
b ecome more sophisti ca ted about how they securitize
creel it card debt.
In addition to easy access and an expansion of th e occasions to use cr edit card s, many con sumer s are t urnin g
sh own in 2004 do llars). Thi s debt appears more prob -
to cred it cards to cop e with the dua l challenges of risin g
lematic in light of th e fact that the 2004 median income
cost s and diminishing buying power. Real wages in many
o f inclhidua ls 65 and older was $15, 199. Nearl y 40 per-
ar eas have not kept pace with the combined incr eases in
cent of these seniors were living below the poverty line.
housing, tran sportation and hea lth care cos ts.
Fatal attraction
A more fundamental problem?
What factors are driving Americans to precariously high
l evels of cr ed it ca.rel debt? Part o f the explanation is that
In May 2008 National Public Radio feat ured a five part series that examined America ns' relatio nships with
.
'
"Just as other disasters can foster awareness of the need to be prepared, the
problems of excessive debt can serve as a wake-up call to take control of the
future. The key is to learn more about managing finances and build reserves."
cr0dit cards. Accord i ng to eco nomy.com analyst Mark
seem espec ially n tl nerable: .!6 perc-en1 of rent ers used
Zandi, the r ising debt taken on by consu mers masks ·'a
credit cards for living expenses as opposed Lo 28 percent
f un damenta l probl em, particularl y among I hose half of
of homeown ers.
households that han" lowC'r i n comes. T h ey han,' bee n
under a lot of pressure over the years. Th e j obs that I hey
had in manufacturing have bee n losl , and tlw y' re compet-
Loss of a j ob or maj or med i cal expenses were c ited
i ng against labor all across the world an d suffC'ri ng as a
as primary reasons fa mi lies re li ed on credit cards to get
result. They used debl tot ry to suppl emen t their incomes
by. The socia l and financial syst ems that once buffered
and now they can't."
A nwri ca n fa m ilies from ha rds hi p prov i de less protec-
I ncreases i n cre dit ca rd debt thus see m to hinge on
tion I han t h ey once d i d. The tabl e at the top of page 9
mon· I han j usl I ifestyle choi ces and soc ial pressu r e I o
shows changes in som e of I hese safety nets over t he
consume. According to a 2005 nati onal survey of low- and
pasl :30 ye ar s.
moderate-incom e households by Demos an cl the Center
The next generation may fa ce even shaiver cu tbacks in
for Responsi ble Lend ing, 20 percen1 of respondents i ndi -
their social inveslment ancl safety net as priorities shift to
caled I hat this was " the first ti me I hei r cr edil card debl
the senior population. Scholars Eugene Steuerle ( a Senior
was thi s high."
Fellow at The t ·rban Institute, co-director of th e l'rban-
Furlhermore , 70 pe rcenl repo rl ecl that l llC'y used !h eir
credil cards as a sa fety net to pay for car repairs , basic
8
Holes in the safety net
Brookings Tax Policy Cenler) and Ad am Carasso ( Former
Research Di reclor, Fisca l Policy Program at th e New
li ,·ing expenses, med ical bills and house maintenance.
A merica Fou ndation until April 2008, w hen he left to
Mo re than 30 percent used cred it cards dur ing four of I he
join I he Hou se Budge t Comm i ttee as Chief Eco no mi st)
l asl 12 mon th s to cover basic li,·i ng expenses. Rent0r s
found I hat bel ween 1960 and 2005 , federal spending
VOLUME 18 , NUMBER 2
Changes in saftey nets over the past 30 years
Then
Now
Unemployment Benefits-Maximum Duration
15 months (1975)
6 months (2004 )
Percentage of workers covered by pensions
40% (1980)
20% (2 004)
$27 billion (1985)
$4.4 billion (2004)
72% (1979)
60% (2 004)
Federal budget for job training
Percent of workers with employer-provided health insurance
Pc •er(, Go< ,eli
he New ,Eal
',, 11'1 IL 1 > R,c r WI y l\rp It F·, 11r Mucl• e , S, CJ re .. Lo; 1\/lP,1'' ,
5 '
r,mes I Octot ( 10 20D +) 1'pnnt· d n rIH Plastic S1t,•t 1 Net, p11bl1 r rd by D, 110s and the Cuit, r for Re· 001,. •t E
Li 11d111g October 200',
on ch i ldren decl ined fro m 20. 1 pe rcent of t he domes t icbu dget to 15...l percent, w hi le non-chil d Soc ia l Sec ur it y,
Helping consumers adjust
Co nsum ers ar e l ikely t o feel t he effects o f burgeoning
M ed icar e, and Medica id spendi ng soar ed fro m 22. 1 per-
cred it card defa u lt s as ma ny banks in response reduce
ce nt to --15.9 percent.
credit l in es, ti ght en access t o new l i nes of cr edi t, assess
higher fe es and ra tes for th ose w ho hm·e bee n late in
Trouble in the credit card market?
Look in g at t he ri si ng cost of li \·in g in r elati on to
in comes and co nsumer attitu des t oward credi t , so m e
m akin g pay men ts, and in iti at e m ore aggress ive col lection effort s.
Se\·cral ad\·ocacy groups are se izin g th i s oppor t unit y
an alysts predic t t hat the next fi nanci al c r isi s w ill be i n
l o increas e aware ness about a w hole range or asscl -
th e cre dit card m ark et.
b uilcli ng and consumer p ro t ection initi at i\·es. Demos, tlw
Assoc i at cd Press repo rt er Bob Po rt erfield says t h at
Oc t obe r 2007 saw a 26 pe rce nt ri se i n the num ber o f
Cent er fo r A mer ican Prog ress, the New A mer ic-a Fo u nd ation and m any o thers ha\'c worked to creat e a platform
c r edit card holders m ak ing pay m ent s at leas t :30 cl ays
o f pol icy changes designed t o increase fin ancial lit eracy,
l at e. Port er field co -wro t e th e ar t ic lc " Cr eel i t Carel
sa\' ings and access to a fford able banki ng sc 1Y iccs. Th ey
Crun c h" w i th re porter Rac hel Ko n ra d a ft er co mp i lin g
are also garneri ng fin anc ial suppor t to mend the A meri -
st a ti stics and rc\· iew ing spe nd i ng patt ern s. li e says
ca n sa fet y net and fo st er responsib le lend ing practices.
defau lts and del in qu enc ies ar e surg in g, poss i bly an
indi cat io n o r mo re p rob lem s to co m e.
