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S. HRG. 103-137
PROBLEMS IN COMMUNITY DEVELOPMENT

BANKING, MORTGAGE LENDING
DISCRIMINATION, REVERSE REDLINING , AND
HOME EQUITY LENDING

HEARINGS
BEFORE THE
COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
FIRST SESSION

ON

FEBRUARY 3, 1993-COMMUNITY DEVELOPMENT BANKING

FEBRUARY 17, 1993-REVERSE REDLINING; PROBLEMS IN HOME EQUITY
LENDING

FEBRUARY 24, 1993-MORTGAGE AND OTHER LENDING DISCRIMINATION

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

70-832 CC

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1993

For sale bythe U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office , Washington, DC 20402
ISBN 0-16-041270-6

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
DONALD W. RIEGLE, JR., Michigan, Chairman
PAUL S. SARBANES, Maryland
ALFONSE M. D'AMATO, New York
PHIL GRAMM, Texas
CHRISTOPHER J. DODD, Connecticut
JIM SASSER, Tennessee
CHRISTOPHER S. BOND, Missouri
RICHARD C. SHELBY, Alabama
CONNIE MACK, Florida
JOHN F. KERRY, Massachusetts
LAUCH FAIRCLOTH , North Carolina
RICHARD H. BRYAN, Nevada
ROBERT F. BENNETT, Utah
BARBARA BOXER, California
WILLIAM V. ROTH, JR. , Delaware
PETE V. DOMENICI , New Mexico
BEN NIGHTHORSE CAMPBELL, Colorado
CAROL MOSELEY-BRAUN, Illinois
PATTY MURRAY, Washington
STEVEN B. HARRIS, Staff Director and Chief Counsel
HOWARD A. MENELL, Republican Staff Director
KONRAD S. ALT, Counsel
KEVIN G. CHAVERS, Counsel
JEANNINE S. JACOKES, Professional Staff Member
MARK KAUFMAN, Legislative Fellow
AMY L. KOSTANECKI, Professional Staff Member
MATTHEW D. ROBERTS, Counsel
MICHAEL A. ROTGIN, Professional Staff Member
RAYMOND NATTER, Republican General Counsel
IRA PAULL, Republican Senior Counsel
EDWARD M. MALAN, Editor
(II)

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CONTENTS

WEDNESDAY, FEBRUARY 3, 1993
Opening statement of Chairman Riegle
Opening statements, remarks, or prepared statements of:
Senator Mack
Senator D'Amato
Senator Shelby
Senator Bryan
Prepared statement
Senator Moseley- Braun
Prepared statement
Senator Boxer
Senator Bennett
Senator Domenici
Senator Mitchell

Page
1

61
20
61
20
30
61

WITNESSES

(III)

6
62
62
64
193
8
81
203
11
86
210
12
88
88
90
91
214
22

Milton O. Davis, chairman, South Shore Bank of Chicago
Prepared statement
I. Renewing community economics
II. Shorebank Corporation
Response to written questions of Senator Riegle
Lyndon Comstock, chairman, Community Capital Bank
Prepared statement
Response to written questions of Senator Riegle
Steven Lopez, president and CEO, Southside Bank, Grand Rapids , MI
Prepared statement
Response to written questions of Senator Riegle
Edward H. McNamara, Wayne County executive, Detroit, MI
Prepared statement
I. Why Wayne County has chosen a Development Bank
II. Why a Development Bank complements conventional lending
III. The role of Government
Response to written questions of Senator Riegle
Pauline Nunez-Morales, executive director, New Mexico Community Development Loan Fund, Albuquerque, NM; accompanied by Jeremy Nowak, executive director, Delaware Valley Community Reinvestment Fund
Prepared statement
The work of the New Mexico community development loan fund
The Loan Fund industry
Strategic Federal support
Funding
Human capital development
Corresponding Federal policy changes
Ronald L. Phillips, president, Coastal Enterprises, Inc., Wiscasset, ME
Prepared statement
Introduction
......
Purpose oftestimony
The legacy of community development corporations
CEI profile ....
Examples of CEI projects
Filling the credit gap .....
Example of gap financing
Recommendations

42
92
92
93
95
95
96
97
45
97
97
97
97
98
98
99
99
99

IV

Page
Ronald L. Phillips, president, Coastal Enterprises, Inc., Wiscasset, ME─Continued
Prepared statement-Continued
Conclusion
Response to written questions of Senator Riegle
Robert Jackson, treasurer, Quitman County Federal Credit Union, Marks,
MS
Prepared statement
Community development credit unions
The story of Quitman County
Position paper
Amendments
Response to written questions of Senator Riegle
Michael Swack, co-director, Institute for Cooperative Community Development, Manchester, NH .................
Prepared statement
Additional testimony
Response to written questions of Senator Riegle
Jeremy Nowack

99
222
48
109
109
109
111
112
229

51
113
115
234
59

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD
Principles of Community Development Lending and Proposals for Key Federal
Support
ACORN, comments by Deepak Bhargava, director
National Association of Home Builders
Woodstock Institute
Neighborhood Housing Services of New York City, Inc.
Consumer Federation of America
First Nations Development Institute: The Oweesta Program

119
131
136
146
170
177
186

WEDNESDAY, FEBRUARY 17, 1993

Opening statement of Chairman Riegle
Opening statements, comments, or prepared statements of:
Senator D'Amato
Senator Campbell
Prepared statement ……………………........................
Senator Bennett
Senator Kerry
Senator Domenici
Prepared statement
Senator Shelby
Senator Boxer
Senator Moseley-Braun
Prepared statement
Senator Sarbanes

243
246
248
305
248
249
250
305
251
252
270
306
284

WITNESSES
Scott Harshbarger, Attorney General, Commonwealth of Massachusetts
Prepared statement
I. Introduction
II. Background-Setting for the problem
III. Allegations-Apparent scope of problem
IV. Actions by the task force
V. Conclusions and recommendations
Kathleen Keest, National Consumer Law Center, Boston, MA
Prepared statement
The causes
The victims
The perpetrators
Allocating responsibility
Recommendations

253
307
308
308
309
309
312
256
313
314
315
315
316
318

V

Page
Kathleen Keest, National Consumer Law Center, Boston , MA-Continued
Prepared statement-Continued
Regulatory reform for predatory home equity lending
Alternatives for home equity loans regulatory approaches
Terry Drent, Ann Arbor Community Development Department, Ann Arbor,
MÍ
Prepared statement ……………………...............................
Problem
Background
Recommendations
Summary
John Hamill, president, Fleet Bank of Massachusetts
Prepared statement
1. Introduction of Fleet Financial Group and Fleet Finance
2. A general overview of the consumer finance industry
3. The role of home equity loans in consumer finance transactions
4. Why costs to borrowers for home equity loans are higher than
costs for conventional mortgage loans
5. Fleet Finance's development of business
6. The Georgia lawsuits
7. Recommendations of Fleet Finance
Eva Davis, resident, San Francisco, CA
Prepared statement
Annie Diggs, resident, Augusta, GA
Prepared statement
John Long, attorney, Dye, Tucker, Everitt, Wheale & Long
Prepared statement
I. High finance charges
II. Redlining and reverse redlining
III. Issues
IV. Recommendations
V. Conclusion
Bruce Marks, executive, Union Neighborhood Assistance Corporation (UNAC),
Boston, MA
Prepared statement

320
323

258
329
329
329
331
331
261
332
332
333
333
334
335
336
340
291
382
292
382
294
392
393
395
397
397
398
297
433

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Fleet Financial Group, Inc.
South Mississippi Legal Services Corp.
St. Ambrose Legal Services
Southern Arizona Legal Aid, Inc.
State of New York, Department of Law
Legal Aid Foundation of Los Angeles
City of New York, Department of Consumer Affairs
Dye, Tucker, Everitt, Wheale & Long

436
446
447
448
451
457
460
469

WEDNESDAY, FEBRUARY 24, 1993

Opening statement of Chairman Riegle
Opening statement, comments, or prepared statement of:
Senator D'Amato
Senator Faircloth
Senator Moseley- Braun
Prepared statement
Senator Campbell
Prepared statement
Senator Sarbanes .....

473
475
476
482
523
483
523
483

WITNESSES
Richard Syron, President, Federal Reserve Bank of Boston, Boston , MA
Prepared statement
Response to written questions of Senator Riegle

478
524
581

VI

Page
John P. LaWare, Chairman, Federal Financial Institutions Council (FFIEC),
Washington, DC
Prepared statement
Recent developments
FFIEC efforts
Federal Reserve efforts
Compliance examinations
Consumer complaint program
Community affairs program
Conclusion
Response to written questions of Senator Riegle
Address to the Bank Administration Institute's 1993 Bank Audit, Compliance and Security Conference
James Turner, Acting Assistant Attorney General for Civil Rights, Department of Justice, Washington, DC
Prepared statement
I. The mortgage lending discrimination lawsuit
II. Enforcement activities after Decatur
Response to written questions of Senator Riegle
Retha Wilson, board member, Michigan ACORN, Detroit, MI
Prepared statement
Summary of testimony
Summary of recommendations
Testimony of Willard Brown
Joint statement of: ACORN, Center for Community Change, Center
for the Study of Responsive Law, Consumer Union, First Nations
Development Institute, League of Cities, NAACP, National Council
of La Raza, National Neighborhood Coalition , Public Citizen's Congress Watch
Response to written questions of Senator Riegle
John Gamboa, executive director, Latino Issues Forum, San Francisco , CA
Prepared statement
Allen Fishbein, general counsel, Center for Community Change, Washington,
DC
Prepared statement
Appendix I-A cronology of fair lending enforcement
Appendix II -Wall Street Journal article, February 19, 1993 , entitled
" Home Equity"
Gale Cincotta, executive director, National Training and Information Center,
Chicago, IL
Prepared statement
Discrimination and disinvestment
Problems with CRA enforcement
Fair lending violations are not translating into CRA ratings
What Congress can do

485
526
526
527
529
529
530
531
531
589
827

488
532
533
536
597
506
538
538
539
550

551
582
509
554

511
561
571
574
515
575
575
575
576
576

ADDITIONAL MATERIAL Supplied for THE RECORD

646
First Nations Development Institute
Response to written questions of Senator Riegle from :
650-824
Federal Reserve System
671
Federal Deposit Insurance Corporation
692-816
Office of Thrift Supervision
730-821
Comptroller of the Currency
Federal Reserve Bank of Boston, paper entitled "Mortgage Lending in Boston :
Interpreting HMDA Data" by Alicia H. Munnell, Lynn E. Browne, James
762
McEneavey, Geoffrey M.B. Tootell

COMMUNITY DEVELOPMENT BANKING

WEDNESDAY, FEBRUARY 3, 1993

U.S. SENATE ,
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS ,
Washington, DC.
The committee met at 10:40 a.m., in room 562 of the Dirksen
Senate Office Building, Senator Donald W. Riegle, Jr. (chairman of
the committee) presiding.
OPENING STATEMENT OF CHAIRMAN DONALD W. RIEGLE, JR.
The CHAIRMAN. The committee will come to order. Let me welcome this overflow gathering this morning. We are in a different
committee room because the normal committee room is undergoing
a regular refurbishing and it is done every few years, and we will
be back in that room shortly. I want to also indicate the reason we
are starting later than our announced time, which is that after
scheduling this hearing for 10 o'clock, some votes were scheduled
on the Senate floor which we have just completed . And so that necessitated members being there and delayed the opening of this
hearing. I say to our witnesses particularly, I appreciate their patience today.
Before we begin this morning's hearing directly, I want to announce for the record that, as members arrive, they will be recording their votes on favorably reporting the nomination of Laura
Tyson to be Chairperson of the Council of Economic Advisers. We
will begin the period for voting now and it will extend until this
hearing concludes.
If a quorum is established in that time, which I anticipate , the
final vote will be announced as we adjourn and the nomination will
be reported to the full Senate later today.
Let me now move to the subject that brings us here this morning. This is a very important hearing, I think one of the most important that is likely to happen this year with respect to the new
direction that the country needs to take and is preparing to take
with respect to revitalizing our urban communities particularly.
We are here today to talk about community development banking. President Clinton , to his credit, has advocated the creation of
a national network of community oriented financial institutions
dedicated to the revitalization of distressed urban neighborhoods ,
and as well, depressed rural economies .
Our distressed communities are in need, and really urgent need,
of new strategies to address neighborhood disintegration and clearly inadequate access to capital .
(1)

2
That need was clearly demonstrated by the riots in Los Angeles
and it is obvious from the general condition of many of our communities where homelessness, unemployment, and crime are really at
crisis levels .
Recent studies, official, national studies show that redlining and
discrimination are significant problems , and that many people are
denied credit based on the color of their skin rather than on any
measure of their true creditworthiness .
We are going to be examining this issue of mortgage discrimination at a hearing on February 24. But the point today is that more
than ever, we need new initiatives for revitalization , particularly in
our communities that are in the greatest difficulty today.
I believe that any new Federal community lending initiative
should be built upon the roles played by all existing lending institutions.
Enforcement of the Community Reinvestment Act, I think must
be improved and strengthened so that traditional lenders increase
the flow of credit to low-income and minority communities.
However, the Federal Government should also , as recommended
by President Clinton , experiment with new and additional models
that can further increase availability of capital and build the capacity of residents to revitalize their own neighborhoods .
Any new initiative must recognize that both efforts are necessary, both through the established channels and through new
channels , and at the same time ensure that the safety and soundness of federally insured depository institutions are not put in jeopardy.
Our witnesses today will focus on some of the new models for
promoting revitalization , including community development banks ,
and other types of community lending institutions.
Community development banks are organizations the primary
mission of which is to revitalize their communities by investing in
them. They combine the structure and expertise of an insured depository institution with the commitment typical of a community
based, nonprofit organization.
Currently, there are four such institutions in the Nation . Two of
these institutions, South Shore Bank and Community Capital Bank
are here with us today and incidentally are located in the home
States of members of this committee, Ranking Member D'Amato,
who will be here in due course , and Illinois Senator Carol MoseleyBraun.
We will also hear from two prospective community development
banks who will discuss some of the pitfalls encountered in starting
new institutions of this kind. We will also hear from representatives of several nonprofit lenders , including a group from Senator
Domenici's home State of New Mexico . These community - based
lenders include a wide range of organizations that promote revitalization and will help us get a fuller understanding of the field of
community banking as it is happening across the country.
I want to welcome all of our witnesses this morning, and I want
to extend a special thanks to Steven Lopez, here from my home
State of Michigan , and also the County Executive of Wayne, Edward McNamara.
I want to say a word more about that in a minute.

3
Finally, let me say that I also look forward to hearing from the
administration as soon as they are ready to testify on this important issue, and put their package and recommendation before the
Congress.
During the campaign, President Clinton said that he would like
to create ,
A national network of community development banks to provide small loans to
low-income entrepreneurs and homeowners in the inner cities. These banks will also
provide advice and assistance to entrepreneurs, invest in affordable housing, and
help mobilize private lenders.
So I know from that statement and things said since, that this
is a very high priority for the new administration , and the committee will move forward very promptly as soon as they have put their
proposal on the table for us.
Let me now just finally say a word before calling on our other
members , and then going to our first panel of witnesses .
It is a particular pleasure for me to welcome my two Michigan
representatives who are here at the table today. But I want to say
a special word about Ed McNamara , because it is very difficult to
make local government work sometimes and there are a lot of problems , especially because of changes in funding patterns and the
starvation , I think, of financial help from the National Government
to help local communities deal with some of their problems.
I think Ed McNamara is probably without question the most ef
fective county executive anywhere in the country. I am very proud
of that personally, and my State is very proud of that as a matter
of his work and his accomplishments . I have found, over the years ,
that if you want somebody that can turn a problem into a solution ,
a good person to call is Ed McNamara.
So I am very pleased that he is here today and I am very much
interested in what he will be saying in his comments and the concept that he has in mind in our State, as does Mr. Steven Lopez
as well , representing from the perspective of folks in the Grand
Rapids area.
So before going to our witnesses, I know Senator D'Amato will
be arriving shortly, let me now yield for any brief opening comments that members might have .
Senator Mack.
OPENING COMMENTS OF SENATOR CONNIE MACK
Senator MACK. Thank you , Mr. Chairman. My comments will be
brief. Unfortunately, I am going to have to leave in about 20 or 25
minutes, and I really wanted to have the opportunity this morning
to have the input from the two panels.
Let me say, at the outset, that the issue that we are going to be
talking about this morning I think is a significant one. It is dif
ficult for me to believe that capitalism can work without capital.
There are areas of our country in which we know that capital is
now flowing.
Credit is to the economy what oxygen is to the body. And without
capital, without credit, it is very hard to see how you can bring to
fruition all the other efforts of empowerment that is a popular word
that is been used for a number of years now.

4
I must say to you, however, having spent 16 years in the banking
business myself, having had to go through the process of making
decisions about who to lend to and who not to lend to, the difficulties in putting together new organizations with new missions is a
very very challenging one.
While I come here with a very open mind, and want to be supportive, at the same time, I have got some skepticism to deal with.
I look forward to your testimony to kind of help me through that,
if you will . So I welcome you along with the other members of the
committee, and look forward to your testimony.
And thank you , Mr. Chairman , for the opportunity.
The CHAIRMAN. Thank you , Senator Mack.
Senator Boxer.
Senator BOXER. Mr. Chairman , I do not have an opening statement. I just want to commend you for holding this hearing and I
look forward to hearing from the witnesses.
The CHAIRMAN. Very good.
Senator Faircloth, did you have an opening comment that you
wanted to make?
Senator FAIRCLOTH . No thank you.
The CHAIRMAN. Senator Campbell .
Senator CAMPBELL. No opening statement, Mr. Chairman.
The CHAIRMAN . Senator D'Amato I know has a strong interest in
this area, and has talked and very active with respect to the issues
of the community and urban redevelopment particularly.
Senator D'Amato.
OPENING STATEMENT OF SENATOR ALFONSE M. D'AMATO
Senator D'AMATO. Thank you very much, Mr. Chairman .
Mr. Chairman , I join you in welcoming today's distinguished witnesses as the committee considers ways to promote community development in inner cities, rural areas, and other economically distressed neighborhoods of the country.
I want to extend a special welcome to Lyndon Comstock, who is
the chairman of Community Capital Bank in Brooklyn , and to
thank him for his willingness to provide us with his insights and
suggestions concerning this important issue.
Our Nation's inner cities, rural areas, and other economically distressed neighborhoods are in dire need of credit for community development. We need to find a way to encourage banks and other
lenders to return to these areas and to provide the credit needed
for economic redevelopment .
There are all sorts of community development bank proposals
floating around in Washington . Some proposals require huge
amounts of taxpayers' money. Other proposals call for creating a
new kind of specialized community development banks. Still other
proposals seek to coerce banks to make community development
loans by stronger enforcement of the Community Reinvestment
Act.
While I know that these proposals are well intended, I do not believe that we need new kinds of banks or new Government spending programs. Instead, we should take the money and time wasted
on creating paperwork to satisfy Community Reinvestment Act regulations and channel those resources into making real loans to

5
home buyers and small businesses in poorer communities all over
America.
Community development banks are basically ordinary banks
with an extraordinary purpose. By pooling resources and talent
under one roof, community development banks can focus their efforts on designing products and services that meet the special credit needs of the inner cities and rural areas.
We should encourage banks, especially smaller banks, to pool
their resources and carry out their community reinvestment responsibilities through investments in community development
banks.
If every bank invested up to 5 percent of their capital, and that
happens to be the current legal limit, in a community development
bank, it would dedicate almost $ 12.9 billion to revitalize our inner
cities and poorer neighborhoods. This translates into $ 193 billion in
new credit for community redevelopment. Now that is real money,
even by Washington standards.
Mr. Chairman, there are those who say this idea would enable
banks to buy their way out of CRA. But I say, this is the best way
for banks to buy into CRA. Instead of building mountains of paperwork in the name of CRA, banks can be building affordable housing
and stores for small businesses. Under CRA, banks should get credit for giving credit.
I hope to examine my proposals with today's witnesses and to
work with them and other financial institutions and community
groups to find the most efficient and least costly way to promote
community development activities.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Shelby.
OPENING STATEMENT OF SENATOR RICHARD C. SHELBY
Senator SHELBY. Thank you, Mr. Chairman .
Mr. Chairman , I ask unanimous consent that my full prepared
statement be made part of the record.
The CHAIRMAN. Without objection , it is so ordered.
Senator SHELBY. Mr. Chairman, I am very happy to have the opportunity today to learn more about the community development
banks.
Since President Clinton has mentioned his interest in creating a
network of community development banks, I have followed with interest the media coverage of existing community development financial institutions. There currently exist, according to my information, somewhere between 2,000 and 3,000 community development organizations.
These organizations take several different structures and have a
number of different missions, but seem to concentrate their efforts
on developing affordable housing, creating and retaining jobs, providing credit to small businesses and micro enterprises, and providing banking services to under served members of the community.
If these numbers are to be believed, these community development organizations have been extremely successful. They have created thousands of jobs, developed thousands of units of housing,
and moved a significant number of Americans off public assistance
through employment and self- employment opportunities.

6
I believe that community development financial institutions
clearly have an important role in our financial system. They satisfy
a need not met by other sectors of the financial services industry,
constrained as they are by the demands of the shareholders.
I look forward, Mr. Chairman, to hearing from this mornings witnesses and to see what else we can learn about the community development banks.
The CHAIRMAN. Thank you, Senator Shelby.
Senator Bryan .
OPENING STATEMENT OF SENATOR RICHARD H. BRYAN
Senator BRYAN. Mr. Chairman , thank you very much.
I too would like to ask unanimous consent to have my statement
made a part of the record.
The CHAIRMAN. Without objection, so ordered.
Senator BRYAN. I would also like to indicate to the distinguished
panel that I look forward to learning more about your experience.
hope it will enlighten us to some opportunities to provide additional capital to the urban centers of our communities, that are so
desperately in need of additional resources to develop themselves.
Thank you very much.
The CHAIRMAN. Thank you, Senator Bryan.
I am going to introduce each of our witnesses now, and then we
will go right down the table to hear from them.
First we will hear from Mr. Milton Davis who represents the
South Shore Bank in Chicago, IL, often pointed to as the leading
example of a community development bank. Mr. Lyndon Comstock,
with Community Capital Bank of Brooklyn, NY, another very important illustration of the efforts now underway . Then Mr. Steven
representing the Southside Bank in Grand Rapids, MI and
Mr. Ed McNamara who is the county executive for Wayne County,
coming from Detroit, as it were. I will introduce the second panel
when we call them forward.
Mr. Davis, we are very pleased to have you and interested to
hear about your experiences and the advice you have for us. Let
me say to all the witnesses, we will make your full statements a
part of the record, so I want you to feel free to summarize and go
right to the points you really want to stress for us.
STATEMENT OF MILTON O. DAVIS, CHAIRMAN, SOUTH SHORE
BANK OF CHICAGO
Mr. DAVIS. Honorable Chairman and members of the committee ,
thank you for inviting me to appear today. It is a great honor, particularly because this committee has been at the forefront in recognizing the potential of community development banks at the
same time the committee has already been able to shed considerable light on the complex issues facing distressed communities, and
the range of distinct institutions and products appropriate the different market challenges in these communities .
As requested, I would like to briefly provide background on Shore
Bank and Southern Development Corp. , before touching on some of
the distinguishing characteristics of development banks , their relationship to other banking and nonbanking activities , and the opportunities for replication.

7
Three colleagues and I formed Shore Bank in 1973. We believe
that the multifaceted problems of distressed communities required
large scale permanent institutions. Such institutions would have to
take a business like comprehensive approach to community development. They would need high levels of credibility, expertise and
market knowledge to profitably invest in the area, and to restore
the confidence of private investors revitalizing healthy market
forces.
A bank holding company with nonbanking community development subsidiaries can have all of these characteristics . We thus
conceived of a development bank as a specialized structure with
the capacity to transform the market dynamics of a geographic target area.
Shore Bank owns a bank, the South Shore Bank of Chicago, but
it also owns a real estate development company, a minority small
business investment company, and has a nonprofit community affiliate engaged in small business assistance, labor force development ,
and various community services all active in this targeted community in Chicago.
These companies, through their coordinated activities in carefully
targeted areas, aspired to comprehensive community development.
While provision of credit is an important tool toward this end, it
is not enough. Community development requires more than credit,
and delivering credit successfully in disinvested communities requires more than a bank.
In 1973, the South Shore community had rapidly changed from
all white to overwhelmingly black, and no credit was being extended there. Since that time, Shore Bank has made development
investments totalling $351 million in South Shore, and a few other
recently targeted neighborhoods. And has financed or leveraged the
renovation of nearly 8,000 housing units in South Shore alone,
nearly a third of all such units in that community. While doing so,
our financial performance has been comparable to peer institutions .
For the last 10 years, Shore Bank's compounded annual growth
rate has been 16.6 percent.
Southern Development Bank Corp. , our sibling in Arkansas, was
formed with Shore Bank assistance in 1988. It applies the same
principles of comprehensive, coordinated interventions tailored to
particular communities, to a rural area whose primary market
needs are business development.
Southern also owns a bank and a real estate development company, but it is nonprofit affiliate includes, in addition to a venture
capital fund, a microenterprise fund and a sophisticated manufacturing, finance and consulting company. To date, Southern has invested $ 19 million and has been very profitable.
In essence, these institutions work because they bring a singular
focus and specialized expertise to a carefully targeted area combined with mutually reinforcing interventions . This allows the development bank to successfully manage what would otherwise be
high risk investments, to more aggressively initiate, identify and
evaluate development opportunities, and to address multiple dimensions of community renewal.
From the point of view of banking, a development bank occupies
a special niche, primarily growing the market by fostering and sup-

8
porting deals which would not be present or bankable without the
comprehensive target characteristics of a development bank. For
these reasons, development banks do not primarily compete with
conventional banks. Instead, they are natural partners addressing
complementary equally important credit needs.
Unleashing the enormous credit potential of conventional banks,
with appropriate incentives , is vital to strengthening the Nation's
economy and to under invested communities. But if the goal is development of distressed communities , this credit is not enough. It
will not reach the deals in these communities which cannot be
identified or prudently banked with credit mechanisms alone . Perhaps the broader point is that different markets require different
types of development products which are most effectively delivered
by different types of institutions.
Bank community lending departments in large banks , community loan funds, credit unions, community development corporations and others, all provide much needed but distinct products.
Appropriate support should be crafted for each with the recognition
that they have different needs and serve differing goals . This considerable range of activity, interest and expertise in community development relates to one final point, replication .
Many talented people and capable institutions, ranging from conventional banks to loan funds to community development corporations are exploring becoming development banks . We believe that
with appropriate start-up support, our experience can be widely
replicated.
Development banks represent an unusual model of private institution serving public purposes, offering a new partnership between
the private sector and government, and effectively delivering resources to revitalize disinvested communities. As in so many areas
of public need, after many years of experimentation, we know
something that works. The difficult challenge is to carefully design
a program which translates this knowledge into public policy.
Thank you for your interest and commitment. I would of course
be glad to answer questions.
The CHAIRMAN. Thank you very much, Mr. Davis.
Mr. Comstock, we would like to hear from you now, please.
STATEMENT OF LYNDON COMSTOCK, CHAIRMAN, COMMUNITY
CAPITAL BANK
Mr. COMSTOCK. Thank you for inviting me to address the committee on the topic of community development banking. It is a
privilege to speak after Milton Davis from Shore Bank, which has
been a principal inspiration for our bank.
My name is Lyndon Comstock. I am the chairman and founder
of Community Capital Bank of New York City. Community Capital
Bank is, as far as I know, the only commercial bank ever organized
specifically as a community development bank in the United
States. Our bank is now 2 years old, and has $20 million in assets .
I am also the chairman of LEAP, Inc. LEAP is a nonprofit venture development organization with its office at Community Capital
Bank. LEAP provides intensive management assistance, including
help in sourcing risk capital, to small businesses in low -income
areas of New York City.

9
At the outset, I would like to note that community development
banks are only one of the categories of community development financial institutions or CDFI's, for short. I include , as CDFI's, along
with community development banks, community development credit unions, community development loan funds, microenterprise
funds, and venture development organizations.
Each of these various categories, including rural reservation
based and urban CDFI's, is performing an important service to
community economic development, and could benefit from Federal
support. Assisting in the expansion of existing institutions , and not
just the creation of new CDFI's, is particularly important.
Our bank is a member of a recently formed ad hoc coalition of
community development financial institutions which advocates
Federal support for building the capacity of the CDFI industry.
I understand that you have been provided with a copy of the coalition's position paper, "Principles of Community Development
Lending and Proposals for Key Federal Support. " I hope that is correct.
The CHAIRMAN. Yes, we have that, and we are making that a
part of the record.
Mr. COMSTOCK. Thank you. I hope that your investigation of
community development financial institutions will lead you to the
same conclusion I reached some years ago. CDFI's are a highly effective, private sector means for channeling capital into community
development. An investment in low- and moderate-income communities is essential to the establishment of functioning economies in
those areas .
To expand the capacity and therefore the impact of the CDFI industry I suggest three principal factors are needed .
The first is equity capital. Equity capital for CDFI's is very difficult to raise, and appropriate Government participation, perhaps
on a one to two match, could help induce private sector investment.
Second, grant funding is needed to fund technical assistance for
new or expanding community development related businesses or
projects. Technical assistance is also needed for new CDFI's.
Third, professional training programs will need to be created to
help provide the staffing for a major expansion of the CDFI industry .
Within the context of this discussion of CDFI's, I have two comments I would like to make about the Community Reinvestment
Act.
First, I believe that all of my colleagues in the CDFI industry
agree that any Federal support for CDFI's should not cause a
weakening of the CRA. We support full CRA enforcement.
Also, it is entirely unrealistic, in my opinion , to think that the
CRA will cause widespread bank support for CDFI's which could
therefore substitute for Federal support. Banks already generally
receive CRA credit for investing in CDFI's, but have only chosen
.
to do so in relatively small amounts. Most of that investment has
been deposits or their equivalent, rather than the equity investment and technical assistance grants which are needed for the expansion of the CDFI industry.

10
I hope there will be more investment in CDFI's by banks , but
Federal support is needed if there is to be any significant step up
in the rate of CDFI formation and expansion .
Turning to the CDFI's that I have founded, Community Capital
Bank is a New York State chartered , FDIC insured commercial
bank.
Our bank has committed more than $7 million in loans and letters of credit so far, all of which are community development related. Approximately $3 million of this total is directed to multi unit
affordable housing, while the other $4 million supports small businesses and nonprofits in low- and moderate-income areas of New
York City.
I am happy to tell you that the bank does not have a single
nonperforming or delinquent loan so far. Our bank has received no
Government subsidies of any type to date, nor, may I add are we
asking for any operating subsidies . Our bank makes small commercial loans from $25,000 up to $450,000 or to $ 750,000 with an SBA
guarantee.
Let me sum up for you the competition in that market in lower
income areas of New York City. We have had only two deals where
we were truly in competition with another bank- I am talking not
about just the loans that we have made but the loans that we have
seriously considered . We have not lost any of our existing loans to
another bank, and we have not taken a loan from another bank
that was anxious to keep that loan .
I would also like to briefly describe LEAP, Inc. , to you. LEAP
started out of a recognition that a commercial bank cannot provide
risk capital , meaning equity or seed capital . A bank may also have
significant problems in providing intensive technical assistance ,
partly for legal reasons .
LEAP is a nonprofit which fulfills these needs for small businesses that have a high community development potential, especially as to job creation. I refer to LEAP and similar organizations
as venture development organizations .
Finally, it is important that any legislation supporting CDFI's
that may come about be flexibly structured . This is a young and
growing industry whose needs are evolving. A responsive administrator of Federal support is equally important so that the process
does not become so time consuming as to be effectively useless , especially for newly forming CDFI's .
I urge that strong input from CDFI practitioners be incorporated
into the administration of any Federal support to CDFI's . The best
vehicle for accomplishing these administrative purposes may well
be a quasi-independent corporation .
I appreciate the opportunity you have given me to express my
views on community development banking . A considerably more detailed version of my testimony has been submitted to you in writing.
Thank you very much.
The CHAIRMAN. Thank you very much .
Let me just indicate, for the record , that a quorum has now been
established, and has expressed itself unanimously in favor of Laura
Tyson's nomination. We will leave that voting roll open for others

I

S

11
to be able to be recorded and she will be reported out favorably on
that basis.
Mr. Lopez, we are pleased to have you, and we would like to hear
your summary now.
STATEMENT OF STEVEN LOPEZ, PRESIDENT AND CEO,
SOUTHSIDE BANK, GRAND RAPIDS, MI
Mr. LOPEZ. Mr. Chairman, honorable members of the committee,
I am really delighted to be here today as president of Southside
Bank, to share with you why the members of that community got
together to form the bank.
They got together to form this bank because, for example, in
1989 , the established banks held $ 508 million in deposits in various commercial banks and savings institutions , and only about 1
percent of that was being loaned to members of the community for
mortgage purposes. I find it very difficult to participate in a capitalistic system when you have no capital.
In today's economy, when States are struggling with tax revenues-when you are dealing with a shrinkage for tax purposes because most of your employees are idle , employers are making sacrifices to save money, I think it would behoove the system to make
sure that small businesses have access to capital .
Because, without access to capital, small businesses are going to
find it very very difficult to generate jobs . Like, for example, in the
community that I represent, you are going to find minority contractors who have received contracts from the city, the State or the
Federal Government, and they go to the banks and try to finance
them. They have a difficult time getting it financed . Most of these
people have to resort to family loans , if they are lucky enough to
come up with family loans.
So I recommend and suggest to this body that at a time when
the United States needs to grow its economic base, it cannot afford
to continue to ignore a major segment of its market.
The African-American market, which is 32 million strong, in
1991 earned $300 billion . Unfortunately, we seem to be on the
consumer side of the economy, as opposed to the supply side . And
based on that, I would strongly suggest that we start looking at
community banks as a way of shoring up the established banking
system .
I know a lot has been said about the Community Reinvestment
Act. It has been my experience, and I am not here to bash the established banks, what has happened is that the Community Reinvestment Act has been looked upon as a safety valve for the major
corporations , together with black organizations in the AfricanAmerican community, where it has provided the corporations with
a safety valve.
For example, the corporations have a way of making or underwriting events for black organizations, and the bottom line is that
no perpetual mechanisms are being built. Also , financial institutions factories that will eventually make a difference in terms of
helping the African-American community not only find jobs , but
also give them a sense that they, too , can participate in the capitalistic system. And the only way we are going to change this is by
changing the perception that African -Americans are only entitled to

12
entitlements , as opposed to fully participating in the capitalistic
system .
Right now, we are sponsoring organizations in Russia to teach
them the capitalistic system. At the same time, we seem to be ignoring the potential of the 32 million African-Americans that we
have in this country. And I think that we would all be better off
if we would start teaching the African-American how to become
fully partners in the capitalistic system .
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much, Mr. Lopez. And I appreciate the observations you have just given us.
Mr. McNamara, pleased to have you and we would like to hear
you now .
STATEMENT OF EDWARD H. MCNAMARA, WAYNE COUNTY
EXECUTIVE , DETROIT, MI

Mr. MCNAMARA . Thank you .
Honorable Chairman and members of the committee, thank you
for inviting me to testify this morning.
In other testimony given today, and at previous hearings, you
have heard representatives of Shore Bank Corporation discuss
their work with organizations throughout the country who are exploring the establishment of development banks . Wayne County,
MI, is one of those organizations .
Why is Wayne County the Nation's eighth largest county with a
population of over two million people interested in forming a development bank?
The greater Detroit area, including Wayne County, has witnesses
a tremendous shift of wealth over the past 30 years . A lethal combination of blight, disinvestment, and suburban sprawl has contributed to the decay of many neighborhoods across our county.
Our older urban areas have been virtually abandoned as investment has moved further and further away from the central city.
Urban blight has now touched some of our inter ring suburbs , yet
we continue to push development further and further out into farm
land.
Essentially, what we are doing is throwing away billions and billions of dollars in infrastructure investments that we made earlier
this century in our urban neighborhoods . At the same time, we are
spending billions more to build new schools, roads, and sewer lines
in greenfield sites . I am sure you will agree, Mr. Chairman , that
this is a shameful waste of resources.
As Americans are becoming more cognizant about the benefits of
recycling, it seems we need to develop a strategy to rebuild our
aging communities, house by house , block by block, and neighborhood by neighborhood.
Our older communities in Wayne County face three basic problems . Nonfunctioning real estate markets , minimal job creation
through business development, and a deteriorating social fabric.
We have identified three communities in Wayne County as potential markets for our development bank : Hamtramck, Highland
Park, and the East Side of Detroit. In each of these markets , real
estate activities have essentially been nonexistent.

13

In 1989, only two mortgage loans were made for 1,000 housing
units in Highland Park, compared to 55 mortgages per thousand
housing units in healthy markets. The perceptions of crime, violence, and depreciating values has discouraged new investment in
homes and businesses.
Despite these perceptions, there are many signs of potential in
these markets. The housing stock is very affordable, each area
boasts a strong African-American population, and there are many
active block clubs and community based organizations . Furthermore, there are numerous opportunities for economic development,
both commercial and industrial.
Our proposed institution would have three operating units: A
commercial development offering conventional bank services ; A real
estate development arm to focus on housing, commercial and industrial development; And a not-for-profit affiliate which would provide non- bank business credit, business support services , and
housing assistance.
The investment and credit activities of the bank will be complemented by these other two units which can initiate development
projects and mount a coordinated revitalization effort.
The bank will inspire prospective homeowners to purchase homes
in established neighborhoods. It will nurture the entrepreneurial
spirit by encouraging ma and pa rehabers. And it will encourage
other investors to pump money into newly stabilized neighborhoods, therefore generating jobs and opportunities for local residents. The economic challenge facing our older communities will require some heavy lifting.
A development bank will need to work together with conventional lenders and private and public sector leadership . All of the
bankers with whom we have met to discuss the development bank
concur that development banking is a niche business that complements conventional banking.
Since we began discussing the business plan with individuals
from the private sector, we have received many calls from individual bankers expressing their support for our efforts. As government, we at Wayne County have had to recognize our limits in the
creation and operation of a development bank. We can be the convener but cannot operate, control, or influence an entrepreneurial
private sector development bank without constraining its ability to
respond to changing marketplace.
In the document we submitted for the Congressional Record, we
recommended the committee keep in mind certain guiding principles as it drafts legislation . And to summarize these principles :
We believe the fundamental premise of a development bank as
an entrepreneurial adaptive organization must be preserved. We do
not believe a separate regulatory structure is necessary.
Because of the significant organizational and legal costs , we believe grant funding should be allowable for start-up costs , and
matching Government funds for private capital commitments will
allow a development bank to build a sound capital base.
We have been talking about, what we have done , in effect, is to
plagiarize, from President Clinton's campaign theme, a theme that
we believe applies in this case, and we truly believe that it is the
neighborhood's stupidity.

14

In conclusion , this county has established public purpose , permanently capitalized professionally managed institutions to carry out
activities important to society. Museums , hospitals and universities
are all examples. And now it is time to create similar institutions
for urban neighborhoods. After 2 years of extensive planning and
research, Wayne County is prepared to launch the first community
bank of the Clinton administration .
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much .
As we start down through the questions here, I am going to, for
those Senators that were not given the chance or were not here to
make an opening statement, we will provide a little more time in
their period so they can do that. Because I know particularly Senator Moseley- Braun has a comment I am sure she will want to
make with respect to Chicago's experiment . I know Senator Domenici has expressed a special interest in this area as well.
Let me just ask you several questions at the outset. It seems to
me that I am very strongly in support of the Community Development Bank idea. I think they are by their nature hard to make
happen, because you have got to have a committed pool of talent
that can sort of come together and assemble resources , and with
the support and blessing of governmental institutions get off the
ground.
I am struck by the fact, as to the study that I have done on the
South Shore Bank that you have been very favored over a period
of time by having an extraordinary team of leadership represented
importantly by yourself and your colleagues there. I have asked
myself this question : If you subtract that extraordinary team of
people that over the years now have made this the success that it
is, and have nurtured it and have brought it along, could it otherwise have happened? In other words, would the concept succeed by
itself if you did not really have an extraordinary team sort of making it happen?
I am going to ask you in a minute to comment on that, but I
have drawn from it at least in my own mind, subject to what you
tell me, that you really do need quite an extraordinary team, and
they have got to be tough, and they have got to hang in there over
a period of time because these are not simple issues to resolve and
to get the momentum and to sustain the momentum. I am also interested in the degree to which we run any risk here of the traditional banking institutions who have not done very much yet anyway in many cases-not in all, but in some-of doing a sufficient
amount of community based lending. There is a lot of mortgage discrimination and other lending discrimination we know from Federal Reserve studies.
I am very much concerned that I do not want to see a burst in
community development activity allow the traditional banking system to back away or to maintain an anemic commitment to urban
and community revitalization. I think we need them involved far
more than they have been involved . At the same time, we foster
the development of Community Development Banks to come along
and do some of the niche-type work that has been described here.
So I think we need both .

15
Now, Mr. Davis, let me start with you to ask you to react to both
of those points, ifyou would.
Mr. DAVIS. Well, if I could take your second question first, because it is really the easier. As I said in my statement, the work
of Community Development Banks and of the larger regional banks
should be complementary. In our case, for example, we are a small
institution. The bank now has assets of just in excess of $200 million.
The CHAIRMAN. Over now what time period? It has taken you
how long?
Mr. DAVIS. We bought the bank in 1973. This is a 52-year-old
bank, incidentally.
The CHAIRMAN. Right.
Mr. DAVIS. It had tried to move from the neighborhood, was denied that request by the Comptroller of the Currency which regulates national banks as you know.
The CHAIRMAN. Right.
Mr. DAVIS. We then went in to talk to them about purchasing it
with the idea of keeping it there.
The CHAIRMAN. Right.
Mr. DAVIS. It was then a $40 million institution.
The CHAIRMAN. If I could just stop you, so it has been literally
a 20-year climb?
Mr. DAVIS. In August of this year we will be 20 years old as a
development institution ; correct. So we do not view ourselves as
competitors for the $30-$40 billion institutions in this country.
The CHAIRMAN. Right.
Mr. DAVIS. There is no way that we can compete with the First
National bank of Chicago. However, we are in need of support from
the larger banks.
Our real estate subsidiary, for example, borrows very heavily
from the large banks in Chicago to do its projects, which we could
not do unless they were there to provide that pool of credit. So
there is a lot that the larger banks can do in support of these
niche-players, and you have to be a niche-player to make this work.
You have got to be in the neighborhood, know the market, and
there is a market in every single community in this country. It is
just dysfunctional in a lot of cases at the moment.
The CHAIRMAN. That is right.
Mr. DAVIS. So we need to help restore that. You have got to be
in the neighborhood every day doing your business to learn that
market and make it work. Our hope is that we can then say to the
larger institutions: We are here. We know this market. Help us
provide the kind of credit that is needed.
On your first question about individuals, it is true that our interest grew out of the fact that the four of us who now form the management team for South Shore had all worked in community development organizations in prior years and had seen the extreme difficulty that those organizations had in trying to do their work.
Most were concerned with how were they going to keep the lights
on next weekThe CHAIRMAN. Right.
Mr. DAVIS [continuing]. Or how were they going to pay the utility
bills? And they did not have time to look at the real problems that

16
they were trying to address. We concluded that a permanent institution organized specifically for development was the way to go.
I think if you may recall, in the 1970 amendments to the Bank
Holding Company Act the Federal Reserve Board itself stated that
in their opinion bank holding companies possessed a unique combination of managerial and financial resources with which to deal
with the Nation's social ills . We concur in that.
Specifically, just one quick example which I think illustrates how
this works. In the area of housing we have a not-for-profit and a
for-profit real estate company that does housing rehabilitation .
They go in and do large-scale projects: 100, 200 units. That enables
the bank to come behind them and loan to private individuals at
market rates who are interested in investing in housing rehabilitation and improving the neighborhood.
As of the end of last year, we had caused 30 to 35 percent of the
housing stock in this one neighborhood, the rental housing stock,
to undergo some form of rehabilitation.
Our development companies use Government subsidies for their
programs. But for every unit of subsidized housing that gets produced in that neighborhood , we produce 42 units of unsubsidized .
That is the kind of leverage that I think development institutions
can bring to bear.
The CHAIRMAN. Let me just say before yielding, it seems to me,
again with this 20-year march that you have made as an institution starting after you took over the bank with $40 million I think
you said in assets and you are up to $200 million now, it has taken
20 years of sweat, and vision, and hard work to do that.
I think I draw from that the lesson that: As powerful and as valuable as this concept is , we cannot just speak it and expect that
1,000 flowers will bloom, that it is going to take a comparable effort
and support from the rest of the system.
We cannot have the rest of the banking system saying: "Boy am
I glad this community development bank is coming down the track
as this will relieve us of our CRA responsibility, and we will let
them tackle the hard problems and we will go out and sort of cherry-pick the credit market."
I think what I am hearing you say is that these things really
have to work in tandem if we are going to really start to break the
strangulation of credit that is not getting into our inner cities , to
minority people, and to others who have the-I mean, to be peddling capitalism in the Soviet Union and not doing capitalism in
the United States to me seems to be absolutely upside down.
Mr. DAVIS. I think so . Two responses .
One is , we are much smarter today than we were 20 years ago
about all of this business . I think we have now in fact moved to
a second Chicago neighborhood. The pace at which redevelopment
is occurring is much faster than it was when we were sort of the
first people out there by ourselves in Chicago .
I would like to re-emphasize, I think one thing you said— and
this is not a quick-fix to this problem-if there is one thing that
this has taught me, it is that when I started I had no gray hair.
I now have prey hair.
[Laughter. ]
Senator D'AMATO . At least you have hair.

17
[Laughter.]
The CHAIRMAN. Well, and we have asked you to be our lead witness because you bring great wisdom and experience, and we need
to draw upon that, and we are doing so.
Mr. DAVIS . Thank you.
The CHAIRMAN. Senator D'Amato.
Senator D'AMATO. Mr. Chairman, I would like to piggyback on
something said earlier and try to understand from the people who
are out there on the battleline, why would it not be a good idea to
give credit to institutions who indeed give you the credit and the
capital that you need to continue your work? You are the specialists.
So why should we not say, for example, if xyz bank has $ 150 million in capital itself and is in a suburban area where there may not
be the kinds of needs and demands , where they do not have the
kinds of specialties that you have developed by being in the community as every one of you have indicated, and why should they
not be able to take 3 percent of our capital, or 4 percent of their
capital and invest it in your bank?
Mr. DAVIS. I support that 110 percent, Senator. In fact, we have
suggested that and are now in a process in Chicago of trying to get
the larger because we need more capital to grow-we are trying
to get the larger banks to buy stock in Shore Bank, and for that
they would get CRA credits.
Senator D'AMATO . Yes?
Mr. COMSTOCK. Yes, Senator, if I could respond to that.
First of all I think it is important to understand that it is generally regulatory policy already to give CRA credit for these type
of investments. So I do not think you need to take new action in
order for that regulatory policy to be in place. I mean, there are
a lot of bank regulators , but in general that is policy already. The
question is
Senator D'AMATO. Let me suggest how we can open that up and
get you more.
They get no relief from the regulatory requirements in reporting.
So consequently, if a bank gives you 3, 4, or 5 percent-and they
can only go up to 5 percent and we might look at that of their
capital, what you do is encourage them, because they save x dollars
per annum in not having to meet volumes of paperwork because
they are actually investing, and they can say that $5 million in
capital or so is invested with you.
Mr. COMSTOCK. Could I make a little further response to that?
Senator D'AMATO . Yes.
Mr. COMSTOCK. I am a banker, not a public policy person, but it
seems to me that there is a very fundamental issue about CRA
that maybe the Congress has to think about-which is the fact that
there has never been standards set for CRA. Part of the bottom
line here is that the regulators do not know, and the banks do not
know what is an acceptable performance on CRA.
It may be that Congress has to look at that question of what is
an acceptable performance on CRA in order to be able to come to
a solution to this question.
Senator D'AMATO. All I am suggesting to you is that if these
banks meet certain capital requirements that they invest with com-

18
munity development banks such as yourselves, and others who
have the expertise and get a double bang. You are getting capital
that you never would have gotten before . They are getting expertise at bargain rates. They are getting the best in the business,
people who are there, and they are also relieving themselves of
that reporting requirement.
Yes, Mr. Lopez.
Mr. LOPEZ. Senator, I would like to share with you also that
some of these banks know that they can invest 4 percent of their
equity into these community banks, but some of them blatantly
refuse to do so because they see these small banks as competitors .
You also have to take inSenator D'AMATO. Let me set it up this way so that you understand fully. What we would say is that unless you put x dollars in,
you have got to meet CRA. You have to then go through that, because then there is a presumption.
We want to see what you are doing as it relates to your loans .
If you put that 3, 4, 5 percent-I don't know what the number
should be-then there is a presumption that you have met your responsibility by virtue, prima facie, of giving that kind of contribution to a community development bank. What do you think of that?
Mr. LOPEZ. Yes, but the point is, as I said earlier, that they are
aware of this but in some cases they just refuse to do it.
Senator D'AMATO . Right.
Mr. LOPEZ. OK? They refuse to do it.
You also have to understand that bankers bring their cultural biases to their jobs . You have bankers who pretend that they have
never seen Black people, or Hispanic people. There is no way that
I can hide the fact that I am an African-American. From the time
I step through that door, you know who I am.
What bankers are doing these days is they are not recording applications that they are taking in from minorities. You walk in with
your application, and they give you a verbal turndown . So when
the regulators come in, they see that xyz bank took in eight applications and turned down two, and this is why you have some of the
inflated rating that you have.
Senator D'AMATO. Mr. Davis, what do you think about us setting
it up as an alternative? Do you think that would promote a great
deal more investment?
Mr. DAVIS. I have a couple of responses .
I truly believe that most bankers in this country are not racists.
I really believe that . I do know and believe that this is a market
with which they are not familiar. Like all of us , if it is something
we do not know well, we tend not to understand it, and we avoid
it. So what we need to do is to try to move to an arena which gets
a fuller understanding of these markets to those bankers . I think
there is no better way than investing in a small community institution whose business is this.
With Mr. Lopez I think I disagree, that we are not competitors.
There is no way that a small bank can compete with a mega institution. It is a different world.
What we need to do is to work toward what is the arena in which
we can do our job best, and where they can be most supportive .