A rece nt Smart Mo11ey ar t i cle by A leksa nclra To cl o r m ·a disc usses t ro u b li ng t ren ds in cred it ca rd pay-
Just as other d isast ers ca n foster awareness or th e need
t o be pr epar ed, t he prob lem s of excessi\'e debt c-a n scn ·c
as a 11·ake-up ca l l to take cont rol oft he futu re. The key is to
learn mo re about manag ing fin ances and b u ild
rese r ve s. ■
nwn ts. Th e r at e o f delinqu en cy at t he co u nt r y's 100
largest bank s h as ri sen in t he las t yea r as h,1\'e cha rge o f'fs. llowever, t he c r eel i t card ou t look might not be as
d i re for lend ers as th e subpri me m or t gage m ar ke t h as
been. Fo r now delin que ncy r at es arc st ill lowe r t h an
duri ng t he last recessio n o f 2002 t o earl y 200:3, w hen
For more information:
Refer to www.demos.org. Founded 111 2000. Demos 1s a non partisar
public policy resemch and aclvrsory organi1iltion headquartered
in New York City. Other sources for the article mclude tile Center
for Responsible Lending (www.respons1blele11d1ng.org), t11e
Center for American Progress (www.americanprogrPss org).
and New America Foundation (www.newamerica.net)
th ey we r e c lose to 5 pe r ce nt . Ba nk s have m an age d
c r ed i t c ard ri sk for se\·cra l deca des and k no w ho w
Tl1is 1rt1c,e •.vas 11r1tte11 by Narc, Montoya srn101 rE 1 iona1 co111111u11 t\
develop111e1't ma ,Jger 111 the Atlanta Fed's New Orleans brn1cl1
t o adj ust t heir und erw rit i ng cr it eri a and ca pit al t o
weal he r a dow nturn .
FEDERAL RESERVE BANK OF ATLANTA
9
Banking Development Districts
Offer Access to Services
BANKING SERVICES ARE CRITICAL FOR NEIGHBORHOOD REVITALIZATION, AND STATES ARE EXPLORING
NEW TOOLS FOR ATTRACTING BANK BRANCHES TO UNDER-SERVED COM MUNITIES.
Incentives,
which w ere initia l ly o ffer ed to lure l arge
indu strial corporations , have a lso been success fu l for
income commu nities or in areas without a significa nt retail
or se rv ice sector, citing a lack of profitability. They are
dra\\' ing businesses li ke hardware st or es and grocery
concerned th at bu ilding up the deposit base necessary for
stor0s to dc,·eloping neighborhoods. Now inccntiYes arc
more profitable loans will be difficult in these communities.
being used l o recruit banks as well.
Ne\\' York State's Banking Oe,·cl opmen t District (BOD)
Banks, gov('l'nment agencies and communit y organizations realize the import ance of making banking se1Tices
program identifies ar eas without sufficient banking se r-
accessible. Tlwy are no\\' working with se,·eral sta t es to
v ices and provides a \'ari et y or st a t e and local benefit s
explore ba nki ng development districts as a strategy to
for banks t hat locate branches in these commu niti es.
att ract ban ks to under-serYed areas where lack of profit-
The strategy s0ems to work , and se,·era l ot her sta t es
abilit y may be an obstacle.
arc now co nsideri ng sim ilar programs.
Banking Development Districts provide access to services
Meeting an important need
Adequate banking servi ces arc crucial for a community's economi c deYelopmcnt . Stud ies al so suggest th at
encourages th e es tablishment of bank branclws in ar eas
est abli shin g a bank account is an import ant first st ep
with a de mon st rat eel need for banking servic0s . Th e
for low- in co me indivi du al s tryin g t o ac h ieve financial
state r ecog ni ze d t hat alth ough banks mi ght see a m ar-
sec urity. 1-lo wc,·er, according to the :2004 Sur\'cy o f Con-
k et oppo rt u nit y in und er-se r ve d areas, it would t ake
sumer Finances, more than 9 percent o r U.S. fami li es lack
many yea rs for th e ban k to attra ct suffi ci en t deposit s
bank accounts. Many more househ olds ar e considered
to make th e bran c h v i ab le.
uncl crba nkcd : although th ey ha,·e bank accounts, th ey
To draw banks to banking deYelopment distri cts-areas
continue to rely on other fin ancia l service pro,·iders for
th at the state designates as underbanked-the state offers
ba sic transac ti ons.
incentives such as access to below-market-rate public fund s
The costs for indi\·idu als w ith out access t o ade quate
and municipal deposits to help banks increase their deposit
banking se r v ices ar e significa nt. In ad dition to l ack-
ba se; rea l est ate assi st ance for locating new bra nches ;
in g a secu r e place to k eep th eir money, th ose wit hout
property tax in ce ntives; C'RA credit; help with workforce
accounts may be for ced to rely on altern at i\·e financial
de,·elopment ; and fina ncial education for customers.
se rvi ce providers who charge hi gh fees t o conduc t
transactions.
One reason households do not establish bank accounts is
10
Ne\\' York was the first state to institute banking dewlopm ent distri c t s. Cr ea t ed in 1998, th e BOD program
In acid ilion t o increasing access to ba nking sel'\'ices,
t he BOD program in
ew York also ai m s t o increase
cap it al fo r businesses in under-sen·ed commun iti es,
t hat th ey cannot access banking serv ices in their neigh-
cr eat e jobs, enh ance co mmunity st ability and foster
borhoods. Banks may hesitate to locat e branches in low-
economic development.
VOLUME 18, NUMB E R 2
To qualify as a BDD in New Yo rk ,
a bank in partner sh ip w ith th e l ocal
government files an appl ication seeking
designation as a banking develop ment
distric t by th e st at e. Th e appl ication
documents current and anticipated bank-
, I I,
ing needs in the commun ity and shows th e
needs are not b eing met by oth er insti tuti ons. Banks also outline th eir plans to
meet these needs. App licants document
soc io-eco nomic conditions in a proposed
BDD and project additional ben efits to th e
communi t y, in c lud ing j ob creat ion an d
economi c stimu lus.
i ncent ive's not on ly to enco u rage' new bank b ra nches,
b ut al so to assi st banks on th e ver ge of c losin g so th ey
New York's success inspires Louisiana program
Sin ce the launch of th e banki ng development distri ct
can r ema i n i n the comm uni t y.
Ac-cord ing to John Fi elds, Deputy Chief Examinn for
program i n New York , 38 BDDs have been cr eat eel , pri -
the Louisiana Offi ce of Financi al Instituti ons, the details
m ariiy in New York Ci ty and Buffa lo, and t he prog ra m
o r the law are sti ll being clarified to determ ine how long
i s mee tin g its obj ec ti ves. I n 2006, BDD bank bra nches
a bank can r ece i ve t he prop erty t ax brea k and hol d
opened 2 1,000 new accounts and in 2007, they loaned m ore
govC'rnme nt depos i t s. A lt hough no appli ca ti on s h ave
th an $126 million for mor tgages , construct ion , per son al
been fil ed for BDDs in L oui sian a thus fa r, se\·eral banks
loans and comm un ity development. I n additi on t o pro -
havC' exp ressed an interes t.