M

19
And on the issue of CRA, I think the fault with it now: when
CRA was passed , South Shore Bank was the only bank in the country who came here to this city to testify in favor of it-the only one.
What is wrong with it I think is that it is a punitive thing. It
says to a bank, if you do not do this, then we will not let you buy
this bank over here, the branch. What one should be doing instead
is to provide incentives, which is what I think this is, for them to
do so .
Senator D'AMATO. Exactly. You got my point exactly.
I hope we can get out clearly that what we are trying to do is
to provide encouragement for people to meet this responsibility and
go beyond it bring that critical capital.
We are talking about hundreds of billions of dollars capital that
can be flowing into those poor neighborhoods. I think we can really
make it the kind of thing where banks will be happy, the larger
institutions, to be able to meet this opportunity and their social obligations and their financial obligations, and not have something
that is now very punitive and detrimental.
Mr. DAVIS. And just another point, the leverage is enormous. For
every dollar of capital that a large bank would invest in Shore
Bank, it allows us to put $15 on the street.
Mr. COMSTOCK. Could I make one further point here? I think I
do not have any problem with the general line of thinking that you
are going on, Senator. We certainly would like to have more bank
investment in our entire industry.
Senator D'AMATO . That is right.
Mr. COMSTOCK. We encourage that. And we have some already.
Morgan Guaranty, for example , is a shareholder in our bank. I
think one of the questions we are going to have, though, is if you
are talking about this as being an alternative to CRA, whether this
is an appropriate standard . Five percent of capital is going to
translate to roughly one-half of one percent of assets for a bank.
Is that an appropriate level?
That question I do not think has ever been addressed by Congress that I know of: What is an appropriate level of total bank
Toans, or total bank assets that ought to be going into CRA? I think
most people are going to end up feeling that half of one percent of
assets is not adequate.
Senator D'AMATO. Let's look at this.
My time is over, but you are getting right to the core of the issue.
Banks are still going to be making lots of other loans . The fact that
you now have a relationship with Morgan, and you might then
have one with Chase, and who knows who else , then they are going
to be doing other kinds of business with you . Morgan probably has
already been doing more business with you as a result of that and
taking on some of the bigger loans, or participating, and that is the
thing that Mr. Lopez is discussing.
It brings people together who heretofore have not been together.
So think about it.
The CHAIRMAN. Let me, if I may, given the pressure of time, the
late start, and we have got another panel, if you will indulge the
Chair for a moment, Senator Moseley- Braun of course is directly
relevant to the story that we are talking about in Chicago , and I
know you must leave to attend to another assignment in a moment,

20
so I will interrupt the order to just allow you to make comments
that you wish to make right now, and then resume the original
order. Go ahead.
OPENING STATEMENT OF SENATOR CAROL MOSELEY-BRAUN
Senator MOSELEY- BRAUN. Thank you very much, Mr. Chairman
and I will be brief. I would like my prepared statement to be placed
of record .
The CHAIRMAN. Without objection .
Senator MOSELEY- BRAUN. I would like to thank you, Mr. Chairman not only for allowing me to break in the order this way, but
also for calling this hearing so early in the process. This is a tremendously significant area.
It I think lies at the very heart of our efforts to redevelop our
country and to put our people back to work, to reclaim our neighborhoods, and it is probably the single most important area in my
opinion that we can move in terms of the urban agenda. So I want
to thank you for putting this first in terms of our hearings .
I am particularly proud of Mr. Davis. Not only are we personal
friends, but we go back 20 years. I felt old , Milton, when you said
it was that long.
[Laughter. ]
Senator MOSELEY-BRAUN. I go back to his efforts in the South
Shore community, and that is of course where I live in Chicago.
I remember when we were all very young, bright-eyed and bushy
tailed, young people starting out. I was in Government and Milton
was in banking, and we had such great hopes for the future. Well,
the future is now, and I am just very proud to see you here testifying on behalf of what is a successful, laudable experiment that has
been taken up nationwide. I just wanted to express that to you before I leave. I am going to try to get back in time.
I understand the Chairman is going to plow through with the
hearing and continue, because the areas that you touched on , particularly as regard to the CRA, and Senator D'Amato's questions,
is just so critical to our understanding of the approach and the direction that we take.
So again to all of you gentlemen , Mr. McNamara , Mr. Lopez, Mr.
Comstock, and of course Milton Davis, I want to thank you all for
coming this afternoon and for starting this ball rolling, and starting this level of conversation , because we need your help in this regard .
Thank you again .
The CHAIRMAN. Thank you , Senator.
Senator Boxer.
OPENING STATEMENT OF SENATOR BARBARA BOXER
Senator BOXER. Thank you , Mr. Chairman.
I would like to get the panel's reaction to a very important event
that occurred a little over a week ago in California when the
Sumitomo Bank of California agreed to provide more than $ 500
million, a full 10 percent of its assets , for home and community development loans to neglected areas in California . The bank, as have
others in California, has been criticized for its failure to make
enough loans to minorities in the inner-city.

21
For example, in 1991 Sumitomo made only two loans to AfricanAmericans and 6 to Latinos out of 180 total home mortgage loans.
Unfortunately in California this is the story over and over again
in every area.
Now my understanding is that Sumitomo's commitment is the
largest from a Japanese controlled bank; it begs the question I believe Senator D'Amato is pursuing, the question of how best to ensure that capital-starved areas are Federal.
Here, with Sumitomo, we have a bank that is under a lot of pressure from the community and agreed to this very big contribution.
As I listen to you-and you have all been eloquent-it's clear that
one of the strong points of a community development bank is its
location in the neighborhood; you keep your eye on the problems ,
you are out there with the people, and you know what is going to
work.
My question is: Should there be a spinoff from traditional banks
that only handles community development? Or can we trust that
a bank that has never done this before is suddenly going to understand the needs of the community?
Mr. MCNAMARA. Just from a practical standpoint, if I might comment, the South Shore Bank has proven that the concept works.
They have for 20 years not lost money. So obviously it is not a giveaway program ; it is not a grant program; it is a business. But it
is a business with a social agenda that is specific from that group .
It is niche-operation , niche-banking, and I think that is what is extremely important.
If we are going to bring back the inner cities, the communities
that have been so blighted, it is as I mentioned a house-by-house,
block-by-block, neighborhood-by-neighborhood action , and I am not
sure large banks that you are referring to have that kind of social
conscience about them.
Senator BOXER. So you would prefer to see community redevelopment spearheaded by a very special institution that oversees its
needs, as opposed to having a large bank do it by themselves?
Mr. MCNAMARA. I would prefer to see the organization that could
be most effective to accomplish that end. I think it is niche-banking
that has the best-the most stability to make it happen, rather
than a large bank that would lose this process someplace in its
total operation .
Senator BOXER. Mr. Lopez.
Mr. LOPEZ. It has been my experience that when the larger
banks have a community development arm, that you continue to
get more of the same.
I would just like to say, to follow up on Senator D'Amato's question, like for example again I am confining myself to Grand Rapids
where in the community I see qualified African -American borrowers in front of me, like for example Ms. Lambert here, who is a
member of a board.
She is a member of a board to the point where she has committed $60,000 of her measly savings because she sees the need for
this bank- not only, herself having been denied loans , even though
she is a qualified person who owns her own business, but she has
associates who have been denied loans.

22
Like for example right now I see a gentleman in front of me who
is a graduate of Northwestern University, who started a soda business. All the banks in the area turned him down. OK? When they
turned him down, he went to them and said, OK, give me a second
mortgage on my home. They refused to do that, too.
Senator BOXER. Well, I do not mean to interrupt, except that I
am on yellow here and I want the answer to the question : Do you
agree that a large bank with a community development arm would
not meet the needs of the community, as well asMr. LOPEZ. It would be more of the same.
Senator BOXER [continuing] . A niche bank?
Mr. LOPEZ. Correct . It would be more of the same. And I think
the best way to relay this is to share with you an exampleSenator BOXER. I agree already. I am just trying to pin it down
because in California we have got this big announcement, and it
is very exciting, but I want to know if the organization should be
changed to meet this need.
Mr. COMSTOCK. If I could just make a quick response, I think the
basic word is that our communities need all the help they can get.
If Sumitomo Bank is willing to jump in and do it, let us encourage
them in whatever way we can. I think they will find out very
quickly that it does take a lot of expertise to do this work. Apparently they have not been doing it, and they are about to find out.
One of the things the community development financial institutions are trying to do is actually provide the know-how that is
going to help leverage this lending. I think it is absolutely the case
that we are functioning just as Mr. Davis has just described to try
to help leverage more conventional bank lending into these neighborhoods .
I think the role is going to actually be complementary, but they
will soon find out that they are going to need a lot of expertise and
will have to turn somewhere to get it. I do not know that we have
to tell them legislatively that, you should not do this; I think we
should just try to encourage them.
Senator BOXER. Mr. Chairman , could Mr. Davis just answer
that?
The CHAIRMAN. Sure. Go ahead, Mr. Davis.
Mr. DAVIS. I think it is a good question because-and it seems
it me the bottom line is whether the money that has been committed gets out into the neighborhood.
Senator BOXER. Right.
Mr. DAVIS. And I do not care whether it comes from them at
their big office downtown or someplace else. I think I would argue,
however, that if they committed and then expect to do it from
downtown, it will not happen.
If you look at all the mortgage disclosure information that revolved around the issue of discrimination , it was because people
were trying to do these programs from their downtown headquarters, and they were being serviced by people who had been
trained to look at credit in a different way from the way I think
you have to look at it in the neighborhoods.
I have always thought of States like California being the optimum place for this because you could simply take a branch that
was located in a low- income neighborhood and turn it into a devel-

23
opment institution and staff it with people from the neighborhood
who know their neighbors , and know the market, the local market
of that community.
You would not have to form anything new. It is just that this
branch becomes this specialized niche-player in this market where
you have people who understand the economy of that community
and the people in it. So it has to be done in some way where there
is a local presence by this bank to make sure that the credit gets
out.
Senator BOXER. Thank you so much. That was very helpful.
The CHAIRMAN . Thank you very much. Very useful.
Senator Bennett.
OPENING REMARKS OF SENATOR ROBERT F. BENNETT
Senator BENNETT. Thank you, Mr. Chairman.
Mr. Davis, I will talk primarily to you, but I would be delighted
to hear the others comment, as well. You made the comment about
replication, and you said talented people with start-up support can
do it. That is my big concern .
You are kind of a hero. South Shore Bank has caught everybody's
attention, and it has been written up, and gotten lot of press. As
I sit here, I find myself thinking. If I were not under the kind of
strictures that the Ethics Committee puts on us, I might be interested in investing in your bank.
Mr. DAVIS. We would welcome you .
[Laughter. ]
Senator BENNETT. I know you would.
[Laughter.]
Senator BENNETT. But my interest comes, quite frankly, not from
your social conscience that I have heard people talk about, saying
the banks will not have the social conscience to do this; my interest
comes from the fact that you have made money.
The entire economy is filled with companies that find a niche
that bigger companies have overlooked and have filled the niche
and have made money in the process. I wrote myself a note : "It is
not social conscience; it is good management that makes this
work."
And as I hear you explain things in answers to the questions,
you always come back to that theme: We know how to do it. We
have the expertise. This is a 52-year-old bank, you said. You did
not start up something with a social conscience dream.
You saw as a manager an opportunity that the existing managers were not smart enough to see, and you bought the bank, and
you made money on it. I salute you, and I wish we could replicate
you everywhere.
My one concern in these hearings is: How are we going to do
that? At the Federal level, what can we do that can produce the
kind of management ability and expertise that you have? Standing
up in here and saying "we salute the concept" is not going to
produce the kind of managers on the street that will make this
happen. So I would like some comments from all of you about that
particular problem.
Mr. Davis. Well, a couple of comments.

24
One is: Today we are now operating, or are at least under contract, with different owners of the development institution in Arkansas, which is where the now President first became familiar
with this .
We have, as the gentleman here said, we have been-we are now
talking to people in Wayne County, but we actually have an institution in the Upper Peninsula of Michigan headquartered in Marquette that is beginning to do this kind of activity in conjunction
with people who came to us from that section of the country because they wanted to do this same kind of thing. In this case , it
is not a full-blown bank.
Senator BENNETT. So far you are proving my point. "You" are
doing it
Mr. DAVIS. No, we are notSenator BENNETT [continuing ]. Because of the expertise you accumulated .
Mr. DAVIS. We are helping them. They came to us, and we
helped them think through the business plan. We have an advisory
service which again we set up partly to help spread the word as
to how this is done.
But back to your point, it also is another source of profits for us.
What we do is consult. We are now talking with 12 cities : Cleveland, Milwaukee, Portland , Louisville-about development banks .
So they hire us to help them develop the plan as to how this ought
to be organized and run.
Now in Arkansas we were able to send one person from our staff
who had been trained there to go and be the president of that institution . But it cannot work that way. I mean , we just cannot- we
are too small to provide training for all the people that are needed.
But part of what I think Mr. Comstock was saying is that part of
this could be money for training.
People can be trained . There are smart people around this country interested in this issue who can be trained . There is nothing
holy or sacred about banking. It can be taught, and there are smart
people who want to learn it.
If we had the resources with which to teach them, we could do
it. That is where I think you will get the people that you will need
to staff these banks.
Senator BENNETT. Let me ask Mr. Comstock a question about the
success of things you say.
You are also the chairman of LEAP, Inc. , a nonprofit venture development organization with its office at the bank.
Mr. COMSTOCK. Correct.
Senator BENNETT. Is that an essential part of the economic viability of these efforts?
Mr. COMSTOCK . Yes .
Senator BENNETT. Would the bank not work if you did not have
that? Is that another piece of the expertise that you bring to the
table?
Mr. COMSTOCK. I am not saying that the bank would not function. I mean, there are a lot of loans that could be made in the
community. But in terms of an overall community development
strategy, we very much agree with South Shore's concept that

25
there are a number of different pieces that are needed to make any
economic development work.
I would point out in particular that the need for equity capital
is at least as great as the need for debt capital in our communities,
and banks are not the vehicles to provide equity capital.
Senator BENNETT. I have started enough businesses that
I know exactly what you are talking about.
Mr. COMSTOCK. The idea of LEAP is that it is kind of the leading
edge of the bank. The bank cannot work with people until they are
bank-able.
How do we help get the community development related businesses, the businesses that are doing job creation in low-income
communities, formed and stabilized to the point where they become
bank-able, which means intensive management technical assistance, plus finding equity capital for them. So that is very much a
part of the overall issue here.
Mr. DAVIS. Could I just endorse that a little stronger than Mr.
Comstock did?
There are three nonbank subsidiaries of our holding company. It
owns the bank, but it also owns a for-profit real estate development
company. It owns a venture capital company, and it owns or there
is affiliated it that is not-for-profit.
I think we could never point to the success in South Shore if it
had not been for those nonbank entities. The bank alone simply
cannot do it. The complete development entity has to include those
nonbank subs .
Senator BENNETT. And that is, again, the part of the good management you bring to the table.
Thank you, Mr. Chairman.
The CHAIRMAN. And the question of whether you can compress
this 20-year growth now with their know-how and experience down
to a time frame so that we get an answer to the problems within
the lifetimes ofthe people-I mean, we are going to need the expertise that you bring, as well , in terms of this view.
I think both the other witnesses wanted to respond, and then we
will move on. Go ahead.
Mr. LOPEZ. Mr. Bennett, that is a pretty good point. I think talent and skill is really an essential ingredient, once we capitalize.
One of the things I am critically looking at is to make sure that
we have a comptroller that is versed in banking, because he has
been a comptroller in one of the banksSenator BENNETT. You mean a Comptroller of the Currency?
Mr. LOPEZ. No, a comptroller of the bank.
Senator BENNETT. OK
.
Mr. LOPEZ. Also, the point I am trying to make is you are going
to have to go with seasoned people. Regardless of their color, you
cannot confine yourself to ethnicity. You are going to hire people
because you are satisfied that they are capable of doing the job.
The CHAIRMAN. Mr. McNamara, you wanted to make a comment?
Mr. MCNAMARA. Yes. I would just like to comment relative to
that. You know, we are a governmental unit, and we are talking
about establishing a bank, and probably the worst group in the
world you could have going into the banking business is a governmental unit.

26 ,
But the approach to this is to form a founder's group . The founder's group are people like Heinz Prechter, who is chairman of the
American Sun Roof; Wayne Dorne, president of Ford Land Co .; Don
Barden, Dave Bing who is a businessman and at one time was a
great basketball player at S. Martin Taylor. These people would become the board of directors. They would run this as a business. The
county would stay in until these people took over. Then, like the
Communist Party, we would wither away and turn the
operation[Laughter . ]
Senator BENNETT. I hope not like the Communist Party.
[Laughter.]
Mr. MCNAMARA. Well, the theory of the Communist Party.
Senator BENNETT. All right.
Mr. MCNAMARA. But it is not a case of- it is a case of bringing
the business community to run this thing with that social conscience as their objective.
Mr. DAVIS. And I think, Mr. Bennett, also just a final point, some
people have asked us why we did this as a for-profit rather than
a not-for-profit. There is not enough philanthropic money in this
country to rebuild cities . We could give up now.
We have got to begin turning the thinking around that they are
good places to make investments, and investments on which you
will get a return . I think once we have demonstrated that you can
make a profit doing this, we describe it as a lot of the really hard
money of this country will begin to then flow into this process.
Senator BENNETT. And you begin to attract investors like me.
Mr. DAVIS. Good.
Senator BENNETT. Thank you , Mr. Chairman .
The CHAIRMAN. Thank you very much.
Senator Shelby.
Senator SHELBY. Thank you, Mr. Chairman .
Senator SARBANES. Mr. Chairman , would the Senator yield?
Senator SHELBY. I would yield to the Senator.
Senator SARBANES. Could I be recorded in favor of the nomination of Laura Tyson? I gather we are reporting that out this morning?
The CHAIRMAN. Yes. You will be so recorded .
Senator SARBANES . Thank you, very much .
The CHAIRMAN . Thank you .
Senator SHELBY. Mr. Chairman , thank you .
How can the Federal Government best expand the role community development organizations? For example , is it the provision of
the patient capital that is needed to support community development reforms? Is it capital and management? Or management and
capital?
I believe you have got to have capital, and you have got to have
management. If you have capital and you have inadequate management, we know you are planting the seeds of a disaster. What are
your comments?
Mr. Comstock, you look eager.
Mr. COMSTOCK . Thank you.
I think there is quite a substantial existing talent pool already
to build on. We have actually more than 300 community develop-

27
ment financial institutions in the country. It is not just the four development banks.
So one of the first starting points is to realize that we could expand upon the capacity of that group. I think anyone who looks at
it closely would say that that group is doing a good job at what
they do, and their impact could be increased if their capacity could
be expanded. What would it take to expand their capacity? More
equity is number one.
Senator SHELBY. By equity, you are talking about money? Capital, right?
Mr. COMSTOCK . Capital. Equity capital.
For the for-profits, some form of shareholder type of capital. For
the nonprofits, equity grants . But that equity base is the first starting point in terms of expansion of capacity.
The second point is that in terms of economically devastated
communities , communities that are heavily disinvested where there
is a very low level of business development and economic development taking place now, there is a lot of technical assistance and
hand holding needed to get that process going. That is inherently
something that is not self-supporting and needs grant funding.
The third thing is : As Mr. Davis had suggested, we could increase the talent pool if we had some support for professional training programs .
Senator SHELBY. Should we give CRA credit, or consider giving
CRA credit to other banks to have them train people? Because
management is so important to any organization .
Mr. Davis.
Mr. DAVIS. I would vote for that overwhelmingly. I think there
are a range of–
Senator SHELBY. That makes sense, does it not?
Mr. DAVIS. Pardon?
Senator SHELBY. It makes sense , does it not?
Mr. DAVIS . It makes great sense. I think there are just a range
of things that could be done. The need at the moment I think is
for somebody to do the appropriate level of work on the kinds of
things that it would make sense to do so that, based on the experience we have had, that we can move closer to believing that these
are things that would truly work.
In the more extensive version of my comments today, there are
some of those things being suggested that we have to look at . I
think , like all things, some of them will turn out to be good ideas ,
others will not work. But we need to do the work that is required
to see whether or not those would work.
But I think training-I mean, it would have to be differently
from the way the large banks do it now, because you really want
to train people in this development arena . But they certainly have
the resources with which to work to pull that kind of thing off.
Senator SHELBY. And they could train them in a special niche
which you are serving in the community. Is that correct?
Mr. DAVIS. Right. Precisely .
Senator SHELBY. Mr. Lopez , if I wanted to start, or help some
people start a Community Development Bank in my State of Alabama, what would you suggest? Capital and people, I am sure.

70-832 O - 93 - 2

28
Mr. LOPEZ. Well, capital and people, and I must remind you that
we have a lot of unemployed bankers out there.
[Laughter. ]
Senator SHELBY. They would probably be diligent workers if they
were re-employed; right?
Mr. LOPEZ. Correct. Absolutely. But I couldn't emphasize that
more, that it is an arduous process when you have very limited
capital. So whatever assistance can be given in tandem with getting a good talent pool, identifying a talent pool.
My only comment is: I would be a little reluctant to give banks
credit for training people unless I can get some commitment from
them within a certain parameter. I just would notSenator SHELBY. Why not? Who could train them better than actual banking experience? The Federal Government should not be
training them .
Mr. LOPEZ . Well what I would do is, No. 1 , I would identify a
president of a bank who is capable of doing what he is supposed
to do, and then let him go out and find the support talent that is
needed .
Senator SHELBY. OK
Mr. McNamara, you mentioned in your statement: The organizational and the legal costs for a Development Bank are quite significant, you know, for start-up, preparing management, and preparing fund raising. You have got to get the capital . That is a formidable task, is it not, sir?
Mr. MCNAMARA . Absolutely.

Senator SHELBY. Any suggestions there? Get your core group together, management first? Is that what you do?
Mr. MCNAMARA. No, we have notSenator SHELBY. OK
Mr. MCNAMARA. I think you do things like determine the neighborhoods where this process will work.
We have brought together people who we consider very competent who would become in a sense the Board of Directors of the
founders. We are attempting now to identify sources of private dollars from Foundations. We have had discussions with major banks
in the State of Michigan who are extremely enthusiastic and positive about this. It may be a form of conscience money, but we do
not care what motivates them. we would like to see it flow.
The management will come, but I am not sure that that is the
initial concern on our part.
Senator SHELBY. Oh, the initial concern I suppose is the concept
of how to put it together, and without the capital management you
will not need the money?
Mr. MCNAMARA. That is correct.
Senator SHELBY. OK. Any other comments?
Mr. COMSTOCK. That seed capital is very hard money to raise.
You have got a good point, that organizing a new bank, typically,
it is up to 15 percent of the amount of capital raised that we spend
on the total organizing costs of the bank . I am talking about any
kind of bank, community development or otherwise.
In this case, since you do not have a small group of millionaires
forming the bank, which would be the typical case in the typical
small bank, you are going to have a hard time raising that seed

29
capital . So grants for that purpose are going to accelerate the process of formation of these banks .
The CHAIRMAN. You know, my-if you would yield?
Senator SHELBY. I would yield, Mr. Chairman.
The CHAIRMAN. Might we not also think about maybe I mean ,
I like the incentive approach . We are talking about change in some
capital gains treatment, and capital gains treatment based on holding period. There might well be a way to incentivize through the
Tax Code a greater flow of equity capital into this kind of thing to
achieve a strategic objective for the country. I mean, it is not a
novel concept to try to target and do something that you need, as
long as it is done competently, and because we are going to get the
money back.
We are going to get the money back in economic growth and revitalization by some multiple of what it is we spend. I mean, this is
precisely the path intelligent nations have to take. Anyway, I do
not want to trespass further.
Senator SHELBY. Mr. Chairman , that is a very good comment.
One follow-up on it. Mr. Davis, is there any competition or any
overlap between the commercial bank in an area trying to fulfill
the mandated CRA and what you do in a niche? Is there any overlap there, or some competition? In other words, say a commercial
bank in Chicago serving the same neighborhood that you would be,
they compete within a niche?
Mr. DAVIS. Unfortunately, this is an area of when we went to
South Shore it had 80,000 people in the community.
Senator SHELBY. OK
.
Mr. DAVIS. We were the only bank there at that time, and we
still are the only one.
Senator SHELBY. OK.
Mr. DAVIS. But, I would hasten to add that we really are not
talking about creating anything new here. The holding company is
examined by the Federal Reserve Board.
Senator SHELBY. Sure.
Mr. DAVIS. The bank is examined by the State Banking Commission because we are a State-chartered bank, and the FDIC because
we have insured deposits. And we think in doing this work in a
glass bowl, so to speak, is what partly makes it very successful and
we would not change that.
So this is not a new institution. It is going to be subject to all
the regulations that banks are at the moment. But I guess to answer your question specifically, we would welcome another Development Bank in this neighborhood, because I think this competition is the strength of what makes this country run . And that
needs to be brought to this arena.
As I said earlier, we are not looking for charity or for grants. We
have got to get these markets functioning in these neighborhoods
so that none of the special sort of stuff is needed again; that it then
moves just as the rest of this country operates , under regular, normal market forces operating in those places.
Senator SHELBY. Are you giving people in the inner cities , or
wherever you are operating, an incentive to save money, to invest,
to put money in your account where it is available there that they
did not have before? You were the only bank.

30
Mr. DAVIS. Well, we are-I am not sure we are doing that much
to increase savings. Part of the purpose of what we do is we have
the purpose of trying to increase wealth in these neighborhoods, because that is a big problem. I mean, there is no money there. A lot
of what we are doing, we have a cadre of five or six dozen we call
them ma and pa rehabilitaters to whom we loan to buy these large
buildings to rehabilitate them.
We are making an 80 percent loan -to-value for acquisition. We
will do 100 percent of the financing for rehab. We will not do a loan
unless there is a rehab component to it. We have, I am not
ashamed to say, created through that process several millionaires
within South Shore at the moment, and that is a part of what we
want to do.
Senator SHELBY. Thank you.
Thank you, Mr. Chairman .
The CHAIRMAN. Thank you.
Senator Domenici.
OPENING STATEMENT OF SENATOR PETE V. DOMENICI
Senator DOMENICI . Thank you very much, Mr. Chairman.
I too want to, right up front, indicate that I think this is one of
the truly important areas that Congress ought to be looking at in
an effort to see what we can do to help create wealth in some of
our poverty areas and, as has been indicated here, to create entrepreneurs in the area, and certainly to create ownership.
As I see it, as has been summarized here, we are not going to
rehabilitate and revitalize our inner cities, or even our dilapidated
rural areas unless we have something like this working with this
kind of investment taking place. The Government is just not going
to be able to do it all. It is going to have to be done by applying
this concept of community development.
I am here also to welcome a New Mexican, Pauline Nunez-Morales, who is sitting in the front row. Pauline, I am not sure when
you testify if I will be here, but I will try. I think what you have
to suggest by way of a small community organization in New Mexico that does some work in rural areas and relies on contributions
from more or less charitable organizations to get your nucleus
started is a concept that at least we ought to look at in terms of
this overall picture, and I thank you for being here.
Let me suggest, Mr. Davis, one of the things that is always difficult when we attempt to write laws or change laws to try to stimulate something that is working, that is a model and we want to
expand it, and we know that its concept is very vital and really important, that we tend to try to have Government do the next step.
No one in this institution is more concerned about small business
and minority small business people as entrepreneurs in this country. In fact, I agree with the statements made here. You know, we
do not have a fair society.
If minority business people are not getting their fair share of
loans and ability to accumulate equity when they have good deals ,
it is just not American . We are not going to fix the slums until that
momentum moves in that direction. But it is not so easy to do. It
is very easy to say we want to change.

31
Right now I would say, Mr. Lopez, small businesses that are not
African-American are lining up at our doors saying they cannot
borrow money. So the issue for the next few years is: How do we
get bank money into small businesses? And in the process, what
can we do to see to it that we do not miss the boat again when
it comes to small minority businesses?
The set-aside programs on contracts and the like is not the whole
answer to this. I mean , the answer is to get loans and equity so
they can have their own businesses and not be so dependent upon
preferential treatment.
Now having said that, Mr. Davis, I would support in a minute
a set of laws that moved American business in the direction that
you have just gone through, and that you now have in your Community Development Bank.
What I am kind of worried about is: How are we going to write
that into law so that we can duplicate your kind of activity all
across this land? And what is needed from us to help with that?
Right up front, I truly believe the concept of building profit into
it as a motive is very, very important. You clearly cannot ask people to invest if they do not expect to get a return. You cannot expect bankers to be bankers if they cannot expect to make some
profit. There may be a nonprofit role, but I truly believe the heart
of this activity ought to be accumulating capital and equity from
across America that wants to invest.
In this instance, the invest is invest in a viable business organization or entity that they have a chance of owning, or sharing in,
or making profits from.
If you had to in just 2 minutes, if you had to define for us what
would you change about the banking system or the current laws as
you know them that would most probably cause more development
companies like yours to come into existence in this country, what
would those four, five, six things be?
Mr. DAVIS. I think we touched on that earlier I think before you
came in the room.
No. 1 , Senator, I am not sure I would change any laws at the
moment. In 20 years of looking at this, I would not. Where I think
the help is needed is not in changing laws but in trying to think
through what is the proper role of Government in something like
this. I do not think it as doer, but I think it is as being supportive
for those in the private sector who are attempting to pull this off.
So I think, as Mr. Comstock said earlier, it is a matter of making
capital available for the development of these institutions through
sort of a third-party, not the Government investing directly. I can
give you an example of that in which we are intimately involved .
The U.S. Congress gave something called the Polish-American
Enterprise Fund $250 million as a grant to spur economic business
development in Poland . That was a grant made by this Government to that fund. When they received the money, they came to us
and said: "We don't know much about small business development
in Poland, for understandable reasons."
We have now entered into a contract with the Polish-American
Enterprise Fund to manage a small business loan program in Poland . We are in our second year of that. It has gone extraordinarily

32
well. There is almost $40 million that has been put out for small
business development in Poland throughout the country.
We have had two losses on that program, and am happy to say
that in both cases we have recovered the full amount of those
loans. So it is that kind of thing that I think is applicable to development banks, that some pool of capital is made available for a
third party to administer that then gets put in the form of equity.
Also there is money, as was said earlier, for training people who
are going to run these institutions .
Specifically I guess I would not change any laws because I think
they are sufficient and appropriate for this kind of development. I
would try to find the role that the Government could play vis- a-vis
capital, grants, training funds to make these things happen .
Senator DOMENICI. Mr. Chairman, I have just one suggestion
that maybe our staff could do.
It seems to me that we do have an awful lot of development programs in the Federal Government, and I am not so sure that they
are all directed at the same target in the same itinerary of objectives such as Community Development Block Grants, Minority
Business Development, Urban Development Action Grants , sometimes called UDAG, EDA- we don't have many more UDAG's, I
understand .
Through appropriations we have done away with them, not by
law; so we just do not fund them anymore. But it seems to me we
might take a look at how are they directed criteria wise. Maybe
there ought to be more of a uniformity of criteria that directs them
at community development, at least proportionately, if we want
community development banks to be tied to community development programs .
It might be an interesting source of resources . I gather that is
sort of what you are saying?
Mr. DAVIS . Precisely.
The CHAIRMAN. And I might say that Mr. McNamara, being a
county executive, has to deal with certain of those other programs
coming through those other categorical avenues .
Let me say, we are finishing a vote that started about 12 minutes ago on the Senate floor, so we must all go and vote, but I want
to announce what our program is for the remainder here.
Senator Sarbanes left early to vote. He will be coming back. He
wants to ask some questions of this panel. When he has done so ,
we will then excuse this panel and call our next panel.
I want to move right on forward, and while we are all here finish
the work today and go through a part of the lunch period. I will
appreciate everybody's indulgence in doing that because we are
being interrupted by votes which we could not forecast when we established this.
So we will stand in recess for a very short period of time until
Senator Sarbanes returns , and he will reactivate the committee
and he then will follow through .
Senator DOMENICI . Mr. Chairman , might I say that I did not
have enough time for each member, but I appreciate your testimony and I thank you very much.
[ Recess .]

33
Senator SARBANES [presiding] . Mr. Davis, if you and Mr. McNamara could take your seats, I think we could get started again.
Hopefully we will be able to finish with this panel shortly and then
move on to the next panel . I know it has been a long morning.
I am interested in this question: I guess ideally one would not
want to have to set up special institutions or arrangements in
order for credit to be available in these communities . Would you
agree with that?
Mr. DAVIS. I would, wholeheartedly.
Mr. COMSTOCK. Yes, and I do not think that we are advocating
a new class of charter or anything of that type. What we do need
is institutions that have the desire and focus to work in these kinds
of communities.
Senator SARBANES. Well, do you think that we should go in the
direction of setting up, or trying to set up these institutions who
have the desire and focus to work in those communities and say
to the existing institutions, well , you don't seem to have the desire
or the focus to work so you go off and do what it is you want to
do and we are going to figure out some other way to get the institutions to the focus we need. What is your reaction to that?
Mr. LOPEZ. Senator, I cannot speak for Mr. Comstock and Mr.
Davis, but I know the banking community where I come from in
Grand Rapids is that I think we do need an institution in that area
that is going to be sensitive to the needs of the minority business
people and individuals as a whole.
Senator SARBANES . Why should not the existing institutions be
sensitive to that?
Mr. COMSTOCK. I think they should. The issue has simply been
that, in 16 years of CRA, we have only had limited success with
that legislation in trying to force institutions that do not want to
lend to do so. Now there are
Senator SARBANES. Now would you say that your perception is
that a real effort has been made to apply CRA?
Mr. COMSTOCK. No. And I think that is one of the issues. If a
real effort was made, which I think would have to start with setting some realistic standards for what CRA ought to mean, if such
an effort was made , I think that would be good. I support full enforcement of CRA.
I would not want to see the banks that are doing something now
go back to doing nothing. That would be a step in the wrong direction. If anything, maybe they could do more. But I do think that
it is always going to be difficult to try to get institutions- especially large institutions who do not want to do this work -to do it
just to satisfy a Government regulation.
I doubt if that will be the ultimate long- term answer for this
problem, although I do not think that we should have them backing away from what they are doing now.
Senator SARBANES. How much of a problem do you think that is ,
that the development of alternative institutions will become an in
lieu of instead of a complementary or an in addition thereto?
Mr. DAVIS. On your first question , I think that what 20 years has
taught us is that in order to do this you must have an institution
whose primary objective and goal is development. That simply is
not the case with the large institutions , or at least the large finan-

34
cial institutions at the moment. Their primary objective is profits.
With that going in, you are sort of off on the wrong track.
I do not think anything I have said today I hope has not been
looked at as inferring that the large banks should not be in this.
This has not been their business for all the years that they have
been operating. They do not know the markets in these neighborhoods. The last thing I would to happen is to have them forced to
make investments in the neighborhoods, have them all go down the
tubes, and then for the banks to say we tried this but it did not
work.
What I have been trying to focus attention on is to find the avenues through which the work of these community development institutions and the larger banks can be complementary so that we
then-and I know in the case of South Shore, because we are in
the neighborhood, on the ground, are willing to help them think
through where they can play a role most effectively and where we
will have success .
Senator SARBANES. How long did it take you to get South Shore
from ground zero to sort of where it was a viable, functioning organization?
Mr. DAVIS. We did it in increments, Senator. As I said earlier,
this is a 50-year- old bank. We bought it
Senator SARBANES. It is 50 years old?
Mr. DAVIS. Fifty years old, right. It was chartered in 1939.
Senator SARBANES . All right.
Mr. DAVIS. When the neighborhood changed racially, the bank
wanted to move. The comptroller denied them permission to move
it. So in 1973, a group of us who were interested in this issue of
development banking were able to put together a group that
bought the bank. We have only had ownership for now 20 years.
But it was an ongoing institution , which is what we basically recommend for this kind of activity because there are a lot of problems
you have normally with start ups, and so if you are going to try
to start a bank with all the natural problems you are going to
have, plus lay the development agenda on it, it is not impossible
to do, it just takes you longer.
We bought an institution that was relatively clean, without problems , that had a stream of earnings behind it. And so on the day
that we walked in there, we were able to begin our development
agenda.
That bank located in the neighborhood was one of the many institutions with most of them in Chicago-who would not make a
mortgage in that neighborhood, and they had not done so. The day
after we were there, we announced that the bank was back in the
mortgage business. So that is just an example that we started with
that. Then as the years went on, we began to add more and more
development products to that arsenal .
Senator SARBANES. Now how long was it before people started
coming around and saying you're doing such a fine job here that
we want you to go elsewhere and tell about what you are doing,
or hold you up as an example?
Mr. DAVIS. Well , our original hope had been that we would demonstrate that bank holding companies could do this kind of activity
and be profitable.

WE

35
Then, naively we assumed that a lot of other bankers would
come running to emulate it. That did not happen . Specifically in
answer to your question, it was 10 years after we were there.
I think a lot of people were watching just to sort of see if what
we were doing was some sort of fluke, or whether it was real. So
after 10 years of profitably doing this work, the neighborhood actually getting better, that some people began to say, well , maybe it
is for real.
That interest has increased. As I said earlier in my testimony,
we are now consulting through our consulting company with at
least representatives from a dozen other cities about establishing
this kind of institution.
Senator SARBANES. Now would you say that it would probably
take others a comparable period, maybe somewhat less, to get into
the same position?
Mr. DAVIS. I think it would take somewhat less .
Senator SARBANES. How much less? By a factor of what?
Mr. DAVIS. I said earlier we are 20 years smarter about all of
this than we were . We have a consulting company which we set up
specifically for this purpose, for others who wanted to talk about
how to do it.
We are smarter about how one would structure an entity like
this in another place so that, rather than going through the trial
and error that we did, people can put in place more or less-I think
Lyndon generously acknowledged the help that he had gotten from
South Shore, or had seen at South Shore when he established his
bank, and I think he would agree on the basis of having that experience of what we had done and our willingness to help him in any
way we could-that he was able to move much faster. His bank is
now three
Mr. COMSTOCK. Two years old.
Mr. DAVIS [continuing]. Two years old, and he talks about theI don't remember the numbers exactly, but in 2 years they have
been able to do significant financing out of that bank for the areas
in New York in which they operate.
Senator SARBANES. I guess what I am concerned about , I have
enormous respect and admiration for what you have done, and I
would be happy to see it replicated anywhere we can do it, but I
have some concern that the normal channels of activity in this area
continue to be pushed to sort of meet their responsibilities .
Otherwise, it seems to me the exceptions will not be the rule.
You will just have the exceptions , so to speak; they will be trying
to make the exceptions the rule, and that is a difficult process . It
takes a lot of time, and there are a lot of existing resources out
there.
You know, the Federal Reserve Bank of Boston in a recent study
found that after controlling for genuine credit concerns-this is
after the control for the genuine credit concerns-minority applicants were 60 percent more likely than white applicants to be rejected for home mortgage loans .
You have, you know, the Community Reinvestment Act came out.
of in part the sense that financial institutions were drawing monies
out of the community but not putting moneys back into the community, and this was an effort to try to get them to do that . Now-

36

Mr. DAVIS. I understand, Senator. I am sorry. I thought you were
finished.
The CHAIRMAN. Go ahead.
Mr. DAVIS. I just wanted to respond that you are right. The large
credit institutions are risk averse. But the one example I can give
is South Shore. When we first got to that bank, or bought it in
1973 , there was not a financial institution in Chicago who would
make you a mortgage in that neighborhood.
Now, because we saw our role as getting out front and demonstrating that it was a safety place to make investments and actually making the market work, any financial institution in Chicago
will now make you a mortgage in South Shore. That is the role
thatSenator SARBANES. You mean in the South Shore area?
Mr. DAVIS. Yes.
Senator SARBANES. And they are now doing it?
Mr. DAVIS. Yes.
Senator SARBANES. To what extent? Is South Shore still doing it?
Mr. DAVIS . To what extent is South Shore Bank?
Senator SARBANES. No. To what extent are regular commercial financial institutions now lending in the South Shore area?
Mr. DAVIS. Well, they are. That is the point I was making, that
10 years ago you could not get a loan of any sort in that neighborhood. Now you can walk into the First National Bank of Chicago ,
Harrah's Bank, those banks will make you credits in that neighborhood because of the work of Short Bank as a development institution we think has now made those institutions perceive that neighborhood as a safe place to invest, and they are doing it.
Senator SARBANES. My question is: What percent of the credit in
that area is being provided by South Shore as opposed to these
other banks?
Mr. DAVIS. I will give you-In the area of single-family mortgages, they are all being made by financial institutions because
what we did, when we first got there, was to announce the next
day, as I said earlier, that we were making single-family mortgages. OK? But we are a small bank.
And because you can now get a mortgage at any institution practically in Chicago for a single-family mortgage, we have withdrawn
from that market and now have put our attention on the larger,
multifamily buildings where we are hoping that we can have the
same results, that we will build that market to the point where we
can withdraw from it, go off and do something else, andThe CHAIRMAN. Would you yield just
Mr. DAVIS [continuing]. And then get those markets working in
their normal way in that neighborhood.
The CHAIRMAN . If you will yield just for a moment, here is a concern that I have.
In other words, now that pattern has changed from the normal
commercial lenders that Senator Sarbanes is isolating on here, and
importantly so. It seems to me in part they are now doing that because, by your efforts, you help take the neighborhood, the area
within which you have been operating over the 20-year timer span ,
you took it up over the redevelopment threshold.

37
You turned the whole area around step by painful step until you
finally became, I suspect, an attractive enough area because of the
improving dynamics, that suddenly the outside institutions took a
different view. They took a look, and they saw that the profile was
changing sufficiently that his now-and there may have been some
social conscience issues at work, too. I don't profess to know them
all.
But to the extent it is because you did the hard work to change
the dynamics and come up above this redevelopment threshold, are
they now coming in because , you know, you have put 20 years into
making it attractive to them .
My concern is that I would be concerned that if a development
bank has to come in and do all the heavy lifting, for some number
of years before you finally turn the community dynamics around
enough that the commercial bank says "Hmmmmm! Looks sort of
interesting."
I mean, we have been redlining this area for a long time regardless of the creditworthiness of an individual borrower, but now
these folks have plowed the ground. They have turned this thing
around. It is now interesting . We will do a little lending in there,
too.
I am concerned that you may have that element in here that
would be part of the story of the 20-year haul that we have to kind
of separate out when we think about what is going to happen with
the brand new one that is going to start out, and does that new
community development bank have to do essentially all of the
heavy lifting to get over that redevelopment hump?
Mr. DAVIS. I think that is why I think the question that was
being discussed earlier today about allowing those banks to invest
in community, they ought to be owners of community development
institutions. That way, they are locked in from the very beginning.
This is an institution where we do not wait 20 years for them
to get involved. They are in there from day one as owners, and I
would suspect and hope that through that ownership that they
would also be investors in the neighborhoods in terms of making
loans there.
So the time that it took us to get to the point where they felt
the market was safe is greatly reduced, because you get them in
from the very beginning.
Senator SARBANES. Well , the problem that I am worried about is
that these community institutions , which I am very much impressed by and in favor of, first of all have-there is a time lag in
getting started, but more importantly that they become an in -lieu
way of the normal institution responding.
In other words, the normal institutions to some extent are engaged in practices that they ought not to be engaged in, that do not
have an economic rationale for the practice even on the basis of
some of these studies.
The question then is : Should they in effect be able to move away,
or walk away from that because you put these community banks
in their place? I mean , somehow you have to figure out a way to
get both, it seems to me, if you are going to try to address this
problem.

38
Mr. COMSTOCK. If I could respond to that, I think your point is
well taken, in that until there is a large enough amount of investment going on in low-income neighborhoods, then we need everybody that we can get there, by whatever means, to be operating
there.
We are a long way away from having the community development financial institutions be able to take over the entire role of
providing investment in low-income communities. We are just not
even close to being there.
Senator SARBANES. And we may not even want that. What we
really may want is for the normal institutions to recognize the
kinds of possibilities that Mr. Davis ' institution recognized and go
ahead an take advantage of them.
Mr. COMSTOCK . Although in his caseSenator SARBANES. You do not have a separate outfit that manufactures soap to be sold to low-income people. You know, Procter
& Gamble makes it and everybody buys it.
Mr. COMSTOCK. Although this problem is not common to just
banking. I mean, we could talk about grocery stores. I realize you
are the Banking committee, so you are not going to focus on grocery storesSenator SARBANES. No.
Mr. COMSTOCK [continuing]. But it is not a problem just exclusive to banking in terms of the lack of an economy in a low-income
neighborhood. I think
Senator SARBANES. Let me ask you this question and then I will
desist, Mr. Chairman.
To what extent do you think the problem in these neighborhoods
has an essential economic rationale to it? And to what extent is it
other factors that are at work? That if you really analyze the economics , a good deal could be done a lot of activity could be done
on sound economic grounds, but they either do not perceive that,
or are unwilling to engage in that kind of activity which is tougher
in some ways and therefore they do not go in, and to what extent
is it in fact that the economic basis is not there and if you are
going to do some of these things you have just got to find unique,
underwritten, subsidized ways in which to do them?
Mr. LOPEZ. Sir, could I just share this with you?
In Grand Rapids, again it depends on the perception of these
banks. They look at these communities as a source of raw materials which you can go in and get cheap deposits, and you already
redline it. You have a policy of redlining it by not investing in it.
You invest that money elsewhere. So it is a good markup.
The reaction of some of the banks when we first announced that
we had been chartered and that we were capitalizing was to try to
snuff us out. They also started pairing off their lending officers , one
white, one black, going into the community to ask the people what
they wanted. They started out with the ministers.
So getting back to the Community Reinvestment Act which
seems to be an important aspect of this whole problem of minorities accessing credit is that to be it appears that the banks are satisfied with the concept that they can do public relations and nothing else and get away with it. I think that is what is at the heart
of the issue, the way I see it.

39
Mr. DAVIS. Could I try it? I think it would be
Senator D'AMATO. Mr. Chairman, if I might, Paul, because you
raise the issue that goes really to the heart of it, and to which we
have to give careful consideration .
If I can make an observation-my proposal is to give banks credit for their investment in the local development banks, or in the
banks that are doing the kinds of work that Mr. Comstock's bank
is doing, and that Mr. Davis ' bank is doing, that is exactly what
I am suggesting. I am not suggesting that we give them a gold
star. I am not suggesting to you that they will then be allowed to
discriminate.
Discrimination is against the law, and we should enforce that
law vigorously. If banks are not making mortgages to credit-worthy
people, as some of the studies have indicated, we ought to crack
down on them.
I am suggesting that we have an ability to leverage and bring
capital into capital- starved neighborhoods in an intelligent manner
and in a way that will in the fullness of time build these community development banks. So what if there are going to be some unprincipled people and there are always going to be some-who
say, well, this is the way to meet our obligation, and that is how
we will do it.
What do we care? If Mr. Davis gets the capital, if Mr. Comstock
gets the capital, if Mr. Lopez gets the capital, we have accomplished our purpose. We are not suggesting, however, that banks
that capitalize there community development bank can now go out,
break the law and discriminate.
But it seems to me that in another aspect, and we talked about
training and how to get help, that when somebody invests in Mr.
Davis' bank, in the Southside Bank, they are helping the community he serves. If they put $ 500,000 worth of capital in there, they
are also going to help. They are going to have people in there who
are going to provide some expertise, et cetera.
It is a natural extension . They have an investment and they are
going to see what takes place there, and we are going to begin
building bridges. We are going to begin building bridges and getting capital into arteries that do not even exist now.
We will first put an artery in there, and we will get that flow
of that capital going. Will there be some problems? Sure. But I suggest there will be far fewer than if we do it by using the existing
system .
Mr. Davis pointed out that for every dollar of capital, that is a
$ 15 infusion into the community. So we have a bank that is doing
that kind of thing. And there are a lot of smaller banks- not just
big banks. There are some small banks, for example-in relative
terms they may not be small, they may have $ 1 billion worth of
assets -that went to get involved in trying to make loans in depressed neighborhoods and they may not even have any in their
community.
What a wonderful thing to get them to meet CRA requirements
and actually take money from affluent communities and have a
stake in investing it in the less affluent communities that are not
within their service or market area. I think that potential exists
but we have to study it. I do not think it is just a matter of saying

40
that now you can go out and break the law-or not meet basic requirements, that you can go discriminate. I just share that with
you.
Senator SARBANES. No. I was not suggesting that, obviously. I
would assume no one would want to do that. I am trying, though,
to get at how these responsibilities are met and how we address
the problems that are in these communities, and how we can maximize the effort.
A lot of it may depend on what is the price you pay. I mean, if
you are going to let them meet their community reinvestment requirements by just sort of buying in, then it is a big question of
how much is the buy-in, if you are going to do it that way.
Now that still leaves you with the question of whether you want
to completely give up on the idea that the normal institutions
ought to be that is why I asked this question about the economic
differentiation, because if they are cutting it off at a point where
the economics still make sense, and my suspicion is that that is the
case on the basis of South Shore's experience, that is one thing.
If they are cutting it off at the point where they say, look, our
bottom line is we have to show a profit and we just cannot handle
this particular problem because we are down to a point where the
economics of thing just will not work, then that is a different kind
of problem.
But the question is whether the range in which the economics
will work, how you try to address getting the existing normal institutions to assume activity in that range, as opposed to creating institutions which in effect will substitute for them.
Mr. DAVIS. Just two responses. I would like to say, I think I have
heard nothing here today, and I certainly have not intended in any
way to infer, because some questions were asked at the break, nor
am I saying that an investment in a development bank lets the
banks off the hook.
Absolutely not. I think all that I am saying is it is another way
to help them meet that CRA requirement.
Second, Senator, I think if we had only gone into South Shore
with a bank making credit, I would not be sitting here before you
today, because we would have lost everything we put in.
As I said in my testimony, a development bank is much more
than a credit granting facility. I mean, unfortunately in this country-and we all share the blame that we have allowed these areas
to deteriorate to a point where perhaps in another day earlier credit would have turned them around. It cannot do it by itself.
Senator SARBANES. That is a good point, I think.
Mr. DAVIS. So therefore we have got to have a lot of other things
going on to make it work. My general rule of thumb is that I would
rather lead by example in this area and pull people along rather
than try to legislate what they should be doing.
Because I think if we can begin to move the banks along to show
them that there are profit opportunities in these communities, OK,
and work with them, I think that at least the banks we have had
experience with in Chicago have indicated an interest in doing that
and have in fact begun to participate with us, that we will then get
them to the point-which is what I think you are saying- where
they will not need us or anybody else.

41
They will view those as good markets and will go off on their own
because they have come to feel that they represent good investment
opportunities, and that the markets then begin to work in those
places.
The CHAIRMAN. If I may, and I do not want to be arbitrary in
terms of time, and everybody has been very understanding given
the interruption for votes, but we have another panel that I want
to move to.
I do want to make one comment before we leave this panel in
thanking all of you for your participation . That is, I do not think
we have a lot of time here to work with. We are seeing examples
of cities that catch fire and burn down, and we can see a lot more
of that happen. Lives and opportunities are being squandered and
I think destroyed in effect every day that we under-respond and
under-acknowledge a pile-up of problems that has been in our society for a long period of time. So we have got to have a concept that
will work, but it cannot take forever and it cannot string out over
a long, long period of time because we are playing catch-up as it
is.
I want to make sure that the extraordinary teams that have
come into being that have succeeded , like the two that we are seeing here, and the two that aspire to do it that we have also heard
from , I am sure if we could go back and sort of look at the landscape behind us we would find other groups that tried and did not
make it. They are not here today because of how relentlessly dif
ficult it is to make this kind of thing happen . So I think we have
got to harness everybody.
We are having discrimination hearings in here within a matter
of days because I think I am determined, as Chairman of this committee, that we are not going to tolerate a continuation of discriminatory lending practices by federally chartered and insured institutions. It is not going to happen .
The new Comptroller of the Currency has said to my face that
he intends to rip it out root and branch, and I intend to rip it out,
and I think our new President feels the same way, and I think this
committee feels that way.
So we are going to unlock that part of the strangled capital that
has not been making its way through simply because, as you point
out, loans have not been going even where they are economically
justified, quite apart from the issue of how you get a community
up to the point where it is attractive to new capital investment.
We do not have long to do this with, in my view. So we have got
to take and compress this timeframe . If it is going to take every
community development bank 20 years to get to where you are
now, America is not going to beat the train to the crossroad . We
have got to do this . We have got to compress this down into a much
tighter time frame and thank God we have some relevant experience from which we can draw if we use our brains .
We need to do the training and make sure that the credit is coming through, but we are going to need the commercial banking system to step up to the plate and not just cherry-pick the loans that
look attractive, or the easy ones. And the regulators are going to
have to do their job on community investment criteria.

42
It does not mean a thing to generate a lot of paperwork that does
not convert itself to an adequate flow of credit going into the areas
that have been starved for credit. I do not want file drawers full
of papers so that bureaucrats can , you know, justify the fact that
they have been monitoring the problem, when we have got people
in communities dying on the vine out there because the credit is
not getting through. Maybe we have to set criteria.
I do not want some paltry fraction of 1 percent of the capital and
the credit making its way into the areas that are dying for lack of
credit, and where there is an economic justification for that credit
to go. So we have got to do better in that area in the traditional
system . We need both .
There is no way in the world we are going to get the job done
in sufficient volume and in sufficient time unless we get full mileage out of community development banks, which I am for, and I
want to grow as many as we can that meet the test of being competent, capable, rooted in the communities and able to succeed, but
I want the private banking system and the other financial
intermediaries to step up to the plate. I mean, we have got-they
have got to respond to the needs of the whole country, and not just
a part of it.
Thank you, very much.
Let me thank this panel. You have been very helpful to us. I will
excuse this panel and call our next panel.
[Pause . ]
The CHAIRMAN. Let me welcome this panel.
Again, you have been here all morning, so you know the circumstances of our having been interrupted by the votes on the
floor. I know some of you have planes to catch, and we are under
very tight time constraints here, in any case. So I am going to
make your full presentations a part of the record and ask you to
summarize .
Ms. Nunez-Morales , I know you must leave soon to catch a plane.
Ms. NUNEZ- MORALES. Yes.
The CHAIRMAN. I am going to call on you firstMs. NUNEZ- MORALES . Thank you .
The CHAIRMAN [continuing]. And if you would each give your
summary comments, we will go in that order.
STATEMENT OF PAULINE NUNEZ-MORALES, EXECUTIVE DIRECTOR, NEW MEXICO COMMUNITY DEVELOPMENT LOAN
FUND, ALBUQUERQUE, NM
Ms. NUNEZ-MORALES . Thank you, Mr. Chairman, and members
of the Senate Banking Committee. My name is Pauline Nunez-Morales and I am the executive director of the New Mexico Community Development Loan Fund, a statewide organization .
Today I am representing my own organization and the National
Association of Community Development Loan Funds [ NACDLF ] , an
association representing 41 community development loan funds .
NACDLF is active in an ad hoc coalition of community development financial institutions which are microloan funds, community
development loan funds, community development credit unions ,
and development banks. This coalition has pioneered the business
of community development lending over the past several decades .