\"idin g direc t benefits, banks in BDDs pro\·id e fin anc ial
C'du cat ion and support community development effo rt s.
I n t h e w ak e o f New Yo rk 's success cr C'at ing bankin g
Wh en tlw detai ls are finalize d, tlw stat e w ill mark et the
progra m t o mun ic ipa l ities and ba nk s. l l o we\·er, ban k s
o ft en r equi r e severa l yea rs lea d t i me t o plan fo r a new
devel opment district s, oth er stat es are ex ploring si mi l ar
branch in a com mu nity, so t he impact of th is progra m in
program s. Illinois, Ca l ifo rnia and Texas are con sideri ng
Louisi ana may not be appa rent for some tim e.
the BD D strategy, and thi s year Louisiana is instituting its
own ver sion oft he progra m t o aid w it h storm recove r y
efforts and promote ge nera l eco nomi c devel opm ent.
L oui siana's BOD progr am closel y mirrors New York 's.
Conclusion
Bringing bank s back into comm unit ies th at lac k bankin g service' s is a crit ical component of broader nC'i ghbor-
A bank appl ies w ith a loca l juri sdi cti on t o request that
hood r ev it al i zat ion and C' con orni c devel opment C' ffo rt s.
th e stat e desi gnat e an ar ea as a bankin g devel op ment
Wh il e BD Ds ar e a relati vely new idea , thC' succ- C'ss of
d ist r ict. Th e st at e th en reviews th e need for mor e fi n an-
tlw New York program sugges t s thi s m ay be an effec-
cial ser v ices in t he proposed distr ict and assesses the
ti ve strategy. Just as incent ives have attrac ted o tlw r basic-
p otential benefit for consumers and businesses. T he statC'
goods and services to co mmuni ti es, BDDs may e\'C'ntually
also look s at the socio-economi c and demograph ic dat a
become an important tool to encourage banks t o recon-
for the proposed di stri ct and considers wh ether add it ional
sidC'r neighborhoods that ha\·e long b een ,wglect C' d. ■
banks wi ll encourage economic development.
Lo ui sian a l aw all ows local gove rn m ents t o wa ive
property t axes for bank branches in BDDs and prov ides
fo r th e des ign ati o n of t hese branch es as "pub l ic body
dep ositor ies," so th ey can h ol d governm en t deposi t s at
m arket or sl ightly-below-market rates. T he law includes
FEDERAL RESER VE BANK OF ATL ANTA
For more information see:
New York Banking Development District Program: <http www.banking.state.
ny.us, bdd.htm, and Louisiana Banking Development D1str1ct
<http:' /www.ofi.louis1ana.gov/>.
This article was 'Mitten by Jessica LeVeen Farr. senior regional community
development manager in t11e Atlanta Fed's Naslw1lle Branch.
11
Responding to an Aging Population
TODAY, MORE THAN ONE IN EIGHT AMERICANS IS
OVER THE AGE OF 65. THAT'S OVER 35 MILLION
All of t hese prefer en ces have im p I ications for the
commu nit ies where older adults currently r eside or w ill
res ide. Th is in cludes the need to provide appropriate and
PEOPLE. BY 2030, IT WILL BE ALMOST ONE IN FIVE
afford ab le ho using opt ions t hat are supported by trans-
(OVER 71 MILLION PEOPLE).
portation sys t ems and socia l sen·ices that r ecogni ze
c hanging nee ds.
This growing segment of the populal ion will have
tr emendo us i mpli cat i ons for hou si ng, transportati on,
What does this mean for the Southeast?
Th e national demographi c I rends have seri ous i mplica-
soc ial and fin ancial se rvices, and health care. The demo-
tion s for th e Southeast. By 2030 more than 13.7 million
graphi c shift will call for innm·ati ons to m eet chan gin g
ol der adults (age 6:3 and older) are projected to he in the
n eeds, espec iall y at a ti me o f dimin ishi ng resou rces and
Southeast (Alabama, F lorida, Georgia, Louisiana, Miss is-
an un certain econo mic fu ture.
sippi , and Tenn essee). Th at's up from 6.7 million in 2000.
For example , many empt y-nes t ers are considerin g
down si zi ng th eir hom es or may be co nsid er in g home
Honing in on just Florida, the U.S. Census Bureau proj ects
the sl al e's populalion over lhe age of 65 will grow from
retrofits tha t enable th em to maintain independence as
17.6 percent of tolal r esidents in 2000 to 27.l percent in
some of thei r p hysical abi l ities dimi ni sh. In other cases ,
2030 (see graph below).
w ith expectati ons of more leisure ti me as th ey approach
or enter retirement, some older adults ar e seeking com munities with greater amen iti es .
Th e needs th at result from this shift w ill put additional
str ess on states and metropolitan ar eas already struggling
with budget deficits, deteriorating infrastructure, housing
affordability ancl increasing unemp loyment.
Percentage of population age 65 & older in 2000 and 2030
A strategy for communities
30 %
As people age , their activil ies, household composition ,
soci al networks and fin anci al r esources eYOl\'e. So too
25 %
mu s I I heir hom es, comm unities and the servi ces that
support t hem. While some baby-boomers w ill gravi tate
20 %
to sunnier cl im ates and amenity-laden cit ies , most \\·ill
choose to stay where tlwy are c urrenl ly liv in g. Th i s
15 %
mea ns that every c ity, co unty and slate w ill need to
adapt to accom modate aging in place.
10 %
One innovative response can b e found in th e Atlanta
Reg ional Com miss ion's Li felo ng Communiti es Initia-
5%
t ive. The At lanta Regi onal Commi ssion (ARC ) sen·es
10 co u nties and over 60 c il ies i n th e A tl anta metropo li United
States
Florida
Alabama
Tennessee Mississippi Louisiana
Georgia
tan area. A RC's initiative works t o achieve three major
goa l s: promo! e housin g and tran sportat ion optio ns,
■
■
12
2000
2030
U.S. Census Bureau, Population Division, Interim
State Population Projections, 2005 .
enco u rage healthy lifesty les, and expand in formati on
and access to serv ices. Th is t hre e-pronged approach
VOLUME 18 , NUMBER 2
eanlC'd ARC tllC' :2007 CS. Em·iron nlC'ntal Pro t ection
Agency's Act ivc Aging Awa rd.
Through partnerships wit h local clcetccl o ffic ials and
Such pr0ferenccs are dri\·cn in pa rt by h igher gas prices,
i ncr0asi ng traffic congest ion and a desi re for more healthy
lifes t yl0s. Th e res u lt i s an in crease d d0ma nd fo r ex i st -
gon' rnmen l staff, business leaders and community
ing and new com mu nities where res idents ca n wal k t o
groups, this init iati ve is transforming ci ties, co un ties and
stores or a trans it st op, bike along neighborhood t ra i Is and
neighborhoods in t o places where in d i\·idua ls can li ve
m ingle wi th t heir neighbors.
throughout thei r li fetime. l ·sing a bottom- up approach ,
Th ese model comm unities requ ire partnersh ips am ong
t he init iati ve br ings toget her profess iona ls w ith a w ide
loca l govern ments, real es l ate clevelopers, fi nancia l i nst i-
range of expertise, ol der adults an d careg ivers to fo r m
t ul ions, co m mun it y groups and social scn·icc pro\·ider s
count_v-based partnerships that ana lyze the local d ata,
as well as a coordination o f policies and infrastruct ure
ch a I lcngcs and opp or tu nit ics to id c nt i fy p ri o r it ics and
invest me n t s. Wi th sharPd v ision and pu r pose, t hcse
i m plement st rat cg ies.
pa r tners can cr0a t c susta in able comm unities for people
The I nitiative's focus on creating multi-ge nerat iona l
commun ities where i ndiv iduals fro m severa l age groups
of any ag0.
■
l i\·c in one neighborhood is consist 0nt with consumer stud-
For more about ARC's Lifelong
Communities Initiative visit:
ies by Del W0bb and Robert Charles Lesser and Company.
v-.wv, atlnntoreg1onal com or contact Cathie Berger D•11sion Cl11ef. Ag111f
Specifica lly, the stu dies suggest t hat t he pr eferences of
Services, Atlanta Regional Com1111ss,on. cbergertwiltlantaregional.com or
(404) 1163 1235
aging baby-boonlC'rs and Generations X and Y arc com·erging to call for mor0 compact and walkable neighborhoods.
Tl11s irt, le v-.as v-.rltten liy Karen Leone de Nie. Commur,t1 Affairs research
manager at tl1e Atlanta Fed
Creating Multi-generational Communities for Healthy Aging Symposium:
Innovations in Community Development and Housing
Sponsored by Federal Reserve Bank of Atlanta and Georgia Tech's Center for Healthy Aging in the Built Environment
What does the growing older adult population need in housing and community design? What does it take to make a successful "live,
work, play" comm unity for healthy aging? What are multi-generationa l com mun ities? And what are the trends and in novations to help
you be a stronger part of the team to support healthy aging and comm un ity development?
Spend two days learning about partnerships and innovations to create Multi-generational Communities for Healthy Aging.
Whether through housing retrofits, infill devel opm ent, or master- pl ann ed commun ities, th ere are many appro aches to prom oting mu ltigenerational communities for all. The symposium is designed for financial insti tutions, community and econ omic
developers , local government officials and planners , bui lders and real estate developers, state/ regional planning agencies,
affordab le housing providers, and non -profit organizations.
Date: September 29-30, 2008
Location: Federa l Reserve Bank Building, 1000 Peachtree Street NE, Atlanta , Georgia 30309
Fee: $245
Registration: www.pe.gatech.edu/ conted/ servlet/edu.gatech.conted.course.ViewCourseDetails?COU RSE_ID=973 or contact Jennifer
Freeman, Georgia Tech , at jennifer.freeman@innovate.gatech.edu or (404) 894-4904
More information: contact Karen Leone de Nie at the Atla nta Fed , (404) 498-7237 or karen.leonedenie@atl.frb.org
FEDERAL RESERVE BANK OF ATLANTA
13
Peer-to-Peer Lending:
ATool for Community Finance?
MOST OF US WOULDN 'T DR EAM OF ASKING OUR NE IGHBORS FOR A LOAN TO CONSOLIDATE CREDIT
CARD DEBT OR BUY NEW EQUIPMENT FOR OU R BUSINESS. BUT WHAT IF YOU KNEW YOUR NEIGHBORS
WERE LOO KI NG FOR SOMEONE TO LEND MONEY TO?
This describes
t he concept o f peer-to -peer (P2P)
of t he transacti on. These sites and others offer a variety
lending, w hich allows borrowers and lenders to tran sact
of lending m od els and platforms, product structures and
business w ithout trad iti onal intermediari es such as banks.
levrls of commu ni cation between participants.
Thi s approach, also kn own as "soc ial lending," P2P is a
growing trend both in th e L'.S. and aro und t he wor l d,
and it co uld have import an t impl ications for fin ancing
community development.
Who uses P2P?
Chris Larsen , CEO of Prosper.coni, one of the intern et
companies th at provides a peer-to-peer lending infrastructure, describ es the compan y as an eBay fo r lending. "We
Expanding niche draws lenders and borrowers
As global credit markets tighten lo create bottl enecks in
too l for this marketplace," says Larsen. I-le says that many
a\·ai lable bank lending, th e social lcncling niche market is
Prosper. com members who lend ar c looking for both a
beginning to expand its stru cture and pick up participants.
fin ancial return on investment and th e opportunity to do
Whil e P2P l ending cannot el im inate the inherent r i sk of
something good for th eir co!llmuni l y.
credit , the simpli city and ease of thi s syst em is attracting
In th e marketplace model fo r peer-to-peer lending, orga-
a growi ng market seg ment w illing t o exp eri m ent w ith a
ni za ti ons like Prosper. co m connect borrowers and lend ers
promising altern ative to traditional loans and investm ents.
t hrough a co mpet iti ve process: borrowers present loan
Social investment i s also draw ing donor s who wa nt to
opportunities and lenders bid interest rates and term s
d i rec t their donation s personally t o causes th ey bel ieve
on th e loans th at interest th em. Th e a\·crage Prosper.co!ll
in. Direct personal investment makes it possible to tra ck
transaction is an unsecured loan for $6, 000 with a three-
the impact of projects on indi\·idu al co mmuni t ies and
year term. Larsen says Prosper.corn 's original goal was to
li ves . llarki ng back to th e "chara cter loan " of bygone
offer an altern ati\·e to high-priced unsecured credit cards.
cl ays, this investment trend has al its heart social capital w hat each of us uniquely bri ngs to th e table.
Th e Intern et fac i litat es exp ansion of peer-to-peer
Th e typical Prosper.corn borrower tends to be 36 to 56
years old with an average i ncome of $:')0,000. Th e borrowers arc generally split even ly by gender and arc geographi-
financing by providing a med ium th at supports commu-
ca lly dispersed throughout t he country. "Lenders tend
nica ti on , analysis and accounting. Prosper.com based i n
to skew youn ger,'' says Larsen , "w ith an aYerage income
San Fr ancisco and Zopa.com in Britain are t wo ser v ices
b et ween $50,000 and $ 100,000."
that match people who need to borrow money and peoplr
interested in lend ing money.
For a fee , th e onlin e services arrange person-to-person
lending and provide safeguards and services on both sides
14
view our rol e as that oft he infrastru cture that provides a
Lenders arc often motivat eel by
Ill Ore
than just the higher
return s offered for smaller im·estmcnt comm itments. The
social be nefit is also attractive to many who are w illing
to t ake r isks with a rel atively new and unproven process.