+

43
We have prepared a position paper comprising our best thinking
at this time on the issues involved in setting up a federally supported network of CDFI's . A copy of the paper is attached to my
testimony.
The CHAIRMAN. We thank you for that.
Ms. NUNEZ-MORALES . Thanks.
The New Mexico Community Development Loan Fund is a private, nonprofit financial intermediary created in 1989 and dedicated to the economic and social empowerment of the people of our
State. The fund borrows capital from 29 socially responsible investors and lends it in support of affordable housing, community based
businesses , basic human services, and community development in
general.
NMCDLF is the only community development lending vehicle in
a State that has one of the highest percentages of people living
below the poverty level in the United States.
As a primarily rural State, New Mexico faces a unique set economic challenges. For many people, major markets are distant. The
limited job opportunities, and access to all types of services, particularly financial and public services is inadequate. Over a third
of the State's population is Hispanic. Native Americans comprise
10 percent of the population. Both populations make up the majority of rural residents. Within these traditional communities, language and racial barriers can contribute to their inability to access
traditional capital sources.
The NMCDLF mission is to help create long-term solutions to
poverty by placing resources back into communities, to create jobs ,
retain community services, and improve housing opportunities . To
this end, our fund has helped to expand rural health facilities , support organic agriculture, reduce program costs for transitional
housing groups , and expand rural enterprises.
Let me give you an example of how we work. One of our loans
recently was made in Mora County, which is one of the poorest
counties in the State of New Mexico.
We just recently are going to close on a loan for $25,000 to a
logger in that county. It is a small contractor that otherwise would
not have been able to have access to capital. We also participate
with other institutions in making loans. Last week we closed on an
$80,000 loan to a shelter, St. Elizabeth's Shelter, in Santa Fe. That
was to help them purchase a nine-unit apartment building to house
facilities in transition in Santa Fe. A locally owned bank provided
a $ 170,000 loan for permanent financing, and a local donor contributed $50,000 for the downpayment.
What our loan helped do was actually make the project happen .
So as you can see, the NMCDLF lends for both housing and business projects, recognizing that distressed communities need to develop both aspects of their infrastructures.
NMCDLF is a relatively young and small organization in the
loan fund industry. The 41 NMCDLF member loan funds have
loaned more than $ 100 million which have leveraged $ 760 million
in public and private capital to finance 15,000 housing units , and
to create 3,500 jobs for poor Americans .
NMCDLF strongest member funds, such as the Delaware Valley
Community Reinvestment Fund [DVCRF] , in Philadelphia; the

44
Low-Income Housing Fund in San Francisco; the Boston Community Loan Fund; and the Cascadia Revolving Loan Fund in Seattle
provide leadership for the NMCDLF and other growing loan funds .
They are the pioneers in our field , and their experiences and success are models for growth in our industry.
They and other loan funds have demonstrated the nonprofit,
nondepository revolving loan funds can aggregate significant
amounts of private capital from individuals and institutional social
investors, successfully fill gaps in credit markets in urban , rural ,
and tribal communities, work hand in hand with conventional lenders to their mutual benefit, and finance new forms of ownership
such as mobile home park cooperatives and land trusts.
These institutions are now planning to significantly increase the
scope of their efforts. For example , DVCRF is studying the possibility of adding a depository arm. My colleague from DVCRF, Jeremy
Nowack, is here today and would be glad to answer any questions
about these plans. And I am afraid he is going to have to handle
the Q and A today for me, since I have to leave.
At the other end of this growth ladder, new development funds
such as NMCDLF are models for emerging loan funds and startup efforts in places like Maine, Western New York, Delaware ,
South Carolina, and Chicago.
NMCDLF believes that a performance based lending and grants
program should be the model used to create a national network of
community development financial institutions . It fosters discipline
in business activities while allowing institutions the flexibility to
provide loan products and related services that are appropriate to
the communities they serve.
Collectively, the existing CDFI industry provides a baseline
against which the progress of a Federal program could be measured. Capitalizing more than $ 700 million , much of which was
raised from within communities or constituencies they serve-development banks , credit unions , and loan funds-have extended
more than $2 billion in loans. Loss rates are comparable to those
of the best conventional lending institutions. We offer a solid foundation for a bold community development lending initiative that
might include new institutions, community organizations , conventional lenders, and others.
We believe that Congress and the Clinton administration must
make a clear financial commitment to the CDFI system to signal
their support for the long- term viability of the industry. But this
should be just one part of the funding mechanism. The $ 850 million figure reportedly under consideration by the administration for
dispersement over 5 years seems to be an appropriate scale.
We respectfully suggest that this money should be committed
primarily as equity support in increasing amounts over the 5 years
in accordance with a performance-based lending investment program that provides support to all rungs of the CDFI industry
growth ladder. Those CDFI's that perform up to industry standards
would gain access to increasingly large amounts of the $850 million . This ensures that the money is not distributed without due accountability measures.

45

That concludes my prepared testimony. Thank you for this opportunity to discuss the work of the New Mexico Community Development Loan Fund and our peers in NACDLF.
The CHAIRMAN. Thank you, very much.
Ms. NUNEZ-MORALES. As I said before, Jeremy will answer the
questions.
The CHAIRMAN. Let me excuse you. I know you have got a plane
to catch .
I want to introduce our final three witnesses, and then I will call
on them in this order: Mr. Ron Phillips representing Coastal Enterprises here from Maine; Mr. Robert Jackson representing the
Quitman County Federal Credit Union here from Mississippi; and
Mr. Michael Swack who is here representing the Institute of Cooperative Community Development from New Hampshire.
Let me just say, Mr. Phillips , that George Mitchell, the Majority
Leader, had intended to be here and we were not able to be able
to tell him when this moment would come, and so he has been on
his way at different times and then had to turn back because we
were running long. So in any event, he wished to take account of
your presence today and to introduce you personally.
Having said that, let me invite you now to proceed with your
summary, and we will go to the others . I would like to keep these
summaries within 5 minutes in each case, if we can do so.
Thank you.
STATEMENT OF RON PHILLIPS, COASTAL ENTERPRISES,
WISCASSET, ME

Mr. PHILLIPS. Thank you, Senator Riegle .
I was hoping Senator Mitchell would come, because he does such
a good job talking about CEI that I could have made my remarks
really brief.
Senator Riegle and members of the Senate Banking Committee :
Thank you for inviting me to testify on the proposed community revitalization system. I am using that term because that is the term
developed in a paper written by your staff.
My name is Ron Phillips and I am president and principal founder of Coastal Enterprises, a nonprofit community development corporation located in Wiscasset, ME.
The community revitalization system is a strategic step to accelerate job-creating community development initiatives. It is an investment in America that will grow businesses , create jobs , building housing, and generate assets for low-income and working families . The return on taxpayer investment will multiply and recycle
year in and year out.
I encourage your support for and crafting of legislation that is
both flexible and inclusive, and that will provide a menu of opportunities for community development banking, credit unions , community development corporations , micro and community loan
funds, and small- scale venture capital groups, a network which enthusiastically awaits a resurgence of Federal support for their ef
forts.
As a practitioner of community development for over 15 years ,
and board member of the National Congress for Community Economic Development, a 325-member trade association for commu-

46
nity development corporations-and I have attached to the written
testimony a list of all the members by State of this association .
I want to share briefly with you the legacy of CDC's , CEI accomplishments , and then conclude with some recommendations.
What are CDC's? CDC's originated in the 1960's with the title 7
amendment to the Economic Opportunity Act of 1964 to develop
businesses, housing, commercial real estate, and create opportunities for disenfranchised residents of America's distressed urban
neighborhoods and rural communities. This amendment was introduced in the U.S. Senate by the late Senators Robert Kennedy and
Jacob Javits.
What we contemplate today for a National Community Revitalization System is owed in great part I believe to the accomplishments of CDC's . CDC's are in virtually all States. Their activities
are diverse.
They develop and finance day care facilities, community health
centers, affordable and supported housing, industrial and business
parks , small business incubators and shopping centers. They finance franchises and joint ventures, and provide small- , micro-,
and medium - sized loans and venture capital to businesses that cannot secure conventional capital . They are comprehensive and
knowledgeable about their communities, create new income and assets for residents , are professionally managed, and leverage funds
with the economic mainstream .
CDC's are nontraditional financial intermediaries . They work in
partnership with the public sector-Federal , State, and local government-and the private sector-foundations , banks, private business-to attract investment and lending capital to low-income communities.
According to our recent research studies , between 1985 and 1990
alone over 1,100 CDC's across the United States built or rehabilitated 320,000 units of low-income housing, developed over 17.4 million square feet of commercial and industrial space, made over
3,500 business loans, and created or sustained over 90,000 jobs.
Now let me briefly describe CEI as a model rural community development corporation . Maine's is a small business economy with
90 percent of the businesses employing fewer than 20. Yet, Maine
has traditionally been at the end of the capital pipeline, ranking
among the lowest nationally in bank deposits per capita. It is also
among the highest in dependency on transfer payments .
CEI was organized in 1977 to address the capital gaps of small
businesses to create income, employment, and ownership opportunities for low-income people . CEI is privately and publicly funded.
We provide financing and technical assistance in development of
job-creating value-added natural resource industries, start-up and
expanding small manufacturers , microenterprises, women in business, family and center-based child care , and affordable housing.
We link our investments to the hiring of low-income people in
our enterprises . We have loaned or invested $ 20 million , leveraged
$60 million in partnership with banks, and created or sustained
some 3,500 jobs.
We are an SBA-504 certified lender and operate the SBA's Micro
and the Farmer's Home
Loan
Demonstration in Maine,
Intermediary Lending Program. We participate in private founda-

0

47

tion program related investments such as with the Ford Foundation.
What are some examples of CEI projects? We have a growing
portfolio financed on the continuum of capital need from less than
$5,000 to over $300,000.
Our smallest loan is less than $700 to Sweet Deceptions in
Lewiston, a self-employed starting AFDC microentrepreneur producer of sugar-free sweets and baked goods with only a very small
amount of sales .
Our largest is over $400,000 to DeLorme Mapping Co., in Freeport, ME, the home of L.L. Bean, in a subordinated debt loan and
an equity investment to a producer of advanced technology geographic and recreational maps, with over 100 employees.
The CHAIRMAN. Let me just stop you for a minute, because we
are going to run out of time.
Mr. PHILLIPS . Yes.
The CHAIRMAN. It is very important that we get the recommendations , and I know you are coming to that, but if I may I
am going to ask you to jump ahead to that and tell us what you
think ought to be done here in light of the earlier conversation that
would foster and speed up the kind of work that you are doing.
Mr. PHILLIPS . OK. Well, let me do that.
CEI's function is to fill the credit gap, basically. We work closely
with banks. We work in partnership with them. We have agreements with them both for guarantees, as well as for making subordinated debt loans. Equity and subordinated debt capital is a key
feature of our activities.
We believe that the concept of a community development bank
based on the discussion I have heard this morning is very interesting, and is something we are looking at in Maine.
cannot go into too many details about it, but we think in the
life of our institution in Maine this could be a very interesting possibility, and it could be perfected in a way that continues our partnership with banks, which is the second level of approach I take.
In other words , if you are going to do a piece of legislation here and
establish some funds, I would target them in four areas.
I have listed them in my testimony. One is of course to set up
at least a pilot program for doing some community development
banking, and to support further development of credit unions , or at
least something to get that niche-bank marketing effort going.
The second thing I would do is capitalize existing efforts among
CDC's like our organization where we work in partnership with
banks . We operate revolving loan funds and equity funds, and we
need that kind of infusion of capital from the Federal Government
which we can then leverage with the private sector to continue to
do our work with banks.
The third thing I would do is set up a program to ensure we can
get capital that can be used for equity investments .
Now the SBA has been the traditional Federal agency in the
United States that has been working with an equity type program.
It has had some difficulty in the past.
There are new initiatives going on there, and it is something that
I think we should take a good hard look at as a source of equity
capital for venture capital investment.

48
The next thing I would do is make sure that there is adequate
grant based funding for microloans and community loan funds because this kind of capital is very difficult to raise in the private sector. Small lending is also very labor intensive. It is costly and capital needs to be very flexible.
Let me just try to conclude with this: I would also consider special assistance to nonprofits to form a community development
bank or acquire a troubled bank. There may be some opportunities
in that area if you can get the FDIC working in tandem with the
effort you are making in community development banking.
The last thing I recommend is: It is critical to provide technical
assistance and planning grants to enable community organizations
to analyze their market and develop a business plan .
The CHAIRMAN. Thank you, very much.
Mr. PHILLIPS . Thank you very much, Mr. Chairman.
The CHAIRMAN. I apologize for the time squeeze. We are all in
the same time squeeze together here.
Mr. Jackson, we would like to hear from you now, please.
STATEMENT OF ROBERT JACKSON, TREASURER, QUITMAN
COUNTY FEDERAL CREDIT UNION, MARKS, MS
Mr. JACKSON. Thank you, Mr. Chairman.
I am Robert Jackson , treasurer for the Quitman County Federal
Credit Union. We are located in Marks , MS , a low-income rural
community in the Mississippi Delta, about 80 miles south of Memphis , TN.
I also serve on the board of directors of the National Federation
for Community Development Credit Unions , a coalition of credit
unions that serve low- and moderate-income communities throughout the United States. The Federation is affiliated with the Credit
Union National Association , the national trade organization for
credit unions.
Speaking for my small credit union and for the larger credit
union movement, I would like to express strong support for the
new administration's initiative for expanded community development of financial institution activity. The story I have to tell about
the situation in the Mississippi Delta will show very clearly just
how urgent our needs are.
Before talking about the particular experiences of my credit
union, I would like to say a few words about the national community development credit union movement. Of the 14,000 or so credit
unions in the United States, more than 300 serve low-income communities and rural communities , inner-city neighborhoods , and Indian Reservations.
The primary mission of the institution is to provide credit and
other financial services to people who are considered unbankable
by mainstream financial institutions. The need for credit in these
areas is desperate.
One CDCU in central Florida makes loans to migrant farm workers who need second hand trucks in order to commute to work in
surrounding counties . Another CDCU in San Francisco has made
small loans that allow newly arriving Vietnamese immigrants to
continue earning a living as fisherman.

49

The Harlem CDCU once lent funds to an entrepreneur who
wanted to expand his auto repair business that had been turned
down by 10 different banks . In this case, the borrower repaid the
credit union loan 3 years early.
In Central Appalachia, a CDCU works with public assistance recipients who want to start their own businesses and get off welfare.
The groups efforts were recently described in a front page Wall
Street Journal article.
Hispanic and Haitian immigrant farm workers, Vietnamese immigrants, small business owners in Harlem, and welfare mothers
in Appalachia are not the kind of lucrative clients that other institutions are looking to serve. Frankly, in my opinion many institutions do not even want those folks coming in the front door because
they cannot make a profit serving that kind of clientele.
In Quitman County, our credit union was formed 11 years ago
in order to cope with a lack of access to credit. Like many other
places in the Mississippi Delta, Quitman County is a place where
African-American residents are mired in poverty and trying to cope
with the legacy of centuries of economic and political discrimination.
My town, Marks, was one of the key cities of civil rights activity
that was visited by Dr. Martin Luther King, Jr. , which was highlighted in newspaper publications in the magazine section across
the country on Sunday, January 17, 1993. To this day, however,
there is persistent rural poverty. Unemployment in the area is 18
to 20 percent in the African-American community, and 9.8 percent
overall. The per capita income in the county is $6,450 annually.
The per-capital income for African-Americans is lower, $4,133 .
Many African-Americans are living in substandard housing without running water. They would like to buy new homes, or repair
their old ones, and they would like to start a new business or borrow money to send a child to school.
Until 1977 , there was only one bank in the Marks area, and it
was owned by a local family that also controlled much of the land
and political machinery in the county. Since loans are routinely denied to many poor people, including my parents who were sharecroppers, they did not even bother to go to the local banks.
Out of pure desperation, we organized a grass roots movement
for equality that led to the creation of the Quitman County Development Credit Union, that is also a CDC and a member of the National Congress for Community Economic Development, and the
Quitman County Federal Credit Union . The credit union has
$ 1,017,000 in assets and serves 850 members and growing. Since
the day we were organized , we have lent more than $2,126,000 to
local people, most of whom would not have had other access to
credit.
To tell you a story about a typical loan that we make to a family
that had stayed on the farm, or plantation , all their lives up until
1989, the farmer got sick and could not work on the farm anymore
and was asked to move out of the plantation owned house. The
family had nowhere to move, no credit history to assume a mortgage, and no breadwinner for the family. The family approached
the credit union for a housing loan to purchase a $ 10,000 house.
The credit union made the loan because we knew the family. I am

50
happy to say that they have made their monthly payments like
clock work.
What would have happened to the family? I am afraid to think
what may have happened or transpired if the credit union had not
been there. This is not an exception; this is the rule. Families are
being displaced from large plantations with nowhere to go, no
money to move anywhere else , no sympathy from the landowners,
no severance pay, nothing.
I believe that the CDCU's are financial institutions with a conscience and we need more of them. While we have been successful
in providing credit to people who would otherwise be shut out of
the capital market, there is a great deal more that we would like
to do. We are particularly interested in duplicating the successes
of the Nation's largest CDCU, the Self-Help Credit Union of North
Carolina.
Self-Help has more than $40 million in assets and has extended
loans throughout the State of North Carolina. Their success is due
in large part to an innovative structure that combines the credit
union and a nonprofit development organization. Working together,
the two institutions can provide a full spectrum of services needed
to further economic development.
We have the same structure in Quitman County. Our credit
union provides credit and savings services, while the nonprofit
Quitman County Development Organization is able to conduct fund
raising and take a larger part in high-risk development projects .
All this is done in coordination with each other and other nonprofits in the community.
I am confident that we can grow to Self-Help's size and scope in
a safe and sound manner, but that will require relief from current
regulations imposed on us by our regulatory agency, the National
Credit Union Administration .
We also need more technical assistance from them and a strategic investment of Federal resources . In talking about public investments in CDCU's, an important ratio to keep in mind is 10 to 1.
For every dollar that a CDCU receives in reserve funds , the institution is able to extend $ 10 in loans for home acquisitions and
repairs , small business development, and other purposes .
If credit unions had a $ 100,000 infusion of equity, I can guarantee you that we would make $ 1 million worth of loans in Quitman
County, MS, the poorest section of the United States.
As you go about the process of creating a community development banking program- and I am confident that you will-there
are a few positive steps that you can take to help credit unions like
mine and others throughout the United States.
I support the recommendations of the National Federation of
Community Development Credit Unions for steps which Congress
can take to improve access to credit for consumers and small businesses which are in my written testimony.
In closing, let me again emphasize the importance to easing the
current regulations under which we labor. To effectively do our job,
we must never be held back by limits of nonmember deposits , and
we must have traditional flexibility in making small business loans
to our members . Attached is a CUNA position paper on these issues with amendments, which I support.

51
This concludes my testimony, and I will be glad to answer any
questions.
The CHAIRMAN. Thank you, very much.
That is very helpful, and I appreciate getting that sort of insight
with respect to how it is being done through the credit union structure.
Mr. Swack, you have been very patient and I appreciate it, and
I am going to ask you if you would summarize as much as you can.
We would like to hear from you now.
STATEMENT OF MICHAEL SWACK, CO-DIRECTOR, INSTITUTE
FOR COOPERATIVE COMMUNITY DEVELOPMENT, MANCHESTER, NH
Mr. SWACK. OK
. Thank you, Mr. Chairman, and committee member.
My name is Michael Swack and I am co-director of the Institute
for Cooperative Community Development, which runs the working
capital program, microenterprise program, that has extended over
450 business loans in the last couple of years.
But I also come as someone who has a wide range of experiences
with community development financial institutions, having worked
in them for 14 years, helped start up two community development
loan funds , and I am currently chairman of a community development financial institution that is chartered by the State of New
Hampshire.
I am here today to speak primarily about microenterprise programs. Microenterprise programs work with entrepreneurial individuals seeking to start or expand small businesses. Microenterprises range from self-employment businesses to businesses employing five people, and typically lend between $250 and $ 10,000
to help a business operate or expand.
Microenterprise programs represent a community based economic
development strategy for business development and job creation
among those traditionally left out of the economic mainstream .
They provide individuals with the capital and skills they need to
turn their businesses or business ideas into reality. The individuals
served by microenterprise programs are predominantly women ,
often people of color, and almost all are welfare recipients, unemployed, or working poor.
The creation of small businesses is just one goal of microenterprise programs. They are also designed to increase income , stabilize families, raise self-esteem and self-confidence, develop skills,
create role models and spark a process of community renewal .
Over 150 microenterprise development programs are represented
nationally by the Association for Enterprise Opportunity in Chicago, which also houses one of the more successful microenterprise
programs, the Women's Self-Employment Project .
Senator Moseley-Braun , I was told to make sure I mentioned
that, if you were here.
[Laughter.]
Senator MOSELEY-BRAUN. Good.
Mr. SWACK. Many microenterprise programs include loan funds ,
or offer financial services in partnerships with local banks or credit
unions, but microenterprises face many barriers . The loan sizes re-

52
quired by microenterprises are typically too small to be considered
by traditional financial intermediaries. The cost of transacting such
loans is unprofitable for these intermediaries . Additionally , the borrowers are considered to be too risky. They do not have equity to
put into the business. They have very little collateral, and they do
not have histories of running profitable businesses.
Although these loans are considered too risky by traditional
intermediaries , many community based organizations have successfully loaned to microenterprises.
My own organization , the Institute for Cooperative Community
Development, has run a program called Working Capital, for the
past 2 years. We have made close to 450 loans utilizing a model
of lending called peer lending, a model utilized extensively overseas
in places like Bangladesh and throughout Latin America. In this
model, people join borrowing groups . Members start out by borrowing small amounts of money for their businesses, and incrementally
are able to borrow more.
We have enjoyed close to a 97 percent repayment rate over the
life of the program . In addition to providing capital, many microenterprise programs provide training, technical assistance , and in
some cases support services such as child care and transportation
to borrowers.
The provision of these nonfee-generating services combined with
the small loan sizes means that microenterprise programs are typically not able to support themselves on fee and interest income
alone.
Although it is not within the purview of this committee, it is important to note that microenterprise programs face barriers other
than the barrier of access to capital.
For microenterprise programs to succeed, the Government must
eliminate barriers and penalties for transfer payments and public
assistance recipients who pursue self-employment. They are currently penalized.
We need to allow AFDC recipients to accumulate business assets
and deduct business related expenses in calculating that income.
We need to change unemployment insurance laws to exempt recipients from looking for work while they are starting a business , and
we need to change public housing rent provisions to minimize increases for residents generating wage or self- employment income.
Any legislative initiative to create community development financial institutions we believe needs to explicitly recognize and encourage microenterprise lending, whether through microenterprise loan
funds or other community based intermediaries .
An investment of Federal funds into microenterprise funds could
be done in a variety of ways. Our Working Capital Program has
worked out a unique arrangement with three different banks in
New England whereby we have access to bank lines of credit for
microenterprise lending. In exchange for access to this credit, we
establish small loan loss reserves at the bank. A small investment
into loan loss reserves currently made by foundations has enabled
us to leverage substantial amounts of credit from banks for
microenterprises.
A legislative initiative that supports investment in microenterprise funds in training and technical assistance to borrowers we be-

53
lieve could greatly enhance the viability and success of these programs.
Finally, as someone who has been an active participant in community investment for 14 years with a variety of institutions , I
have four specific recommendations that do not apply only to
microenterprise, and many of them were touched on this morning:
First, a wide range of community development financial institutions, including community development banks, credit unions, loan
funds, and microenterprise funds should be eligible to receive investment from a Federal initiative for community development financial institutions. However, any institution receiving investment
from a Federal initiative should specify how they will help achieve
goals of community development and investment .
Community investment means more than simply investing
money in a particular geographic place. A successful program of
community investment has succeeded in many places in creating
those community organizations which then go out and build housing and create jobs.
We have found with the New Hampshire Community Loan Fund,
of which I am a founder, that our simple existence has created
many community organizations that never would have existed because they now know they can access credit. They have gone out
and built housing and developed jobs .
A key in community development finance, and you have heard
this quite a bit, but this is a slight variation on it, is the need for
equity investment. A Federal initiative should provide equity or
permanent capital to community development institutions, but also
allow them to invest equity in community housing and economic
development ventures.
Traditional loan products are simply not sufficient to meet community capital needs. My experience as chairman of the New
Hampshire Community Development Finance Authority, a quasipublic agency, has demonstrated how critical equity is to the success of projects.
Through equity investments-and we do not actually own these
businesses ; we do it through preferred shares, or getting a share
of net operating income-we are able to invest the kind of money
that then leverages private money.
There is not a single deal that we have been involved in-and
in the past year we have made about $3.5 million worth of equity
investments, that would have gone ahead if we were not able to
put equity into the project.
Allowing community development financial institutions to invest
equity is a way of getting greater participation of private financial
institutions. Equity investment improves the capital structure of
the venture. It leverages private debt. And most importantly, it enhances the probability of financial success of the venture itself.
The CDFA also encourages-and in fact is completely funded
through private investment. I think it is something worth looking
into in response to a question Senator D'Amato asked .
The State of New Hampshire provides a tax credit against a
business's business-profit tax to commit funds to this General Venture Fund. The CDFA then uses these funds to make equity and
debt investments into community based housing and economic de-