VOLUME 18, NUMBER 2
As individua ls, the lenders are app ly ing unique decision
ered by t r aditiona l finan cial insti l ution s, th ese a lt ern a-
criteria to selecti ng potential borrowers for fundin g.
t ivc lend er s may be able to prov ide va luable in sight for
Larsen says that when the compa ny started, ro ugh ly
co m ·ent io nal lend ers.
two years ago, subprime borrowers with less problemati c
credit histories accounted for 1warly 25 percent of the
organization's lending acti\ity. Now, subprim e borrowers
Balancing risk and reward
Th e sys tem is not without risks. Because the process
m ake up only about 5 percent of the lending portfol io.
leaves fina ncial decisions to the di screti on o f borro wer s
BotTowers with strong credit arc finding they can sa\·e
and lende rs, th e success of loan transactions will depend
about ;3 t o 5 percent on interest w ith a P2P debt consoli-
on t he par ti cipants ' abil ity to anti c ip aLC' ri sk . Rece nt
clat ion loan. The company has ge11C'rat 0d over $125 million
mortgage performa nce seems t o dC'monst rat e th at som0
in loans and has a curren t default rate of 4.7 percent.
co nsume rs also l ac k fun damenta l und er sta nding of
Lending circles could benefit community development
One intC'resting feature of the P:2P indu stry is the potential to form lend ing circles or groups - both as borrowers
and as l0nders. The group can comprise indi\·iduals
who interact close ly or a broad membership th at mirrors tllC' st ru cturc of cr edit unions. Lending performance
w ith in groups can enhance credit refer 0nc0s for individuals or can create referen ces for nlC'mbers through group
Iw rforma nce. One cxampl0 of such a group wou ld be an
alumni associat ion.
Lars0n says that lending communities on Prosper.com
"While P2P lending cannot eliminate
the inherent risk of credit, the simphcity and ease of this sys em 1s
attracting a growing market egment
wII ng to experiment with p om1s1
tive to traditional loans
can also improve th e loan bids off0red to borrowers when
fcllO\\. group nlC'mbers personally vouch for a member
or make bids on th e loan requests. He says that loan s to
those who han' received the endorse nlC'n t of fri 0n ds or
In
tments."
h,n-0 recC'ivecl part of the loan from fri ends or group memlwrs tend to have lower default ra tes.
Based on this experience, it s00 ms possibl e that
neighbo rho ods o r non pro fits co u ld est ab l ish lend ing
groups to support community re\·italization or help local
fi nancial products. Bor rowers may b0nefit from gu idance
or increas0d disclosure to make sound decisions.
As intriguing as the peer-to-peer lending industry may
be, it is in th e early stages o f its growth . !l ow the industry
bu sinesses grow. A neighborhood rev it ali zat ion lend ing
deve lops wi ll depend on use r v irtuosity in makin g the
group cou ld attract financing from prh·ate citizens con-
most of what the medium has to o ffer. The impact o f a
cerned with both fin ancial return and th C' soci al impact
slowing economy on P2Ps' performan ce rema i ns to be
o f the group's activities. Requ i ring it s members t o com-
sc0n. Ne\·crth eless th is burgeoning trend could gh·c com-
plete a fin ancial education program or prov ide a shared
mu nity and econom ic deve lopment in itiati \·cs a n0w tool
guarantee could improve repaynlC' nt rat0s and hold down
for prin1te investment and thus reduce dependence' on
future interest cos t s.
publi c fina ncing.
Larsen ag rees that the lend i ng group model holds
potential fo r community development because the lend-
■
This article was wntten by Ana Cruz Taura senior regional co1,i11 u111ty
development director at the Atlanta Feds M1am1 Branch
ing platform al lows for a free flow of captia l and leaves
the lending decisions in the hands of group members. By
c!C'\'C'ioping underwritin g c r i teri a not cu rrent ly co ns id-
FEDERAL RE S ERVE B ANK OF ATLAN TA
15
Covered Bond Framework
Could Ease Mortgage Access
af'l er thl' onset or financia l mark el distress, many fin ancial
i nsI it ul ions ha\'C' re treatl'd Crom cl'rtain IJu sinl'ss lines.
l imi t ed I heir parl ic ipal ion i n nrnrkel s ro r so nw fi nancia l
p roducts , del in'n•d th eir balanc<' sheets, and taken ot lwr
ac t ions ai 111 ecl al ba lam·l' sh eel rppair. T hese dP\'elopnwnts an' both n<'cessar,v ancl Pxprctpcl.
But tlw path to a ne \,. financ ial markPI arc-hilectun\
hO\\"C'\·er unr\·en ancl impro\·isecl, \1·ill nol only lw marked
by I he fon·<'S of n ' t rench mrnt. The path shou lei equally,
in my \"i(' \\', be distinguished by the neati\·e impulses
I hal dri\'C' product and market i11n0Yal ion. It is perhaps
loo com·pni <'nt to denigral e the al t ribu10s of dynam ism
and ingpnuity, part ic-ularly late in N·onolllic c-~Tles. \\·hrn
t lw forcps of innm·,1tion c,m disappoint and w0ak<'n the
rPal econo!lly. PolicymakC'rs and !llarkPt participants
al ikP shou ld rc'cognizr that innonllion - in our product
markrts. labor markets. and y0s. our financial markets
- is lik0ly lo pro\'C' a m'cessary nrt con I ributor to economic growth in lhe collling pC'riocl . \\'p should also b<'
n'lllind<'d I hat fina ncial i nnon1t ion nrrd not lw Pquatrd
REMARKS BY FED GOVERNOR
KEVIN WARSH
Excerpts from the U.S. Department of the Treasury
w il h produ cl co111p lexi l y.
\Vh il<' som e l ak0 co !llfort in the presu mption I hat global
<'conomit•s ha\'C' dl'coupll'<I. I would noll' th at our globa l
financial markPts are mon' integrated than C'\·er. Financial
Press Conference on Covered Bond Framework,
products suc-c-rssfu lly dr\·eloped in a single grograp hy
Washington, D.C.
of'len can he readily exported to anotlwr; readily. that is.
July 28, 2008
if I he nP\\' produc-t expo rl befits i n\·estor pref<'rr·nces and
policylllakers rc'lllo\·e barriers to their adoption. Today's
inlroduc-tio n of lhP Tr0asury Co\'C'red Bond Fram('\rnrk
may bl' illustral i\'C' of llw lwnefi ts of product innorntion in
Financial 111arkets cont inu(' lo shO \\' the ill effpc-ts
oft urmoil t riggPred by !llo11gagP lossPs. Thr rPal econollly
16
globally rnnnectl'd rmandal markl'IS.
Treasury's cl iscussions \\·ith nm rkrt part ic-ipants sug-
is uml<'rpC'rforllling in tPrms of growth and job creation. a
g<'St that a CO\'PrPd bond franwwork may attrac-t im·estor
rpsull i11 pai1 of financia l strains. And fi11ancial institutions
inll'!'est and facilitate gn,ater ac·c·pss to mortgag<' neclil.
t hC'lllSPi\'C'S arP affect Pd by tlw gpnrraliz<'d pullback in
l ligh-quality assPts might lw finatH"Pcl if banks ar<' allO\H'd
liqui dity and dPt0riorali ng c-r0d il qualily. NParly one yc•ar
lo manag<' poo ls of loans, substi tut ing 1ww loa11s into tlw
VOLUME 18, NUM B ER 2
pool as otlwrs bPc-ome dPlinquC'nt. :\'r\\·ly issued c-o\·errd
bonds bac-kPd by high quality mortgagr loans and issurd
Pinancial innon1tion. proper!~· understood. can inc-rease
t hr cli\·Prsity of funding sou re-rs, impro\·p tlw distribution
by strong financial institutions may find a gro\\"ing i11\"es-
of risks. and pro\·iclP inc-entin•s to monitor such risks-
tor bas(' in tlw l "nitrd States.
all helping to promote Pc-onomic- gro\\"th. Till' Federal
Tlw Fedt>ral RPsPn·e has long accepted a broad rangr
R(•sen·e sePks to pnc-ouragr nr"· and innon1t iY<' sourc<'s
or high -quality c-ollateral from dppository instil ut ions at
or funding, and wi 11 cont inu<' to \,·ork ,,·ith ot lll'r pol i-
its discount \\·indo\\". Ilighly rat rd, high-quality c-m·erPcl
cy makers and markPt participants to acc-omplish this
bonds \\"Ould g<'m' raily fall \\"ithin that broad rang<' as Pli-
important oi>jPc-tin• .
giblP c-ollateral. Prirnte lendrrs also an' lik<'ly to find suc-h
bonds attrac-th·r as collatPral for credit extensions.
■
rile ft,11 wxt r• f ec1 liowmor Wc1rsli, pre s rele,
ht'p:
,', 1..1 1ecler<1 reserv
'Ov ~P,", ,r1t1
,P s
ava1111i1t ct
ts speech ,v
r.1 JC SJ, 2Ra
Examining the Issues: Community
Affairs Adds Research Function
THE FEDERAL RESERVE BANK OF ATLANTA HAS RECENTLY EXPANDED THE COMMUN ITY AFFAIRS FUNCTION
TO INCLUDE A NEW TEAM DEVOTED TO RESEARCH THAT FOCUSES ON SIGNIFICANT COMMUNITY AND
ECONOMIC DEVELOPMENT ISSUES IN THE REGION.
Headed by
A\'P Todd Greenr. th e team will iden-
Intrrnational Economic Dewlopment Council. In :200:2. hr
tify key co mmunity conc erns and plan comprehensi\·e
obtainer! the Ce11ified Economic Dr\·rloper designation
rrsearch projrcts with th e goa l of improv i ng the poli cy
(CEd)) .
em·i ronment.
Grounded in the exprri rnces of communi ty clrvelop-
Grrr ne earned a bacl10lo1.-s degree in English and Am eri can lit rrature and language from Ilar\'arcl Cni\'ersity and
mr nl profess ionals throughou t th e south east , t hr nrw
master's degr ees in human reso urces managrment from
rese arch fun cti on is clesi gnrd to i nform polic.v and prac-
Washi ngton l -ni\·ersity and in pub li c ad mini stration from
t ice decisions to c reate more sus tainable com mu nit ies .
Grorgia State l 'ni\'ersit y.
Some potential ,u-eas of rrscarch include post-forrc losure
consumer and neighborhood impacts, housing and the
Dan lmmerg1uck is a \·isiting scholar and a professor in
agi ng pop ulati on , and grrrn dr\·r lopment and lendin g.
Geor gia Tech's City and Regional Plann ing Program.
Th e research age nda will e\'o ln' to be re spons i\·e
Imrn erg luck has authorrd dozens of stud i es on com mu-
to the needs of loca l markets throu ghout t hr Federal
nit y cl r\·e lopment . eco nomic cleYelopment, community
Res en-e's Si xth Distri ct , and the r rsu lts will be w id ely
re i n\·rst ment , fair housing and r elat r d top ics. Ilis most
shared t h ro ugh co nferencrs , publi ca tions , articles and
r ecent boo k is Crccl il to Ili c Com 1111111ily: Co mmunity
t ec hni ca l ass ist ance.
Rci111 •estmc11t a11c/ Fair L e11cli11g Poli cy in th e U.S. ( M .E.
Shar pr, 2004).
Meet the Team
Todd Greene, assistant \ic e president for commun ity and
Brfore moving to Atlanta, lnrn1ergluck taught at Grand
\'allr.v State L"ni\·rrs ity in Grand Rapid s. J\1i chigan. Prior
economic cle\'elopment resea rc h and policy, has held
to tea ching at Grand \ 'all ry State , he was Senior Vice
leadership ro les with Southwestern Bell, the Mrtropolitan
President of the Woodstock Insti tute in Chicago, a policy
Atlanta Rapid Transit Authority and in manage ment con-
r esearch organization that \\·orks on co mmunity and
sulting before com ing to th e A tl anta Feel . Most recently,
economic de\'e lopme nt issues.
Gr een e sen·rd as director fo r Commu nity, Po li cy a nd
l mmrrgluck has a mast er's degree in publi c po licy from
Rrsrarch Srrvices at Georgia Tech's EnteqJri sr Innornti on
th e l 'ni versity of Michigan and a Ph.D. in urban planning
Institute w it h ovrrsight of resea rch and imp lementation
and policy from th e Univrrsity of [Ii i no is al Chi cago.
efforts in app li ed economic de\'e lopment.
In aclclilion to his Feel role, Todd is currently president
18
Karen Leone de Nie is rrsearch manager for community
of th e Georgia Economic Developrrs Assoc iation . On
and economic cle\·clopment r esearch ancl policy. Before
the nationa l leYel. Greene is a committee chair for thr
coming to the Atlanta Feel , she wa s a r esea r cher at
VOLUME 18, NU M BER 2
Pictured from left to right: (top) Dan lmmergluck, Jessica LeVeen Farr, Todd Greene, (bottom) Jared Yarsevich, Karen Leone de Nie
Grorgia Trch's Crnt er for Quality Growl hand Rrgiona l
Dr\·elopnwnt , w lw re slw m anagr d stucli rs ancl built
Farr earn ed a bachelor's degree from llw l ' niversit y of
California at San Dirgo in urban st udies an cl planning ancl
partnerships relatr d to housing, health and built e1wi-
a master 's degree in regional pl an ning from l ' niversit y o f
ronment, tran spo rtati on, and lan d use. She ha s also
Nort h Caro lina at Chapel Iii !!. While bui lding her spPcialty
worked in envi ron mental resources m anagement at th e
eXJ}('rience w ith the Federal Resen·e, Farr gain ed hr r cre-
No rth Ce nt ral Texas Counci l of Governnw nts (Dallas/
dr nt ial as a commissioned rxamin('['.