54
velopment projects . That is, the legislation specifically directs that
it must go into community based housing and economic development projects .
Federal legislation should include mechanisms that encourage
private sector investment into community development financial institutions. Finally, the Federal initiative, we believe, must promote
the development of secondary market mechanisms to support the
growth and liquidity of community development financial institutions.
One of the things that we have really had problems with is, we
have made these loans , but since they are non-standard underwriting criteria, we are often unable to place these loans. So we have
demands on our money. I know we could make a lot more loans.
We often come to the table where we say, well , we are having
requests for about $ 1 million of loans. We have only $200,000 we
can make right now.
If we are able to package these nonstandard ones that we seasoned, that we can provide credit enhancements for, to either institutions like existing banks or through Government Sponsored Entities like Ginnie Mae and Freddie Mac, I believe that would greatly
enhance our ability to increase the flow of capital to these communities.
Finally, I believe that we do have the expertise here that has
been mentioned several times. It is not just the South Shore Bank.
There is a lot of expertise . There are probably 500 institutions represented by the various groups here that are involved in this . That
experience has been gained over the 15 years .
We have a track record that we invite you to look at in terms
of loan losses and money placed that we think compares favorably
to any traditional financial intermediary. So in the focus this morning and concern on South Shore Bank, it is important to expand
that to say that, although it is still a fairly narrow level of expertise, it goes far beyond one institution.
Thank you for allowing me to speak.
The CHAIRMAN. Well, I appreciate that. I appreciate your point,
and that is why we have asked you to be here, to both make that
point and to draw on that level of knowledge and differentiation .
I am going to submit to you some questions that I will have on
behalf of the committee and on behalf of other committee members
to respond to for the record .
I am going to give the gavel here to Senator Moseley- Braun for
her questions, and she will take you on through the remainder of
our hearing today.
I want to thank you for your participation, and again thank you
for your patience. It is frustrating for all of us when we set our
time schedule and events over which we have no control intervene ,
but that is the nature of your life much of the time, and it is the
nature of our life here all the time. So, Senator Moseley-Braun .
Senator MOSELEY- BRAUN [ presiding]. Thank you, very much .
Mr. Swack, I have a question with regard specifically to the
microloan funds and the enterprise development that you were testifying about. One of the distinguishing characteristics about the
South Shore experience was that it integrated the banking and financial services with technical development and, if you will, human

55
resources development, and helped people get around to navigate
other kinds of issues that were not purely financial or credit related.
To what extent you mentioned in your testimony the need for
welfare reform , to recognize this as an area, and public housing authorities, to recognize this to what extent do you provide technical
assistance, human resource development assistance to people as a
part of the loan strategy, or the community development strategy?
Mr. SWACK. There is a wide variation among microenterprise
programs. In some of the programs it is very, very extensive. That
is, the human development element is in fact one of the most, if
not the most important element, and the way success is measured
in these programs often is not simply has a person gone on and created a job.
That is, if you have gone through a training program in business
development, some people may start a business, but if you go back
and you say has the program been successful a couple of years
later, you may say, well, what if the person does not have a business that employs him full time? But what if instead they found
permanent employment in the work force? Is that not also a successful outcome? So there are different ways that microenterprise
programs measure them.
Certainly for many microenterprise programs the training component in business development, developing cash-flow statements ,
identifying a potential market, writing a business plan, getting access to capital , are key in terms of the success of the business owners themselves.
Senator MOSELEY-BRAUN . Again I guess the question- and that
is part of what I wanted to hear you say to me this afternoon, but
I guess the second part of the question is: To what extent do you
help people after the loans are made to continue to do what it is
they have to do? I mean , a lot of time it is a lack of accounting experience or expertise. A lot of time people just do not know what
the rules are and what the expectations are.
Mr. SWACK. Let me talk about our Working Capital Program in
particular.
Working Capital requires people to stay in peer groups after they
get the loan. That is, we do not forget about them afterwards . And
in fact, one of the elements of the model is technical assistance ,
rather than being loaded all up front, what we will typically do is
go through a very short training period with the borrower, get
them a small amount of credit-everybody starts with $ 500 quickly-and begin to identify the different technical assistance needs
that can be provided to those groups on an ongoing basis .
There is learning on the job while they are starting their businesses. The peer groups are the agent through which we are able
to provide a lot of technical assistance , and we work through community groups , community enterprise agents throughout the region.
That is, we have a central program that only employs a couple
of people. Then we contract with community groups to organize
these peer groups. The enterprise agents are also responsible for
coordination of technical assistance that we can provide.

56
It is very important that it is on an ongoing basis both through
the peer group assistance they give each other, as well as assistance we offer in how to do marketing, how to set up books , how
to get to the next level . So it is an ongoing process of technical assistance provision .
Senator MOSELEY-BRAUN . Mr. Phillips .
Mr. PHILLIPS. Yes. May I respond to that? We help a lot in that
area. About a third of our effort at Coastal Enterprises is in technical assistance both before a loan and after a loan, and in fact,
also in other than lending relationships. We operate a counseling
program and have three full-time business counselors that have
counselled some 4,000 businesses over the past 5 or 6 years.
So it is a very, very active program, and they have also facilitated those small businesses-which average about 2.5 people in
employment to get bank loans not just loans from our flexible revolving loan fund. They have managed to facilitate some $ 10 million of financing just through the technical relationship of working
with clients on all those issues you are talking about, from clinics
and workshops, taxes, accounting, to one-on-one counseling, marketing, and so forth.
A second area, which is a very exciting area and is what the
group in Chicago does, too- and I hope you will visit them sometime is a very specialized, customized program to help AFDC recipients gain access to self-employment.
They participate in a much more intensive and even peer support
type of training program. We are working with about 170 in a 3year program in rural communities and some small urban communities in Maine to deal with the opportunities of transitioning
AFDC recipients from welfare to work through the self-employment
process.
Participants go through a very rigid business planning type of
development, understanding how to put a plan together, very small
step loans , and working alongside our loan staff as well as counselors to then break into a more independent business of activity.
So it is a very, very busy area for us , and for a lot of our peers
throughout the country.
Senator MOSELEY- BRAUN. What has been your experience with
that effort? Do you receive State and local support for that?
Mr. PHILLIPS. We have a special Federal grant. It is money given
to us to create a pool of capital to support both the technical assistance side, as well as the softer loan side of the equation.
Senator MOSELEY- BRAUN. A Federal grant from where?
Mr. PHILLIPS. From the Department of Health and Human Services, Office of Community Services.
Senator MOSELEY- BRAUN. And State and local?
Mr. PHILLIPS. The State Department of Human Services - we
have a $ 1 billion budget deficit, by the way, in Maine.
Senator MOSELEY- BRAUN . One billion dollars?
Mr. PHILLIPS. A $ 1 billion . It is a very difficult time there. So
they are struggling, but they are putting some money into the program . They also complement the program with various supports to
the participants in child care , transportation, and that sort of
thing.

57
We have a nonfinancial agreement with them, basically. We have
to have an agreement with them to work in tandem with this program. It is a very interesting relationship and it is one that we
need to keep encouraging both at the Federal level , which actually
requires it, but as well at the local level.
Yes?
Senator MOSELEY-BRAUN . I am sorry, Mr. Phillips? Your State
has a $ 1 billion deficit, not Coastal Enterprises?
[Laughter. ]
Mr. PHILLIPS. We are actually quite solvent.
Senator MOSELEY-BRAUN. OK. I was just trying to help out there.
Mr. PHILLIPS. No, we have a healthy fund balance.
Senator MOSELEY-BRAUN. So the State Department of—
Mr. PHILLIPS. Human Services.
Senator MOSELEY-BRAUN [continuing]. Human Services is also
involvedMr. PHILLIPS . Yes, as a partner.
Senator MOSELEY- BRAUN. Is there other local participation?
Mr. PHILLIPS. There is an employment training program in the
area that handles the Department of Labor funds.
Senator MOSELEY- BRAUN. I hope I am not asking redundant
questions now. I think everybody knows I had to goMr. PHILLIPS. I mean, all these programs work in coalitions and
partnerships. The name of the game is partnership . Everybody
does a piece, and maybe we will get something done.
Senator MOSELEY-BRAUN. Now what is your public-private funding mix?
Mr. PHILLIPS . We have about a third of our funds from private
foundations. Largely the balance, maybe shy of 10 percent, from
the Federal Government. The State government has put some
money in.
Senator MOSELEY- BRAUN. OK, so the bulk is Federal, some State,
a tenth of the Federal of the two-thirds public money and a third
private.
Mr. PHILLIPS. Basically, yes.
Senator MOSELEY-BRAUN. And in terms of your loan experience,
what has been your experience?
Mr. PHILLIPS. That is the anchor of our program. We do financing, technical assistance, and development work. We have done 300
business projects over the past 8 or so years . We have put out $20
million of our money.
The key thing here is we have leveraged another $60 million of
primarily bank financing. That is our partnership with the banks.
So in effect we are bringing them into the kinds of projects and
sectors that are vital to Maine economic development, from the
very small microenterprises, to some very important other sectors.
We have done a lot of child care development in Maine, both
small family day care loans as well as larger facilities , such as
Head Start/Child Care wrap-around facilities. We just participated
in a Head Start Project in Rockland, ME which was about
$380,000. We also had the bank as part of that, and the Farmer's
Home. We also raised private money locally . So it is a real party.
Senator MOSELEY-BRAUN. To what extent and this will be my
last question to what extent have you been able to establish con-

58
tinuing relationships or communication with the major, large financial institutions in the community? And if you have established
that, in what form does it take? Do you have regular meetings with
them? How did you get their attention?
Mr. PHILLIPS. I am glad you asked that, because I think that is
vital to our work. We cannot work without the banks . No. 1 , we
are co-lenders. We work in a subordinated debt relationship . No. 2,
we have three bankers on our board, Fleet Bank, Key Bank, and
Casco Bank, which is owned by the Bank of Boston.
We have a network with banks, and have deposits with banks,
and link our projects and relationships with them. We also get
money from them. They donate money to us particularly for our
technical assistance programs because we are basically helping to
make projects bankable, and there are new prospects, new borrowers for them. Also some of the banks have been working on very
direct TA programs and mentoring type programs, and we have
given them some advice on how to internally develop better ways
to interact with their markets . So they are a vital part of our operation. Does that answer your question?
Senator MOSELEY- BRAUN. But how do you interface with them?
Mr. PHILLIPS. Well , I had an example of a company we financed
in Westbrook, ME, which is Moulded Fibre. It takes recycled paper
and processes it into a fiber product that can be molded to any particular shape. It replaces styrofoam as a packaging material.
Senator Gore visited that company before the election , and he
was using that as an example of a job creating environmental company.
That was a $ 1 million start-up project. They hired AFDC people,
and people with disabilities. They employ about 44 now. We got the
bank involved-it happened to be Fleet Bank, with a percentage of
the financing.
We had to provide the equity and subordinated debt financing to
make that happen . So in financing a project, we bring the bank in
and we provide the more flexible subordinated capital. Am I answering your question?
Senator MOSELEY - BRAUN. Maybe I am not asking the question
right. Your relationships with the majority banks, is it just a matter of informal relationships? Or is there something more structured, something more formal, something that is institutionalized
that allows you to have regular interactions with the majority
banks?
Mr. PHILLIPS . Well , a lot of things happen in rural communities
more informally than formally as a network, and one way of expressing oneself institutionally is the informal network.
We do have standing agreements, written , signed agreements ,
however, with seven banks that reflect the fact that we are going
to deposit money in the bank, say up to $ 100,000 , and in turn the
bank will both interact with us by way of referring projects , or
work with us on financing a project that it may not be able to do
on its own.
We still have to review the business , but the relationship triggers
that process. Those funds can also serve to guarantee a portion of
the bank loan . So that is a more formal part of that.
Senator MOSELEY- BRAUN . Thank you .

59
Mr. Nowack.
STATEMENT OF JEREMY NOWACK
Mr. NOWACK. Just to build on that, many of our relationships
with banks, or relationships where the banks invest in us directly,
but in the last few years we have structured a formal participation
pool with banks where banks buy into participation pools in areas
that we manage where they commit a certain amount of money
based on some agreed upon underwriting criteria that we work out
together.
We process the loans and put the loans on, and then we monitor
and service the loans. So we become a wholesaler for those banks .
That has happened particularly-and it has happened with the
largest banks in the Philadelphia region . It has happened particularly in parts of north Philadelphia and Camden where they have
been most resistant to credit provision.
So banks have seen us as kind of a wholesaling arm for them,
and we have seen in the banks a form of credit, obviously. But we
have bought also with our own loan fund, our own $ 10 million loan
fund, we have bought 10 percent of each one of those credits for
the banks .
Senator MOSELEY- BRAUN . Would you send to us something in
writing on that situation?
Mr. NOWACK. Absolutely. And if I could just say one very brief
word, so much of the conversation earlier today was around this almost either/or issue of CRA and banks . I think that most of our experience is that you cannot look at it as an either/or question .
The way that you build community development financial institutions in part is by getting banks to meet CRA regulatory requirements. And a significant way to meet CRA regulatory requirements, but not the only way to meet CRA regulatory requirements ,
is to work with institutions like ours, and I think that is an important point.
Senator MOSELEY-BRAUN. I think one of the things we are looking at is to the extent that we can make CRA more of a carrot and
stick than it is currently.
Mr. NOWACK. Right.
Senator MOSELEY-BRAUN . And so everybody is really groping for
directions and answers in that regard, and I think it will be on a
bipartisan basis . So we really appreciate your contribution to helping us find some answers in that area.
I want to thank all of you : Mr. Jackson , Mr. Phillips, Mr. Swack,
and Mr. Nowack, for your testimony.
The vote bell has already rung, so the members have to go off
and vote. As you know, I am now standing in for Mr. Riegle, but
I want to thank you for your contributions to this hearing to this
important area.
I am confident that the chairman will follow up and will continue
in this area, and we are certainly open to any further submissions
that you might have, or information , or assistance that you can
give the committee.
So, ladies and gentlemen , thank you very much. This meeting is
recessed to the Call of the Chair.

70-832 0 - 93 - 3

60
[Whereupon, at 2:05 p.m. , the committee was recessed , subject to
the Call of the Chair.]
[ Prepared statements and additional material supplied for the
record follow:]

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PREPARED STATEMENT OF SENATOR RICHARD H. BRYAN
Mr. Chairman, I commend you for holding this hearing today to provide an overview of community development banks and to familiarize the Committee with the
operations of the four existing community development banks. As we know, President Clinton has proposed a network of community development banks as part of
his urban policy, this hearing will give us all an opportunity to become acquainted
with this private sector initiative.
Many of our urban and rural areas are severely distressed with a multitude of
problems : homelessness, crime, unemployment, and hopelessness. These are the
many faces of decline. We must not allow our cities and towns to languish, we must
address these needs and find ways to revitalize our communities. However, we are
hampered in our efforts by our growing deficit and the decreased ability of the Federal Government to finance new programs.
The success of these community development banks shows that solutions do exist
using private sector capital with some incentives from the Federal Government. The
availability of capital in these communities means the residents will have the possibility of establishing new businesses, building affordable housing, and putting resources back in the neighborhoods- in other words creating jobs.
I am anxious to hear from our witnesses today about how they have achieved
their great success and their suggestions about how the Federal Government can
help make this network of community development banks a reality.
PREPARED STATEMENT OF SENATOR CAROL MOSELEY-BRAUN
Mr. Chairman, the subject before us this morning is extremely important to lowand moderate-income communities around my State and across the Nation. Community development banking must be a real priority for this committee . I therefore
want to congratulate you, Mr. Chairman, for calling this hearing so promptly.
At the outset, I want to take special note of one of our witnesses. Milton Davis
of the South Shore Bank is a constituent of mine. He is a banker who has really
made a difference to his community. You don't have to do anything more than walk
up and down the streets in the neighborhoods where South Shore lends to see the
dramatic difference he and his institution have made.
We in Illinois are very proud of South Shore Bank. It is a bank with a national
reputation, and it is a reputation that is fully deserved.
There are a lot of questions regarding community development banking that must
be addressed. Today's witnesses, however, by their very presence, point out an important policy objective for any community development banking proposal this committee considers. That is, it must be flexible; it must permit multiple approaches
to community development that takes local community needs carefully into account.
We need institutions that can make loans, use loans to leverage additional financing from more traditional financial institutions, make equity investments when that
is called for, make micro-loans that can make such a difference to individuals and
their neighborhoods, and undertake the full range of community development financial needs. Not every institution can or should necessarily do all of these things, but
any Federal approach must allow the kind of institutional flexibility that permits
communities to move forward with approaches that meet their own special needs.
I look forward to hearing from all of the witnesses here today. They bring a variety of experiences to bear on community development issues. They can tell us about
a variety of approaches that have worked in communities across this Nation. I know
their testimony will be of great help to us as we work with the administration to
meet community development needs .
PREPARED STATEMENT OF SENATOR GEORGE J. MITCHELL
Mr. Chairman, I'm pleased to be here today to introduce Ron Phillips, the founder
and President of Coastal Enterprises Inc. (CEI), a non- profit community development corporation based in Wiscasset, Maine.
Coastal Enterprises has been a leader in small business lending in my State and
has mobilized over $60 million to support a variety of manufacturing, child care,
natural resource, and microenterprise development projects in Maine. CEI specifically targets assistance to low-income people, women, and people with disabilities.
As an original cosponsor of the Micro Lending Demonstration Act, I have worked
closely with CEI on issues related to small business credit. I can affirm that under
Ron's leadership, CEI has established a strong record of achievement in bringing financial and technical resources to Maine businesses through partnerships with
banks, public and private agencies and community organizations.

62
I commend Ron for his dedication to this program, and I applaud him for all he
has accomplished for the people of my State. He is a recognized leader in the field
of community development corporation lending, and I'm sure that based on his extensive experience he will bring valuable insights to the hearing you are holding
today.
I congratulate you, Mr. Chairman, for holding this hearing. So many communities,
both urban and rural, are desperately in need of credit and investment policies that
will stimulate growth and create new jobs.
President Clinton drew attention to the need to create a network of community
development banks to encourage investment and opportunity in distressed areas. I
hope the hearing you are holding today on development initiatives will focus attention on the diverse network of community-based lenders that already exist.
Development banks have made a tremendous contribution to their communities,
but I am sure they would be the first to admit that they are not alone in their mission. Many other community-based organizations, like CDC's, perform the same
functions and pursue the same goals as development banks. They may work cooperatively with development banks, as well as conventional banks, to achieve their
purpose: To provide financing that is vital to stimulating economic growth in
disinvested communities.
I believe a wide array of community based lenders, and CDC's in particular,
should be integral part of any strategies or programs implemented to rebuild our
troubled communities. As you examine the issues related to invigorating community
development lending in our country, please look at and learn from what already successfully exists, as well as what we can build for the future.
Thank you for the opportunity to introduce Ron Phillips, and I assure you I look
forward to working with you , Mr. Chairman, and the rest of the committee on developing these initiatives.
TESTIMONY OF MILTON O. DAVIS, CHAIRMAN,
SOUTH SHORE BANK OF CHICAGO

FEBRUARY 3, 1993
Honorable Chairman and Members of the Committee: Thank you for inviting me
to make recommendations about the creation ofcommunity development banking institutions . I assume that it symbolizes a marked national increase in interest in institutions that can react effectively to investment opportunities in the Nation's troubled urban neighborhoods and small towns.
The invitation requested information about the history, structure, experience, impact and lessons of the bank holding company that my colleagues and I founded on
the south side of Chicago in 1973. I have been asked by a sister institution, Southern Development Bancorporation in Arkansas, to convey its experience as a development bank holding company which serves small towns in rural southern Arkansas.
Finally, Shorebank and Southern would like to offer some principles that could
guide Federal assistance to the creation of such institutions in other places.
Shorebank is a comprehensive community development institution: the "need" it
aspires to address is development of disinvested communities, but not exclusively
credit needs. Indeed, a salient lesson of our experience is that community development requires more than credit, and delivering credit successfully requires more
than a bank.
For this reason, it may be most helpful to understand Shorebank by focusing first
on the concept of community development banking and the resulting institutional
prerequisites. Within this context, I will describe the experience and lessons of
Shorebank and Southern to date.
I. RENEWING COMMUNITY ECONOMIES : The Concept of Development BankinG
The failure of the local economy-particularly of its markets and market driven
investments-ranks high among the many causes of decline in urban communities.
In deteriorating communities, capital flows out of the area; people cease upgrading
their homes and landlords fail to maintain their buildings; property values fall;
store owners quit investing in their businesses and close or move; community residents lose hope, stop investing effort in education and work skills, and fall into unemployment. In declining small towns, patterns are similar and , in addition, residents rely more on absentee -owned large corporations than locally owned small
firms for employment and entrepreneurial opportunities due to weaker links between residents and business markets and financing. Revitalizing such communities
requires recognition that disinvestment is itself a market phenomenon and, consequently, will only be reversed by fundamentally reinvigorating local markets. Per-

2

63
manent, self-sustaining community renewal results from creating an environment
where private investors inside and outside the community are confident their investments will be rewarded as healthy community dynamics are restored.
A few key observations concerning this process of community renewal and investment underlie the concept of development banking:
• Many persons in economically distressed communities desire to improve their own
life conditions and, although they may lack conventional credit histories, many
ordinary residents are fundamentally credit-worthy. Local residents will invest time and money to improve their community when they are confident about
its future.
• Local development capacity, be it in the form of "ma-pa" entrepreneurial
rehabbers, fledgling business entrepreneurs, or community development corporations, needs to be supported in a disciplined, business-like fashion. Positive community development is a long term partnership between residents who
care about their communities and financial institutions with similar motivations.
• Market forces can be restored in under-invested communities if the level
of institutional capability is sufficient for the task at hand, and if redevelopment is targeted to clearly identified geographical areas with the potential for
renewal.
Targeting allows an institution to develop the necessary specialized market expertise, and assures that investment will be concentrated in order to create the critical mass of activity which shifts resident and investor perceptions and
reestablishes healthy functioning markets.
• By using an array of banking, real estate, venture capital, technical assistance, human resource and other tools tailored to particular community needs, a community development banking institution enhances its
market knowledge and impact, controls risk, and undertakes complementary activities which create a positive, safer environment for private investment.
Sustained economic development occurs when local residents invest their savings
and talent. The clearest indicator of a permanent community renewal process is active investment by private and institutional investors who believe that an identity
exists between their self-interest and that of the current residents. Deliberately accelerating local economic activity requires releasing this local energy by providing
access to capital, credit, technical assistance and market information; and by supporting an entrepreneurial culture that values risk-taking, business discipline and
self-reliance. In particularly distressed, disinvested communities, external resources
must be attracted to leverage the limited local capacity and allow provision of the
necessary credit and capital. Ultimately, development banking seeks to restore
healthy market forces by attracting and combining the resources necessary to building a critical mass of permanent development activities sufficient to restore investor
confidence in the community.
Institutional Implications: Characteristics ofa Community Development Bank. The
term "community development banking" means different things to different people
in the community development finance field. My colleagues and I believe that a community development bank is a bank holding company with a specialized structure
which is organized to transform the market dynamics of a geographical target area.
This structure, including a bank and community development subsidiaries, has a
number of attributes which make it particularly well suited to promote the revitalization of distressed communities.
• As a fully regulated, large scale institution, a bank is known, trusted, legitimate, well-capitalized and self-sustaining.
• A bank possesses unusual capacity to be continuously knowledgeable
about the neighborhood economy.
• A bank can convert ordinary bank deposits into development loans. This
availability of credit committed to the community can precipitate the release of local energies, inducing residents to risk their own savings and
become personal stakeholders in the future of their community.
A bank alone, however, cannot accomplish these objectives in the context of distressed communities with dysfunctional markets. A community development bank is
designed to be a comprehensive community development institution which, in addition to a bank, includes other development subsidiaries and affiliates that complement the investment activities of the bank. These subsidiaries and affiliates enable a development bank to successfully manage what would otherwise be higher
risk investments; to more aggressively identify and better evaluate opportunities
and initiate development activities; and to address multiple dimensions of community renewal, ranging from developing retail shopping centers to upgrading labor

64
force skills. Through its non-bank development affiliates, the institution can invest
equity capital in businesses owned by others, rehabilitate and construct residential
and commercial real estate, operate social development and business technical assistance programs, attract other private and public investors, and generally link
residents, financial resources and government programs into a coherent renewal effort.
A community development bank is further distinguished from conventional banks
by its specialized commitment to the revitalization of a targeted area for the benefit
of current residents. Through its leadership, ownership and governance structure,
the development bank makes its mission the long-term development of a community. It measures its success in terms of the development impacts it has on that
community. It becomes a permanent institution whose success is joined with the improvement of the community. In order to accomplish its mission, the development
bank's leadership and staff must bring together highly localized knowledge of the
community, technical banking skills, and a broad understanding of the strategies
and process of economic development.
Thus, a development bank combines the structure and expertise of a for-profit financial institution with the commitment to place one normally sees in communitybased non-profit organizations. By developing specialized expertise in carefully targeted areas, and achieving synergies through comprehensive coordinated interventions, a development bank is able to manage the tensions between the goals of profitability and community development impact, making development profitable. Profitability is an essential feature of a development bank. Profits enable the bank to be
self-sustaining and to grow and assure that continuing business discipline will be
brought to the task. However, while profitability is essential, the purpose of a development bank is not to maximize profits, but to help effect lasting community renewal.
A development bank also combines the qualities of a community based, market
driven, private institution with unusual scale, expertise and ability to leverage resources. A development bank is a uniquely capable delivery agent for external public
and private resources. Many private and government programs are not fully available in the communities for which they are intended because of the lack of sophisticated, market based delivery systems. A development bank uses foundation investments and grants, Federal loan guarantees, secondary markets, low-income housing
tax credits, JTPA and numerous other programs to accomplish common objectives.
A development bank can be considered a “handyman" of sorts, intimately familiar
with particular local problems, equipped with a "toolbox" of varied government and
private "tools" to address them, and possessing the expertise to select and productively use the appropriate tool.
Finally, a development bank can be flexible and innovative. Location dictates
strategy and design: the organizational structure and the strategies or tools it employs can be adapted to a wide range of circumstances. Thus, whether a bank or
other kind of large scale, regulated depository institution is most appropriate, and
what affiliated activities are needed, will vary from community to community. For
example, Southern Development Bancorporation uses a different array of affiliates
than Shorebank as it has been designed to specialize in business and rural development rather than urban community reinvestment. (See organizational chart.)
II. SHOREBANK CORPORATION : HISTORY, STRUCTURE, AND IMPACT
The South Shore community where I reside was 100 percent white in 1960 and
70 percent black in 1970. By 1972, little credit was being extended in the community despite excellent housing and amenities; the neighborhood is on Lake Michigan
and a 15 minute drive from downtown. South Shore Bank, its largest bank, assumed that the inevitable economic decline that accompanies racial change would
occur in its market and sought regulatory permission to move downtown.
During the late 1960's, an interracial group of bankers-Jim Retcher, Ron
Grzywinski, Mary Houghton, and myself-had begun a successful minority small
business loan program at the nearby Hyde Park Bank and Trust Company in the
University of Chicago neighborhood. The program out-performed similar large bank
programs, according to a Yale Law Review article at the time. We began exploring
the potential of additional private sector approaches to urban problems, including
a carefully structured bank holding company as a vehicle for reversing the downward spiral of deterioration that accompanied racial change. In 1972, The Federal
Reserve Board stated that bank holding companies: "possess a unique combination
offinancial and managerial resources making them particularly suited for a meaningful and substantial role in remedying our social ills.”