Port Worth).
Lrone de Nie earned a bac helor's deg ree i n r;;ngli sh
Jared Yarsevich is an int ern w ith com munit y ancl rco-
from l ·ni\·ersity o f Wisconsin at Madi son and a master's
nomic de\·rlopme nt resea rch ancl poli cy. lie is currr nt ly
clr gr ee in cit y and r eg io na l pl an ni ng from t he Geo rgia
p ursuing a master 's clegrer in cit y and r egional plann ing
Inst itulr o f Technology. In 2007 slw obtained certification
at c;rorgia Trch w ith a focus on housing policy. Yarsr\ich
from tlw American lnslitu t0 ofC0rtifiecl Planners.
has workr d as an rconomist researching tobacco control
po li cy ancl anti-tobacco marketing campaigns with HT!
Jessica LeVeen Farr is the senio r regional co mmunity
Int rrnational , ancl has lectured in philosophy at Gl'o rgia
dr\·elopnwnt manager work in g in th e Frd's Nashville
Stai r Univr rsity ancl Clayton Sta.l e l l niversit y.
Branch. Prior to joi ning the section , Farr was an assistant
Yarse\ich earned a bachelor's degree in rcono mi cs from
v ier p resiclC'nt w ith Bank of Amrrica Com munit y OeVC'l-
North Caro li na State UnivC'l'sil y ancl a master's degrrr in
opment Corp oral ion in Nash\·i lle, where she managed th e
phi losophy from thr London School of Economics. •
single-family development program. Befon' that, she workrcl
for a consu lting firm in Brrkeley, Californi a, specia lizing
Tilis article 1,as written by Karen Leone de Nie, Community Affairs resec1rcl1
manager at t11e Atla1'ta Ferl
in land usr planning and rral estatr economics.
FEDERAL RESE RV E BANK OF ATL ANTA
19
Mississippi
YAZOO CLAY, ACOSTLY CHALLENGE TO CONSTRUCTION
When driving through
t lw many bPautiful old
nC' ighborhoods and new residenti al subdivisions of Jackson, Mississippi , it's no t unu sual to s00 subst antial cracks
cial buildings arc affected , rC'pairs may i1woh·0 digging 25
to ;30 f"PC'l be low the surfac<' to construc t conc-rP tc pilings.
Although builders ha\'C' so me dTPctiv0 rem ed ies for tlw
in th e sidewa lks and st r00ts. ThosP who arpn't from thP
Yazoo clay dil Pmma, problems persist. Part of the reason
arpa mi ght attribuLe th P damagP to tr00 root s or subpar
is th at costs associated with o ffse t ting th e clay's effects
c-onc-rPte work. llowen' r, .Jac k so n nat ives will probably
can lw significan t. Cnscrupul ous builclPrs looking to cut
know that t lw cu lprit is a g0o logic-a l phenonwnon ca ll ed
costs too often fail to rcmm ·0 th e clay or prepare' the foun-
Yazo o c lay.
d at io n inaciC'qu ately b0 f'orp bu ildi ng th e homC' . Ow ner s
Yazoo clay, which causPs cra c- kPcl home foundat ions,
crac-k('(I wal ls, stick ing cl oors, popping w indows, crum bling br icks and plu mbi ng leaks, has bee n an 0xpensivP
o f" oldC'I" homes m ay not be abiC' t o a fford th e necessary
r epairs w hen th ese probl em s occur.
N<'W homes come with a six-yNtr imp li ed warranty,
nightmare for contractors and honwown0rs who arc often
accordin g to th e Ru ncll 0tt Law Firm in Jackson , which
fac('(I w ith costly repairs. F'ounclat ion crac ks can also har-
spPcia li zes in pC'l"sona l inju r y claim s. These wa rranti es
bor molds th at cause se ri ous hcalt h prob lems.
t ransfer to subsPquent owner s wh en a house is sold . In
Dcri\·in g it s name f"rom the Yazoo Ri \·cr, yazoo c lay
add it ion , a hom cbuyer who has purchased an older hom e
i s a minera l-fill ed mud with elas ti c prope r ties-it can
with f"ounda t ion problems th at hm·p not b00n d isclos0d
shr ink and swdl dramatically, cau sing so mct imes scvc'rP
m ay b<' cnt it J('(I to recovPr damagps for ho me defects.
stru ctura l dam age to anyt hin g constr uc t ed on it. Thi s
C'o nsicl erin g the additional costs to ciPvelopPrs of new
pC'culi ar k in d of earth i s loca t<'ci m ain ly in Miss i ss ipp i
con st ructio n ancl the milli ons of dollars paid annually by
in a geographi c area appro x imat Ply 40 mil es w i de and
honwowners to make repairs l o th eir hom es, th e eco-
J:20 mil es long. The swath o f Yazoo clay C' x tcnd s from
nomic- impact of the Yazoo clay ph eno menon is subst an-
Yazoo Co unt y t o Sco tt Cou nty, strPt c hes o n t o Madi so n
tial. l l oweve r, home bu yPrs ca n sm•p mon ey i r they ar<'
an d II inds counties and crosses t he Pear l Ri ve r. A t ot al
a wart• of th e prob lem of Yazoo clay, rPqu ire soil tests prior
o r 11 co unt iPs in ce ntral and pas t Pm l\lississippi a rc
to purchase , ancl make sur<' the cle\'('lop0rs prepare th e
a rf"Pc t 0d by Yazoo clay.
honw's foun clati on carefully. When purchasing an existing
I nclu stry rep orts est im at C' that up to 65 J)('rce nt of"
honws in the m etro Jackson area hm·0 b00n damaged t o
some exten t by th e movement o f" thi s clay. Th e seve rit y
or t lw clamagP depend s on how far bdow th e surface it
liPs. Tlw depth can ran gP f"rom (j inclws to 15 fPe t. When
home', the b uyC'I" should require th e s0IIPr to make any
n0c·c'ssary repai rs.