65
Fed regulations under the Bank Holding Company Act explicitly permit bank
holding companies to make equity and debt investments in corporations or projects
designed primarily to promote community welfare.
Backed by patient, primarily institutional, investors who shared our community
development goals, we formed the Illinois Neighborhood Development Corporation
(now called Shorebank Corporation) to be a one-bank holding company and in 1973
purchased the South Shore Bank. In 1978, we raised additional capital to create two
additional for-profit subsidiaries and one nonprofit affiliate. This was the first attempt to use a banking enterprise as the core of a comprehensive development institution for revitalizing an economically distressed, inner-city neighborhood. The Corporation's principal subsidiary, The South Shore Bank of Chicago, is a commercial
bank chartered by the State of Illinois and regulated by the Federal Deposit Insurance Corporation. The other subsidiaries and affiliate active in its targeted communities in Chicago include:
City Lands Corporation (CLC): a for-profit real estate development company engaged in multi-family housing and commercial real estate development.
• The Neighborhood Fund (TNF): a for-profit venture capital company licensed by
the U.S. Small Business Administration as a MESBIC .
• The Neighborhood Institute (TNI): a 501(c)( 3) non-profit community development
corporation engaged in labor force development (job training, job placement, educational remediation, self-employment support), cooperative, rental and ownership
low-income housing development, cultural and civic activities.
The Bank and these three affiliates operate in concert in targeted communities
in Chicago. (In 1986, Shorebank targeted a second community-Austin, on the west
side of Chicago-opening a branch of the bank and focusing CLC, TNI and TNF activities there. Austin also has good housing stock and locational advantages, but has
suffered from 20 years of disinvestment . )
The non-bank affiliates can take greater initiatives than the bank. They take the
first steps to change the market. Thus, for example, the real estate subsidiary will
initiate large scale, visible and attractive housing-rehabilitation projects requiring
more complex development and financing, generally including several layers of public subsidy. The dozens of local, entrepreneurial real estate borrowers which the
bank has cultivated can then follow wide multiple smaller scale private
rehabilitations in the same area, knowing that these investments reinforce each other's viability. Similarly, Shorebank's real estate subsidiary developed a major shopping center, attracted a major grocery anchor tenant and leases space to minority
owned businesses supported by the venture fund and/or bank; our non-profit affiliate placed several hundred residents in jobs created by the anchor tenant.
After twenty years, including a difficult start-up period and the challenging learning curve of a new type of institution, Shorebank has achieved considerable success.
Through December 31 , 1992 , ¹ Shorebank has made development investments totaling $ 351 million in its targeted Chicago neighborhoods. In 1992 alone, over $41 million was invested in Chicago development loans and other projects. As a result of
its efforts, through the end of 1991 , Shorebank had financed or leveraged the renovation of some 7,716 residential rental units in South Shore alone, almost 30 percent of all such units in the community. In both South Shore and Austin , local black
rehabbers are transforming the neighborhood, building by building. About 100 rental buildings, with 6-36 units, are improved each year. Charts reflecting annual and
cumulative development achievement are attached. Not shown in the attachments
are the non-financial community development achievements: for example, TNI manages three small business incubators; and, in 1991 , TNI placed 380 residents in private sector jobs.
Equally important, Shorebank has been financially successful. The bank performs
at levels comparable to its peer group banks, and the holding company has been
profitable in every year since 1983. As of December 31 , 1992, Shorebank assets had
reached $244 million and stockholders' equity stood at $ 17 million; South Shore
Bank assets were $229.1 million, with equity of $ 14.2 million. 1992 bank net income
was $2.2 million, constituting a 15.3 percent return on equity and a 1 percent return on assets. For the last ten years, the compounded annual growth rate in the
book value of common shares of the holding company has been 16.6 percent . Substantial additional detail is provided in the attached charts.
In the last five years, Shorebank added three additional subsidiaries and affiliates
to manage expansion activities. They are Shorebank Advisory Services, a for-profit
consulting firm providing comprehensive advisory services on community economic
development; North Coast BIDCO, a for-profit small business investment company
regulated by the State of Michigan; and NEICorp . , a 501 (c )( 3) non-profit organiza¹1992 numbers are estimated; final numbers are not yet available.

66
tion which supports small business development in the Upper Peninsula of Michigan. A current organizational chart for Shorebank is attached.
Southern Development Bancorporation in Arkansas was formed with Shorebank
assistance in 1988. It targets small towns in southern Arkansas from offices in
Arkadelphia and Pine Bluff. Its mission is to channel appropriate financial and information services to local entrepreneurs so that small town residents can build
thriving, diversified economies and be independent of the decision-making processes
of large, distant corporate headquarters (who previously moved low value-added
branch plants in and out of their towns). In 1992, Southern invested $9 million,
bringing cumulative investment to $19 million (for 74 firms, 27 farms, 79 self-employed residents, and seven real estate projects).
In addition, Shorebank assisted in structuring the recapitalization of the Douglass
Bank, a minority-owned bank in Kansas City, Kansas, and continues to assist it
through a five year advisory contract. Finally, through the Polish American Enterprise Fund, Shorebank helped create and run a small business loan program in Poland.
Shorebank Advisory Services is currently working with about a dozen credible organizations from throughout the country which are in varying stages of seriously
exploring establishment of development banks, and presumably there are many others. In every instance, particular local needs and capacities dictate an adaptation
of the institutional design. The general principles-that a flexible, private, marketdriven bank holding company committed to community development as a business,
intimately familiar with targeted local markets and achieving synergies through reinforcing affiliated non-bank activities, can contribute to restoring community economies-appear to be applicable elsewhere. Shorebank's own experience in Arkansas
and Michigan supports this.
Nevertheless, development banks are only one model, are neither necessary nor
appropriate in many communities, and are far from a panacea. Other existing models and programs, often complementary or addressing other equally important markets and needs, similarly deserve support. Such programs include community development loan funds, community credit unions, micro-lending programs, and community development corporations.
Policy and Legislative Implications
The expanding and welcome-discussions concerning community development
banking involve institutions engaged in a wide range of activities, from conventional
banks to community development corporations. As these discussions turn to legislative activity, it will be crucial to be clear about the distinct goals and markets addressed and the most appropriate mechanisms for addressing them. The goals of
community development and of expanding access to credit are complementary but
distinct. In the particular market niche of disinvested, local communities, a development bank appears to be a successful model for promoting community development
because of its ability to both successfully provide credit and proactively engage in
the additional initiatives that are required in order to succeed.
I urge you to devise ways to support the capital needs of various institutional
structures with distinctly different programs. This will avoid the risk of a broad,
shallow program which will accomplish little. Supporting an array of different types
of institutions under one umbrella will result in programs that do not work well for
any because the legislative support is not sufficiently tailored to their particular
strengths and weaknesses. If one carefully analyzes the differences between the
types of institutions, the credit products they offer and the markets they serve, it
becomes clear that reducing these issues to a least common denominator of "community lending" is counter-productive. "Community lending" encompasses a lot of different activities and institutions, all of which are important and should be supported, but which need to be supported in different ways .
The distinct categories where government opportunities are presented are:
1. Legislative and regulatory incentives directed at existing commercial banks to
achieve an increase in community lending and community development .
2. A program to facilitate start-up and expansion of community development
banks.
3. Strengthening the array of programmatic support available to any entities engaged in community development.
Existing Commercial Banks. There are 11,000 commercial banks in the country,
government regulated and funded in part by government insured deposits. The response to inner-city deterioration and rural stagnation could be led by the existing
commercial banking system. The key Federal policy action is to use the regulatory
process to offer major financial incentives in exchange for quantified and significant
levels of investment in low- and moderate-income communities. Banks do not invest

67
much in these communities today. Distressed economies need smaller loans, a local
presence, more sophisticated lenders, and partnerships with comprehensive redevelopment efforts. These realities reduce profits; this is a legitimate disincentive for
privately capitalized banks. Yet the country's 11,000 banks employ seasoned loan
underwriting talent, have proven credit mechanisms and controls, and know how to
operate within a prudent and regulated context. They have not yet been sufficiently
motivated to apply this talent to the specials business of economic development
banking.
Legislative action defines the permissible activities of these regulated depositories . Permitted activities could be orchestrated to better serve public purposes by
allowing those depositories which are most responsive to public needs to also engage
in profit making activities that are now prohibited or curtailed. Interstate banking
privileges, authorization to sell insurance, permission to underwrite securities, higher levels of deposit insurance, or other incentives could be provided to banks engaged in public purpose lending. Such privileges, however, should only be granted
to banks that meet a high hurdle of investment in low- and moderate- income communities. Clarification of the Community Reinvestment Act, particularly its enforcement system, such that it rewarded proportionately higher investment levels in lowand moderate-income communities, rather than tolerating resources spent in documentation and process, could also further these goals.
In the highly regulated banking industry, the tightening of regulations and regulatory enforcement can have a significant effect on the availability of credit . The
tension between maintaining the regulatory oversight necessary to ensure the safety
and soundness of each institution and the industry as a whole and ensuring banks
the latitude to exercise the independent judgment necessary to meet credit needs
is a delicate balance. Small business lending, in particular, has recently been negatively effected by a change in this balance . New mechanisms must be found to encourage lenders to prudently but aggressively make more loans to small businesses.
Credit enhancements, such as mechanisms to securitize small business loans, need
to be developed.
Finally, some large banks might most productively invest in low- and moderateincome communities indirectly through a business partnership with a community
development financial institution. Such partnerships might include investments in
community development organizations that include community development banks ,
community loan funds, community development credit unions and micro-credit programs. These types of partnerships should be taken into consideration in the incentive structure.
Community Development Banks. Conventional banks and community development
banks do not compete; they are natural partners. Community development banks
operate in a market niche which is generally not "bankable" except by such specialized, comprehensive institutions . In effect, they "grow" the market for conventional
banking much more than they take a " slice" of the existing " pie." The need for a
network of development banks would not be supplanted by expanded community
lending by conventional banks, but rather development banks would reduce risk for
conventional banks. A few preliminary thoughts on the proposal for Federal support
for expanding the number of community development banks follow.
Creation of a network of 100 community development banks over the next four
years can have a dramatic impact on the quality of life in disadvantaged communities across the country. In scope, this plan is very ambitious for the allotted time.
However, the creation of a large network of development banks can be achieved if
legislation is enacted during 1993 that provides Federal funding for equity investments in development banks. Community development banks need to continue as
privately-owned, regulated, financial institutions subject to the discipline of the
marketplace and the oversight of economically self-interested investors . Equity investments by the Federal Government should, therefore, be matched by equity investments from the private sector on at least a 1 to 1 basis.
Investments by Federal Government should be made and overseen by an independent agency ("Entity") that will carefully select and nurture these nascent organizations . The ultimate success of this program will, however, depend upon the extent to which local market forces rather than regulation set the direction of development banks. Development banks will fulfill their mission by responding to the marketplace, not a command and control bureaucracy.
Development banks need capital . They must also generate profits to support future growth and generate financial returns for their shareholders-including the
Federal Government. If the Federal Government is serious about creating a national
network of development banks , it must invest equity capital in these banks and expect a long term financial return on its investment . The Entity that manages this
investment activity should be independent of existing regulatory authorities and

68
apolitical. The mission, structure and management capacities of each development
bank will vary with the need of the distinct geographic area it serves. Thus, a careful, competitive, selection process must be implemented which selects institutions
with comprehensive business plans, well-qualified professional management, an experienced board or directors, appropriate structures tailored to the needs of local
communities, and demonstrated capacity for comprehensive community development
An array of institutional structures will be appropriate to particular circumstances,
including partnerships with existing community development corporations and financial institutions. Accordingly, the Entity must be afforded great discretion in its
investment decisions.
Grants, forgivable loans, and other creative financing should be made available
to support start-up, and to support the work of the non-bank, non-profit affiliates
of development banks on the cutting edge of development finance. The non-bank affiliates of existing development banks focus on human development issues and on
making "non-bankable" deals work. The non-bank affiliates will be the arena in
which community development banks interface most with traditional financial institutions in areas such as low income housing development, equity financing for small
business, workforce development, and technical assistance for entrepreneurs. Viable
affiliate organizations working in partnership with the financial subsidiary, delivering non-bank development resources, are essential to the success of the development
bank .
As a federally insured depository institution, a development bank will be highly
restricted by existing regulatory authorities. As noted above, this regulation provides a level of discipline and credibility which is crucial to success. Development
banks emphatically should not be established under a wholly new, special charter
which exempts them from the existing regulatory system. At the same time, additional Federal regulation, specific to these institutions, would unnecessarily stifle
them.
The Entity should exercise guidance particular to development banks through the
avenues available to it as a principal shareholder. First, the selection process must
be rigorous. Only organizations that card leverage Federal investments with private
capital and demonstrate capacity to manage a regulated depository as part of implementing a carefully designed, comprehensive community development program
should be considered for investment. Secondly, the Entity can guide the course of
development banks by being an active shareholder, voicing its concerns and voting
its shares. Finally, the Entity can exercise control through investment agreements
that identify specific goals for each development bank. Investment agreements
would allow the Entity to replace management or to withdraw from a development
bank in the event that the bank does not make sufficient progress in fulfilling its
development (as opposed to financial) goals. On a regular basis, the Entity itself
should be required to report to Congress on the development impact and the financial return on its investments in community development banks.
In under-invested communities, development banks are net importers of the capital needed to stimulate local markets. This happens in two ways: through equity
investments by private owners and through deposits generated outside the community. Development banks must attract these funds in the same manner and at essentially the same investment terms as conventional banks. However, development
banks are at a competitive disadvantage in competing in the national marketplace
because they are smaller and have higher costs associated with their support for development activities .
Equity investment in development banks must be made with the expectation of
the ability to recoup one's investment with a modest return. If investors do not have
this expectation, the discipline and oversight critical to success is lessened. On the
other hand, achieving community development goals is a long term undertaking
that requires patient investors that do not seek to maximize profits. Innovative
mechanisms to enhance the long term financial viability of equity investments in
development banks and to increase the liquidity of such investments would increase
the availability of private capital and lessen the need for Federal equity investment.
Similarly, conventional banks, particularly those that do not have retail lending
operations, could be significant partners with development banks. These institutions
do not have readily available, effective delivery mechanisms for meeting local credit
needs in under-invested communities. Equity investments in community development banks could expand their ability to meet their responsibilities under the Community Reinvestment Act without the requirement that they change the nature of
their business . Sanctioning and encouraging these types of investments could provide a new source of capital for development banks. Recognition of the public purpose served by banks making equity investments in development banks should not

69
replace continued emphasis on CRA enforcement and serious attention to the need
to remedy racial disparities in lending markets.
The majority of depositors in development banks seek market rate, FDIC- insured
bank deposit products. Because development banks draw from a national market
place, non-interest bearing checking accounts are not an attractive product because
of the slowness of making deposits by mail. Allowing ATM deposits across state
lines in development banks would make regular checking accounts more attractive
to a national customer base.
Many potential social investors, like pension fund, nonprofit institutions, and religious endowments, would deposit in development banks if deposit products could be
developed that meet their needs as fiduciaries to secure the highest return with the
lowest level of risk. An increase in the amount of FDIC insurance available to development bank depositors would leverage more deposits without additional cost to the
Federal Government.
The deposit base of a development bank, like that of a conventional bank, needs
to be diverse to guard against sudden outflows from a small number of depositors.
Individuals interested in a social return on their banking might be more able to deposit in development banks if the deposit products were fully competitive with those
of large conventional banks. However, development banks are not large enough to
have the economies of scale needed to offer these products at competitive rates to
large numbers of individuals. Creation of innovative tax deductions or credits for
foregone interest on below market rate deposits would open access to deposits from
individuals and corporations without jeopardizing the income stream of the development bank.
Numerous other issues need to be considered for legislation to foster large scale
replication of development banks . Appropriate training and capacity building programs will be needed, particularly to build from the strong existing base of community financial institutions.
Development banks can achieve public purposes on a profitable basis, through unusual institutional design and partnerships. The challenges of inventing an appropriate Federal role and of assuring careful implementation are considerable but, I
believe, well worth the effort.
Programmatic Support for Community Development. This third category of potential government activity encompasses a universe of existing and new programs . Particular, distinct programs could be broadly examined, enhanced, coordinated and
made available as appropriate to all institutions-from conventional banks to microloans funds which engage in community lending. Guarantee mechanisms (such as
those of SBA and FHA), secondary market mechanisms (such as FNMA and FHLB),
housing tax credits, JTPA funds, loans to revolving loan funds from the Department
of Agriculture, capital grants from HHS, and other programs are all essential “tools”
of community development. Performance based programming tailored to the distinct
types of institutions, products and markets should be expanded.
A great deal of additional attention might be productively devoted to this category. Others much more qualified that I , including many who are attending this
hearing, might be asked for suggestions.
Thank you.

70

Southern
Development
Bancorporation
Bank Holding Company

Elk Horn Bank
and Trust

Opportunity
Lands Corporation

SBA Guaranteed Loans
Agricultural Credit
Working Capital

Real Estate Development:
Commercial Space and Low
Income Housing
Arkansas
Enterprise Group
501 (c)3. Tax Exempt
Non-Profit Organization

Southern
Ventures, Inc.

Good Faith
Fund

Equity Capital, Small
Business Investment
Corporation (SBIC)

Small Loans and Services
for
Sell-Employment

Development
Finance

Management
Consulting

Market & Sales
Development

Working Capital,
Equipment Leases. Short
Term Loans

Manufacturing Accounting
Consulting, Bookkeeping.
Training

Market Research, Sales
Brokering, Network
Development

AEG Manufacturing Services (AMS)

O

50

100

150

200

250

1988

Deposits

Assets

oans
l
Ꮕ

1987

millions
$

Shore
Bank
South

1989

1990

1991

wth
Gro
n
Loa
and
sit
D
, epo
et
Ass

1992
Est
.

:
1/25/93
30120003.n08

71

250

500

750

1000

1250

1500

1750

2000

1987

TNI

CLC

Units
Housing

2:1992
activity
1991
exceed
to
Expected

TNI
-Austin

CLC
-Austin

1988

SSB

1989
Woodlawn
Chatham
-G,Arehab
South
or
uburn
resham
-f':Multi
in
amily

SSB
O
-' ther

SS
A- ust
B in

1990

Shorebank
Corporation

1991

1992
Est.2

Neighborhoods
Minority
in
Chicago

Housing
Rehabilitated
Corporation
Shorebank

A
Area
,bffiliate
&
y
Rehabbed
Units
Housing

21220
n08
1/6/9
3005
|:

72
12

50

100

150

74 75 976 977
78
19 19
1
1
19

200

250

300

350

400

millions
in

19

79

0
8
9
1

81

19

82

19

83
19

84
19

Netghborho
the
od
Institute

Lands
City
Corporation

South
Shore
Bank

85
19

Shopor
reb
ank
Cor
ati
on

19

86

87
19

88
89 90
19
19 19

92
19. st
E

351mm

Shoreban
Corporati
k
Cumulativ
on
Results
:
e
Over
$
Million
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00
Communit
in
Developm
y
ent
Investmen
Since
1974
t

Dev
Invest
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men
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tnt

12122
0007.n08
1/6/93
|:
Cum
ula
Ann
e
ualtiv
New
Chi
cag
o

73

16
61

South
Shore
Bank

City
Lands
Corp.

Chicago
Operations

The
Neighborhood
Fund

The
Neighborhood
Institute

Shorebank
Advisory
Services
S
() AS

Shorebank
Corporation

North
Coast
Bidco

NEIC
orp
.

Upper
Peninsula

Shorebank
Corporation
Organization
Chart

2122000
|:1/6/93 1.n08

74

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1987

m$illions

1988

Shore
South
Bank

1989

1990

ROAA
-O

1991

T
- ax
Pre
Income

1992
Est
.

0.00
%

%
0.25

%
0.50

%
0.75

%
1.00

1.25
%

%
1.50

%
1.75

Pre
T
Incom
- ax
e
and
Retur
n
Avera
on
ge
Assets

:
1/25/93
30120001.n08

75

0.25
0.00

0.75
0.50

1.25
1.00

1.75
1.50

2.25
2.00

R
OOAA

NI

1987

m$illions

1988

Bank
Shore
South

1989

1990

1991

1992
.Est

0.00
%

%
0.25

%
0.50

%
0.75

%
1.00

%
1.25

%
1.50

Net
Incom
e
and
Return
on
Avera
Asset
ge
s

1212200
02.n08
1/6/93
|:

76

0.00

0.25

0.50

0.75

1.00

1.25

1.50

figures
unavailable
Group
Peer
21992

1985

0.42

8.91

1986

00

129

Reports
Performance
Bank
DIC
:FPGroup
Uniform
figures
'eer

1987

0.42

077

outstanding
loans
of
Percent

South
Bank
Shore

1988

10.08

0.78

1989

10.12

0.87

1990

0
04
46
2

1991

0.67

1992
Est.2

0.
0.44
40

'
Group
Peer

South
Shore
20
Bank

Y
ears
8
Last
Group
o
7
in
f
its
Peer
Better
than
Near
or
Performs
Shore
Bank
South

Net
Group
Peer
to
Compared
Losses
Loan

121220004.n08
:1/6/93

77

0.00

0.25

1988
1989

1990

1991

1992⚫
.Est

ending
:For
months
nine
9/30/92

0.00
%

2.50
%

5.00
%

0.50

%
7.50

10.00
%

12.50
%

%
15.50

%
17.50

0.75

1987

FOF
ROE

NI

1.00

1.25

1.50

1.75

2.00

millions
$

Shopor
reb
ank
Cor
ati
on

Net
Incom
and
Returne
Equity
on

30120002.n08
:
1/25/93

78

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

NL
R
Ꮕ OAA

1987

m$illions

1988

1989

1990

Shoreb
ank
Corpor
ation

1991

1992
Est
.

0.00
%

%
0.25

%
0.50

%
0.75

1.00
%

1.25
%

1.50
%

Net
Incom
Retur
and
e
on
n
Avera
Asset
ge
s

21220003.n08
;|1/6/93

79

$

O

500

1000

1500

2000

2500

3000

3500

eleven
*:For
months
ending
11/92

b
%etween
16.6
of
rate
.1983
1992
and

Sh
or
eb
an
Corp
kn
or
at
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Share
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1983
1984
1988
1986
1990
1985
1989
1991
1987

1992⚫
.Est

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achieve
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30120004.n08
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80

81
STATEMENT OF LYNDON COMSTOCK
CHAIRMAN, COMMUNITY CAPITAL BANK
FEBRUARY 3, 1993
1. Personal Statement
Thank you for inviting me to address the Committee on the topic of community
development banking.
My name is Lyndon Comstock. I am the Chairman and Founder of Community
Capital Bank of New York City. Community Capital Bank is, as far as I know, the
only independent commercial bank ever organized in the U.S. specifically as a community development bank. Our bank is now 2 years old and has $20 million in assets.
I am also the Chairman of LEAP, Inc. LEAP is a nonprofit venture development
organization with its office at Community Capital Bank. LEAP provides intensive
management assistance, including help in sourcing risk capital, to small businesses
in low income areas.