■
T111s mt1cle was written by M1ctiael Milner. senior regional community
developi>1ent manager at the Atlanta Fed·s B1r1111nP,l1a111 Brancl1 We w1sl1
to acknol'.ledge l'.Ork IJ 1 Lynne Wilb,,nks Jeter wl1 ch appeared in The
M1<,1 1pp1 Bus,nc c Journal
prpparing fo r nPw constru c tion, tlw day can be removPcl
or, in some cases, a spPcial concrPt <' "floating slab" can
[)(' construc ted on top of" the clay. If" t h0se nwasures fail l o
cont rol the probl0m , tedi ous r0pa ir work and costly fo uncl at ion adjust nwnts may lw requirC'cl . Wh0n large comm er-
20
VOLUME 18 , NUMBER 2
South Florida
MIAMI ADVOCATES FIND OPPORTUNITY IN RISK
The Human Services Coalition (HSC),
answPrs th is nl.'ed by pro,·idin g mull ipl e pal hways for
was born in I 99:'i in responsP lo welf'arP rC'form initiativPs
indi viduals l o get in volvc•d in tlH'ir own advocacy and
that wC're gaining momC'ntum in CongrC'SS. While wdfarC'
sustain I his im ·oln• nwnt.
rC'form promised to delivn job training, placC'ment , work
supports and educational ac-c-C'ss in an era of Io,,· unem-
Part ic-ipanls in the Civic Life Academy
1110\'C'
from basic
to m on• adrnnc-l.'d ski lls as tlwy C'ngagc• in posit in• actions
ploynwnt , aeh·oc-ates worriC'cl that dismantling tlw soc- ial
that IH'lp sustain their innih·C'me•nl in I lw program. lndi,·i-
safc,ty net system would Iran• low-inc-omC' famili C's with
duals SC'C'king prospC'rity SC'ffic-C's an· c•nco11ragC'd to tC'II
inadC'quatC' ac-c-C'ss to basic SC'IYiCC's.
Risk, howpver, was paired with a co1-rC'spond ing oppoI°
I lwir stories as a ,·eh icl e for personal e•x1Jrrssion , ,·alidation
a nd empowNmenl. Many of llH' SC' powPrfu I "st oric•s or
tunity. IISC"s founders lwlie,·e•d tlw promise• ofwC'lfar P
reform co uld on ly be realized through a c-om binat ion o r
They envi ioned an orgamz t on tha
se'IYic-P and ach·oc-acy. Tl1C'y C'm·isio1wcl an organization
I hat wou lei not only conn Pct pe•ople• to ec-onom ic- sup port programs and financial c-ounsl'ling, but also create'
m ·C'nuc•s for act in• C'ngagpmrnl in democratic ci,·ic- life.
Tlw goal was to encourage those clirPc-tly afTectPd by tlw
would
reate ve ues f ac I e
engageme t in de ocrat1c c·v clife .
programs Io work along ,,·ith ol her concC'rnPd cit izC'ns.
Af'ln SC'VC'ral ypa rs piloting new ap proadws, IISC devC'l01wd two innm·ati\'C' and C'!Tec-ti,·C' programs: the Prosper-
lnilh and hope•" arP fpatun•d
ity Campaign and Civic- Life' Ac-adC'my. Both addrC'ss thC'
and an• ofTC' rcd as public- test imony lo policy makc•rs.
1wC'd lo provide Pc-onomic opportunity as wp ll as a means
Io par1 ic-ipat C' in policymaking.
A third program , Imagine l\liami, is Pnwrging to create'
011
wC'bsilPs and other lllC'dia
Those• in\'CJh·C'd in the Acade'my tilC'njoin IC'ade•rship
programs such as llH' I\eighborhood Le•adl.'rship Program,
Parpnt Leade•rship Training ln slitulC' and l'ublic- A lliPs,
opport unit iPs for "ci,·ic- ,wt working." The I IS(' program
,,·hi c-h pro,·idC's leadership training for :voung pc•ople.
hears I he working I it le C'C'ntpr for Social In nova I ion and
Add itional skills and pol icy arC' taught th rough Ad\'()('acy
is dl'si gnC'd Io den·lop sustainabll' social C'nlerprisrs Io
Corps Training and Project De,·l'lopnwnl and :\lanage-
addn•ss community and c-i,·ic- c-onc-e•rn s.
nlC'nt programs.
Tlw ProspC'rity Campaign links low- and modC'ratC'incomP housC'holds with inc-omC' supports (s uch as llw
IJ S(' is proud to lw a pirnlC'er in CTC'al ing an integrated
SC'nicP-aci\'CJcacy approach that tC'ac-lH•s indi,·iduals to lJC'
Eanwcl Income' Tax Crrclil) and ol lwr se1Yin's th at bolslC'r
dlecti\'C•ly inYolvPd in both our Pc-o noI11y and dem ocracy.
income•. In addition, it i11\'iles diC'nts lo bC'c-ome C'ngagC'd
T hC' organization, which !Jpgan as a commit tl'e or the
in COllllllU llil y an d c-i,ic lifP.
!IS(' found that actiYat ing and sustaining c-i\ic im·oJ\·pnwnt calls for a ,·ariC'ty of approaclws to met'l indi,-idual
neC'ds, intNe•sts and prl.'f'Prrnc-Ps. Tlw Chic- Life' Academy
FEDERAL RESERVE BANK OF ATLANTA
l\'l iami DadC' Le•aguc or Women Voters, is now an indC'pende•nt nonprofit.
T ,
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1,
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21
FEDERAL RESERVE BANK OF ATLANTA
COMMUNITY AFFAIRS DEPARTMENT
PRESORTED
STANDARD
U.S. POSTAGE
PAID
ATLANTA, GA
PERMIT NO. 292
1000 PEACHTREE STREET, N.E.
ATLANTA , GEORGIA 3 0309 -4470
CHANGE SERVICE REQUESTED
STAFF
VICE PRESIDENT AND COMMUNITY AFFAIRS OFFICER
Juan Sanchez
ASSISTANT VICE PRESIDENT
Toclcl Gr een e
COMMUNITY AFFAIRS DIRECTOR
Wayne Smith
EDITOR
Karen Leo ne cl e N ie
PRODUCTION MANAGER
JJarri ctt e Gri sso m
STAFF WRITERS
414
Research Library
Research Department
Federal Reserve Bank Of Atlanta
1000 Peachtree St NE
Atlanta GA 30309-3904
l,,ll,ll,,,,,ll,ll,,,l,1,,,,ll,l,l,,11,,,,l,,111,,,ll,,,l,l,,I
Ana Cruz-Taura
Jessi ca Le Veen Farr
Mich ae l M iltwr
Nan cy Mont oya
Siby l Slade
CONTRIBUTING WRITER
Dani ella Lc\·in e
DESIGN
Odie Sw anegan
Free subsc ripti on and additio nal copies are avai labl e upon request by mail at the
Community Affairs Department address above, or e-mail us at Partners @atl.frb .org,
or call 404/ 498 -7287; FAX 404/ 498-7342. The views expressed are not necessarily
those of th e Fed eral Reserve Bank of Atlanta or the Fede ral Rese rve System. Ma terial
may be reprinted or abstrac ted provided that Partners is credite d and provide d
with a copy of the publication.
www.frbatlanta.org
FSC
M1:11edSources
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