2. Community Development Financial Institutions
At the outset, I'd like to note that community development banks are only one
of the categories of community development financial institutions, or CDFI's. I include as CDFI's, along with community development banks, community development credit unions, community development loan funds, microenterprise funds , and
venture development organizations . While there are only three independent commercial banks that explicitly specialize in community development lending, there
are a total of more than 300 CDFI's at present. I recommend that any Federal support encompass all of the various categories of CDFI's, inclusive of the rural and
reservation -based CDFI's, as well as the urban. Assisting in the expansion of existing institutions, and not just the creation of new CDFI's, is particularly important.
Our bank is a member of a recently formed ad hoc coalition of community development financial institutions, which advocates Federal support for building the capacity of the CDFI industry. Í understand that you have been provided with a copy of
the coalition's position paper, "Principles of Community Development Lending and
Proposals for Key Federal Support."
Each type of CDFI has done a highly effective job of supporting community development, especially so considering our limited resources. We are professionally managed, private sector organizations that have been created and operate with little or
no Government assistance. The capacity of each type of CDFI could be significantly
increased, however, with appropriate Federal support.
3. Need for Community Development Lending
The largest pool of investment capital in the U.S., and the most important to the
financing of businesses, housing, and consumer credit, is the several trillion dollars
within the banking system. What proportion of total bank lending goes to low- and
moderate-income individuals, their housing, or the businesses in their communities?
I estimate no more than 1 percent. Yet more than half of the people of our country
have low- or moderate-income.
Half of the population, yet perhaps as little as 1 percent of the bank loans. This
situation could be fairly called "capital starvation" for the low- and moderate-income
communities which suffer from it."
CDFI's represent a useful starting point for increasing our Nation's investment
in the development of low- and moderate-income communities . CDFI's make virtually all of their loans in low- and moderate-areas, yet, as an industry, have had
little problem with loan losses to date. CDFI's have proven their ability to provide
the critical first wave of investment and project development in economically devastated neighborhoods, and to do so for the benefit of the existing residents, not
their displacement. And CDFI's do this work at their own choosing, without regulatory pressure and elaborate negotiations .
4. Expanding the Capacity of CDFT's
As part of an overall national strategy of dramatically increasing investment in
low- and moderate-income communities, I urge the Federal Government to help promote a major expansion in the capacity of the CDFI industry by the end of the century.
There are three principal factors needed to make a major expansion of the CDFI
industry possible. First is equity capital. Hundreds of millions of dollars in equity
capital will be needed by the CDFI industry over the coming years to make possible
the degree of expansion of CDFI's which the Clinton administration has called for.
Because the capital markets for social investment capital are only beginning to take

82
shape, a high level of Government participation will be needed to help induce adequate private sector investment.
Second, a large amount of technical assistance is needed in order to help create
the needed flow of new community development projects. High quality technical assistance is critical to the success of new community development projects, yet it is
inherently unlikely to be self-funding. Additionally, technical assistance is needed
for new or emerging CDFI's.
Third, professional training programs will need to be created to help provide the
staffing for a major expansion of the CDFI industry. Conventional financial experience is an excellent starting point, but I believe ČDFI loan officers and technical
assistance providers need a specific background in community development-related
projects.
Since "community development financial institution" isn't a term defined by statute or regulation, minimum eligibility requirements need to be established for any
Federal CDFI support program. I suggest two key criteria. The applicant institution
should have an explicit, formally adopted, primary mission of supporting community
economic development, which ought to be appropriately evidenced.
Further, the CDFI's loans or investments must be principally directed to the support of community development once the Federal support has been utilized. I suggest that be defined as: at least two-thirds of the loans or investments of the CDFI
must support affordable housing, small businesses , or social services in low- or moderate-income areas, or provide credit to individuals of low- or moderate-income . It
should be the CDFI's responsibility to make an affirmative showing that its lending
or investment practices meet this definition if it wishes to receive Federal support.
New CDFI's, whether startups or conversions of existing institutions to CDFI status, will not have had the opportunity to prove their community development orientation, Those new CDFI's should therefore be required to submit a detailed business plan which supports this intended lending or investment posture.
5. Community Reinvestment Act
Within the context of this discussion of CDFI's, I have two comments I'd like to
make about the Community Reinvestment Act. First, I believe that all of my colleagues in the CDFI industry agree that any Federal support for CDFI's should not
cause any weakening of the CRA. We support full CRA enforcement.
Also, it's entirely unrealistic, in my opinion, to think that the CRA will cause
widespread bank support for CDFI's, which could therefore substitute for Federal
support. Banks already generally receive CRA credit for investing in CDFI's, but
have only chosen to do so in relatively small amounts . Most of that investment has
been deposits or their equivalent, rather than the equity investment and technical
assistance grants which are needed for the expansion of the CDFI industry. I hope
there will be more investment in CDFI's by banks, but Federal support is needed
if there is to be any significant step-up in the rate of CDFI formation and expansion.
6. Community Capital Bank
Turning to the CDFI's that I've founded, Community Capital Bank is a New York
State chartered, FDIC insured commercial bank . Our Bank has made or committed
more than $7 million in loans and letters of credit so far, all of which are community development related . Approximately $3 million of this total is directed to multiunit affordable housing, while the other $4 million supports small businesses and
nonprofits in low- and moderate -income areas of New York City. Examples of these
small business loans include minority contractors , nursing homes for AIDS victims,
and a Ben and Jerry's franchise in Harlem employing homeless men.
I'm happy to tell you that Community Capital Bank does not have a single
nonperforming or delinquent loan so far.
Community Capital Bank was initially capitalized at $6 million, which we raised
from socially concerned institutional and individual investors in a limited public offering. Approximately one-third of our capital is from a wide variety of religious organizations, one-third is from other institutions including banks, corporations, foundations and labor unions , and one -third is from 190 individuals .
I know from personal experience that raising this amount and type of capital for
a new organization is extremely difficult. In our case, it took about one person -year
of professional staff time per million dollars raised , not to mention the help of numerous unpaid supporters . The problem of raising equity capital is the single most
important reason that there are so few community development banks today.
Community Capital Bank has received no Government subsidies of any type to
date. We've received a $ 100,000 CD at a market rate from the New York City Comptroller's office, but the rest of our $ 15 million in deposits comes from some 800 pri-

83
vate institutions and individuals. We do make active use of Government credit enhancement programs, especially the SBA loan guarantee program.
Because our bank is unsubsidized and needs to support itself financially, we must
operate efficiently. We are running an entire $20 million bank with eight people,
about to increase to ten. Our people are talented professionals, and all except our
secretary have previous banking experience. Our President and CEO, Stephen
Laine, has almost 30 years in banking. Our V.P. Real Estate, Gina Bolden, has an
extensive background in affordable housing lending.
Since our loans are entirely commercial loans requiring individual crafting, they
are quite labor intensive. We have been able to compensate for this by being extremely efficient on the operations and deposit gathering sides of the bank. Much
of our deposit support comes from socially concerned investors, which has allowed
us to construct a stable deposit portfolio efficiently and at reasonable cost.
7. Competition
Our bank makes small commercial loans-from $25,000 up to $450,000, or to
$750,000 with an SBA guarantee. Let me sum up for you the competition in that
market in lower income areas of New York City. We have had only two deals where
we were truly in competition with another bank. We haven't lost any of our existing
loans to another bank. And we haven't taken a loan from another bank that was
anxious to keep that loan.
8. LEAP, Inc.
I would also like to briefly describe LEAP, Inc. to you. LEAP started out of a recognition that a commercial bank can't provide risk capital, meaning equity or seed
capital. A bank also has significant problems providing intensive technical assistance, partly for legal reasons. LEAP is a nonprofit which fulfills these needs for
small businesses that have a high community development potential, especially as
to job creation. I refer to LEAP and similar organizations as venture development
organizations.
LEAP does not have its own pool of capital. Instead, we use our knowledge of
foundations and other socially concerned investors to help access capital for these
small businesses.
LEAP focuses on two particular industries at present-food processing and primary health care. Our current clients include an effort by a group of laid-off bakery
workers to start their own employee-owned commercial bakery. Another client is a
group of Caribbean-American doctors who hope to start a Medicaid managed care
program in central Brooklyn.
Because we receive so many requests for information about community development banking, LEAP has also become involved in providing technical support to
some other community development banking efforts.
9. Federal Government Support
I hope that your investigation of community development financial institutions
will lead you to the same conclusion I reached some years ago: CDFI's are a highly
effective, private sector means for channeling capital into community development .
Federal Government support could greatly boost the capacity of the existing CDFI
infrastructure. This support should target both existing CDFI's, to enable them to
increase their scope of activity, and the creation of new CDFI's. A relatively small
amount of Government support for the expansion of this industry could ultimately
have a dramatic effect on community development, especially because of the inherent leverage of equity capital by CDFT's.
To give you a feel for the dollars needed, a new community development bank
should aim for $5 million to $8 million in initial equity capital . This will enable the
bank to reach approximately $40 million to $60 million in total assets within a few
years . If Federal equity investment were provided on a 1 :2 match, the Federal investment would therefore be $2 million to $3 million per bank. For other types of
CDFI's, the initial investment per institution will usually be significantly less.
The creation of fifteen or twenty de novo (startup) community development banks
over the next few years would be a major accomplishment, and could be achieved
with appropriate Federal support.
In this context, I'd like to note that seed capital is very difficult to obtain for startup CDFI's. The cost of organizing a new bank can be estimated as up to 15 percent
of the initial capitalization. For a $6 million capital bank, this leads to an estimate
of as much as $900,000 in organizing costs. Federal grants for half this amount
could greatly accelerate the formation of new community development banks and
other CDFI's.
The incentive of Federal equity capital could help lead some existing banks to become community development banks, which would also expand the network of

84
CDFI's. And the existing network of CDFI's could significantly expand its asset base
with the benefit from Federal equity investment of some tens of millions of dollars,
again utilizing a 1:2 match.
Any Federal equity investments must be nonvoting. In the case of community development banks, I recommend twenty-five year preferred stock investments with
a noncumulative dividend in the 2 percent-3 percent range. In that case, it will be
important that Congress provide a directive to banking regulators that these investments be counted as the equivalent of perpetual preferred stock (Tier 1 ) core capital
until the final five years of their term. For the remaining term, I suggest the investments should be considered the equivalent of intermediate-term preferred stock
(Tier 2) supplementary capital .
All community development financial institutions, new or previously existing,
which receive Federal equity investment should be required to provide annual compliance information as to their support for community development until that investment has been retired. Immediate repayment of the equity investment should
be required for noncompliance.
10. Technical Assistance to New CDFI's
Specialized technical assistance for new and emerging CDFI's is needed. For example, for each new community development bank to attempt to duplicate the learning process needed for a successful equity underwriting effort, including knowledge
of the national network of social investors, is impossibly laborious. Yet there are no
investment banking firms at present which assist in this type of socially directed
underwriting for CDFI's.
The organizing process for a CDFI, especially a community development bank is
complex, difficult, and not widely understood. I refer now not just to the regulatory
approvals needed, although that is certainly a significant part of the bank organizing process, but to the actual creation of a substantially sized and, in some CDFI
categories, highly regulated business . Appropriate business planning, board member
recruitment, and management recruitment are the most critical issues, along with
regulatory approval and capital raising.
A highly particular type of technical assistance, rooted in both the finance and
the community development issues of a CDFI, is needed to help launch new CDFI's .
Federal support to assist with the organizing process for new CDFI's could best be
provided by grants or contracts to help pay for the cost of appropriate technical assistance from specialized providers.
The availability of the qualified management needed for an expanding number of
CDFI's is likely to be problematic for the foreseeable future. For example, with community development banks, it will be a prerequisite to recruit experienced bank officers for the more senior positions, presumably from community sized banks where
they will have had exposure to the types of issues and breadth of responsibilities
faced by management of a small bank. In my opinion, the pool of senior officers of
small banks who will have both the capacity to succeed in managing a bank focused
on low-income communities, and the desire to take such a job, will be rather limited.
The only obvious answer to this problem is to train more bank officers who combine the experience and qualifications to manage a bank with the skills and interest
to manage a bank that is specifically focused on community development. That,
however, could become a very long-term project if the process isn't actively assisted.
11. Legislation
Finally, it's important that any legislation supporting CDFI's be flexibly structured. This is a young and growing industry, whose needs are evolving. A responsive
administrator of Federal support is equally important, so that the process doesn't
become so time-consuming as to be effectively useless, especially for newly forming
CDFI's. I urge that strong input from CDFI practitioners be incorporated into the
administration of any Federal support to CDFI's . The best vehicle for accomplishing
these administrative purposes may well be a quasi-independent corporation .
I appreciate the opportunity you've given me to express my views on community
development banking. I will provide you with one page summary descriptions of
Community Capital Bank and LEAP, Inc. are attached for your review.
Thank you .
COMMUNITY CAPITAL BANK-SUMMARY DESCRIPTION
Status
• New York State chartered, FDIC insured commercial bank .
• Two years old.
• Third commercial bank in the U.S. with an explicit community development focus.

85
• First de novo community development commercial bank.
• All loans to date support multi-unit affordable housing, small businesses, or nonprofits in low- and moderate-income neighborhoods of New York City.
• Full assortment of deposit products at market rates, plus CIRRUS ATM cards,
FEDWIRE, and ACH.
Financials
$20 million in assets at 12/31/92.
$7 million in loans and letters of credit committed, all community developmentrelated, to 30 borrowers.
• No delinquent or nonperforming loans so far.
• $ 15 million in deposits from 800 depositors in 25 states.
• 60 percent of deposits from institutions, 40 percent from individuals.
$2 million assets/employee exceeds industry average for operating efficiency.
Capitalization
• $6 million initial equity capital from 250 shareholders.
One-third of capital from 30 religious organizations.
One-third of capital from 30 corporations, banks, foundations, and labor unions
• One-third of capital from 190 individuals .
Loans
• All commercial loans to date.
Loans for working capital, construction, permanent mortgage, and equipment ,
plus standby letters of credit.
• Examples of borrowers including nursing homes for AIDS patients, housing rehab
in Brooklyn, minority contractors, minority owned Ben & Jerry's franchise, knitwear manufacturer, small apartment buildings, and hardware stores.
• Government credit enhancement programs are used, especially SBA loan guarantees.
Staff
• Eight employees, increasing to ten in early 1993.
• All employees but one have previous banking experience.
• President and CEO Stephen Laine has almost 30 years of experience in small
banks.
• Chairman Lyndon Comstock (part-time) has both community development and
banking background. He is also Chairman of LEAP, Inc. , a nonprofit venture development organization with its office at Community Capital Bank.
Mission
The purpose of LEAP, Inc. is to help businesses that benefit low- and moderateincome communities in New York City. LEAP is particularly interested in assisting
businesses that provide decent jobs for residents of these communities . LEAP is
known as a community development venture sponsorship organization .
Services
To support the creation or expansion of for-profit or nonprofit ventures, LEAP provides a range of services chat combine elements of investment banking, venture capital raising, and management consulting. LEAP assists management in:
• Raising capital-e.g. grants, equity, senior and subordinated debt-for a variety
of purposes including seed capital, working capital, and funding of fixed assets.
• Key development tasks-e.g. management recruitment, business planning, test
marketing, site selection, and access to professional services.
• Strengthening finance, marketing, and public relations, including use of specialized consultants or peer contacts.
Clients
LEAP's current clients are food production and primary health care companies as
well as microenterprise funds. LEAP works intensively with a small group of clients
over an extended time frame. Client selection is not based on ability to pay.
Staff
Lyndon Comstock, Chairman . Jonathan Glazer, Project Director . Vivian Hunt,
Project Director. Earl DePass, Project Associate. Brenda Lauchart, Secretary.
Board of Directors
Lyndon Comstock, Chairman, Community Capital Bank/LEAP Inc. Beverly
Brown, Program staffs Joyce Mertz-Gilmore Foundation. Carl Ferenbach, General
Partner, Berkshire Partners. John Guffey, Chairman , Calvert Social Investment

86
Foundation. Oliver Wesson, President, Morgan Community Development Corporation.
LEAP's office is located within the office of Community Capital Bank in downtown
Brooklyn. LEAP is a tax-exempt nonprofit corporation under IRS section 501(c)
( 3).
STEVE W. LOPEZ, PRESIDENT/CEO, THE FUND TO ORGANIZE
THE SOUTHSIDE BANK
WHY THE NEED EXISTS IN DISTRESSED NEIGHBORHOODS TO IMPROVE
ACCESS TO CREDIT
Although African Americans, Hispanics, etc. comprise a substantial segment of
inner-city residents in the United States, they continue to live outside the beltway
of the capitalistic system: To participate fully in the capitalistic system, one must
have access to capital, for without capital one cannot participate in the capital structure or equity base of the United States. According to Jack Kemp in a recent testimony to the Senate Finance Committee on Enterprise Zones, he stated that African
Americans owned less than 12 percent of the equity of the United States, even
though we are 13 percent of its population .
At a time, when the U.S. needs to grow its economic base, it cannot afford to continue to ignore a major segment of its market. The African American community
(32 million strong) that earned $ 300 billion in 1991. The African American community that accounted for 10 percent of domestic automobiles purchased in the U.S.
(Chryslers share of the U.S. Market is 10 percent). If African Americans were to
be spun-off as a Nation based on income earned, it'd be the 9th richest country in
the world. The $300 billion figure compares to the amount ($300 billion), as per
Ross Perot, the U.S. spent for the same period defending NATO . The African American market is substantive, and should not be ignored by American Corporations,
when they are seeking an increase in market shares. If the U.S. can use its resources to teach the Russians and Eastern Europe how to be capitalists, it should
also teach African American citizens how to be capitalists. It is in the national interest of the U.S. to do so.
Today, U.S. corporations go abroad to find cheap labor to increase their market
shares at the expense of urban and rural America. There appears to be this sense
in the Nation, that urban areas or powerless segments of the country can be ignored. It is not being realized, that as the urban centers deteriorate, so will the suburbs. It is only a matter of time, when there will not be a hiding place for anyone.
Presently cities, counties, townships , etc. are pitying their citizens vs. one another
because of a shrinking tax base, reduced revenue sharing from the Federal Government, and due to an idle workforce , that looks to the state for some type of "non
productive entitlement. ” What happens then (as is now) when states and cities have
no one else to tax? What happens when the tax base cannot support the debt capacity of tide local or state Government? How can one help to stem the tide?
Ethnic balkanization becomes more prevalent, local schools and law enforcement
agencies become overloaded and we then start to invest our local resources in nonproductive prisons. One way of growing the economy to help expand the tax base
is by doing the following:
A. Making it possible for "qualified entrepreneurial borrowers" in the inner
cities to have access to "sufficient credit" to make a "feasible project" operate so
it can in turn create jobs and hire neighborhood residents. Too often "inadequate
loans" are made to selected "incompetent minorities, " so the system can have Pygmalion statistics in the negative to justify benign neglect.
B. Duplication of Southshore type banks in the inner cities and rural areas to
provide "viable Ventures" in distressed area's access to capital, so they can remain
as going concerns . Too often, commercial banks, savings and thrifts will accept
cheap deposits from inner-city residents, but will invariably refuse to loan it to
them due to perceived "higher risk problems. " For example, in Grand Rapids,
where Southside Bank is in formation, the inner-city is populated by 85,000 citizens, 35,000 of which are African Americans; in 1989 the commercial banks' savings and thrifts garnered $508 million in deposits, but made only 1 percent of the
amount in loans to the area:
(1) Experienced business persons even with signed City or State contracts
could not get loans.
(2) Skilled persons purchased businesses commensurate with their expertise
and cannot obtain working capital loans.
(3) Professionals such as dentists, doctors, lawyers, teachers, etc. have a difficult time getting a loan approved and gave up.

87
(4) African Americans and Hispanics depositors have a difficult time getting
a loan approved even when their savings exceeds the amount requested to be
borrowed.
(5) Residents have a tough time getting a conventional mortgage or a home
improvement loan.
(6) African American and Hispanic contractors and developers cannot obtain
financing for their projects.
On the basis of the above, African American business persons have a difficult time
becoming job creators, or employers and be in a position to hire other minorities.
Complicating the situation further, are the following circumstances:
The tendency of African Americans to boycott themselves- not doing business
with one another-for example; in 1989, African Americans in Grand Rapids earned
$208 million but spent most of it outside the community-contributing further to
non-job creation-confirming the notion, that African Americans have always been
on the consumer side of the equation as opposed to the supply side. Mark Green,
Commissioner of Consumer Affairs for New York commissioned a study on the
spending habits of African Americans and Hispanics in New York compared to the
Asian community. The results were interesting:
1. For each $ the Asian person brought to his community, it turned over 16 times
before it left. Why? The Asians own their own banks, factories, real estate, stores,
restaurants, etc. They provide jobs for one another.
2. In the "African American community” and the "Hispanic community," it had the
"rubber effect." As soon as the $ came in, it bounced back out-African Americans
own very little land and tools of production. Going back to the Middle Ages, the
power brokers and decision makers were the landowners, the churches, and the
class that produced goods and services.
3. Us African Americans still do not understand the meaning of the word "Freedom. " Our concept ofFreedom is still confined to Civil Rights. We still don't get itthat the color of freedom is "green money"—not which end of the Bus we ride onnot what names people call us-but what we own, what we manufacture-if we own
the Bus, it does not matter which end we ride on-if we own the "Hotel" and the
clerks call us names we can reprimand or fire them.
4. The Corporate Network views the African-Hispanic American people strictly as
consumers-a place where they send delivery trucks to sell their products. There is
no reciprocity-for example, investing in the people or businesses that are in the
area. Unfortunately, the African American is not as sophisticated as the Jewish
American to retaliate by doing "selective buying." In the Jewish Community anyone
that is inimical to the Jewish people or the State of Israel is boycotted.
5. The African American community does not benefit from the community reinvestment act for the following reasons:
A. Weak reviews or audits by pertinent Government regulators of Banks and
their compliance with C.R.A.
B. The corporate citizens are provided with safety valves through community
organizations such as local NAACP, Urban League, some churches, etc. to underwrite annual dinners, little league teams, etc. Investment into meaningful or substantive projects that would provide meaningful jobs, so a person can support a
family are not undertaken. The corporate citizen fills his C.R.A. Portfolio with
these meaningless public relations activities, in addition to writing it off as a tax
deduction. The persons in whose name this was done are no better off for it.
C. Most African American community members do not understand the C.R.A.—
much less monitor it. The banking community has found ways of circumventing
the C.R.A. through mere public relations.
D. The African Americans have abdicated themselves to "helplessness" and "confusion." We are going to need competitive assistance to start turning things
around.
BARRIERS ENCOUNTERED IN THE FORMATION OF COMMUNITY BANKS
A. Established law firms and consulting firms cannot be obtained for Chartering
and writing of the Offering Circular due to prohibitive fecs. Established law firms
have expertise and networks that the "Entity in Formation" cannot benefit from, unless it has a Godfather to pay for it.
B. The utilization of affordable lawyers delays the process for the following reasons:
(1) Lack of expertise in the Chartering of new or De Novo Banks.
(2) Lack of sufficient business and banking experience on the prospective banks
Board (Southside Bank was initiated by community activists) .

88
(3) Understanding of the distinction between a social agency and a “for profit”
venture .
C. Typically the offering is small and not attractive to Brokerage houses for marketing. The stock has to be marketed by the Executive and Board members who are
hampered by the following:
(1) Limited advertising resources.
(2) Educating members of the community who would be the beneficiaries of the
banking services.
(3) Board members invariably have full-time jobs and do not have much time
to devote to stock sale. Consequently, stock sale falls squarely on the shoulder of
the Executive.
D. The time period of one year for capitalization is too short-in minority communities, it should be for 2-3 years. I would strongly recommend that the Banking
laws be amended.
E. Lack of cooperation and concern on the part of some of the following:
(1) Most members of the local financial community who typically benefits from
tax abatements, etc.
(2) Most members of the religious community.
(3) Middle class minorities (African and Hispanics).
(4) Municipalities and agencies.
F. Lack of sufficient financial resources (such as a credit line) to weather the
swings in stock sale. Only the fees from stock sale can be used for administrative
purposes.
G. Bankers manage "risk" to make a maximum return. Unfortunately, the "perception" is that, that "risk" cannot be in an African-Hispanic atmosphere.
TESTIMONY OF EDWARD H. MCNAMARA, WAYNE COUNTY EXECUTIVE

FEBRUARY 1, 1993
Honorable Chairman and Members of the Committee: I would like to explain why
Wayne County has chosen to establish a community development bank as part of
its revitalization strategy. In addition, I will discuss the challenge faced in Wayne
County's older communities and suggest ways in which the Federal Government can
support emerging development banks such as the one we hope to establish.
In other testimony given today and at previous hearings, you have heard representatives of Shorebank Corporation discuss their work with organizations
throughout the country who are exploring the establishment of development banks.
The Wayne County Department of Jobs and Economic Development is one of those
organizations. We have been working with Shorebank Advisory Services for nearly
two years to develop a business plan for a development bank based on the
Shorebank model. I hope to convey to you today Wayne County's vital interest in
forming a development bank.
I. WHY WAYNE COUNTY HAS CHOSEN A DEVELOPMENT BANK
As part of its economic development strategy for the older neighborhoods within
and surrounding the city of Detroit, Wayne County has chosen to pursue a development bank holding company. The important characteristics of a community development bank include:
• Combining a bank with entrepreneurial, non-bank affiliates and provides coordinated, comprehensive interventions for community development, not just the provision of credit.
• Leveraging private sector resources and capital by accepting deposits and turning
them into development credit.
• Targeting credit, capital, and market information into a geographically defined
area to shift perceptions of both residents and outside capital.
• Delivering a wide array of private and public sector resources into disinvested
communities by blending foundation capital, credit enhancements, tax credits, and
other existing programs in innovative ways;
• Conveying a symbolic legitimacy and authority, which can convince residents of
its commitment and confidence in the community and encouraging them to invest
their savings, time, and effort in their neighborhood.
With its detailed knowledge of the community and the ability to tap multiple tools
and resources, a development bank is an entrepreneurial and capable partner to
Government's standard array of incentives and resources .
The challenges facing the older communities of Wayne County are similar to those
facing disinvested communities in other American cities . In response to the glaring
need in our own communities, Detroit's major banking institutions have committed

89
more than $1.6 billion dollars for investment in Wayne County's older communities.
Our markets have nearly ceased to function, however, and very little of these committed funds have been disbursed. The gap between bankable transactions and the
reality of these real estate markets has grown too wide.
Three Major Problems
We have three major problems: non-functioning real estate markets; minimal job
creation through business development; and deteriorated social fabric. Each of these
is addressed by one or more of the operating units of our proposed development
bank: a for-profit real estate developer, a full-service commercial bank; and a nonprofit affiliate engaged in housing assistance, small business support services, and
non-bank business credit.
First, real estate markets have essentially ceased to function in these communities due to the sustained lack of activity. In 1989, only one mortgage loan was
made per 446 housing units in Highland Park, compared to 5 or 6 mortgages made
per 100 units in healthy markets. Only 300 mortgages were made in 1989 in an
area of 140,000 persons. The perceptions of crime, violence, and the poor future of
these communities has inhibited new investment in homes and businesses by those
inside and outside the neighborhoods. While the areas of Highland Park, Hamtramck, and the outer edges of the East Side of Detroit are characterized by low
levels of lending and investment, the housing stock in these areas is very affordable
and is a strong base on which to build.
To create visible change on a scale that shifts the perceptions of residents from
decay to opportunity, the real estate developer will need to change the microclimate
within individual neighborhoods. This can change occurs by undertaking large scale,
top-down rehabilitation and new construction projects that have a visible and dramatic impact on the neighborhood. Like any other for-profit development company,
the developer will combine an array of Federal, state, and private resources, including collaboration with the Michigan Housing Development Authority and use of the
Low Income Housing Tax Credit. By carefully choosing the locations of such
projects, the developer can achieve a critical mass of renovation and visible change.
Shorebank's experience in Chicago has been that when a critical mass of development activity is achieved, a group of housing entrepreneurs emerged and began acting in their own self-interest to approach the bank for the financing to purchase and
rehab nearby, smaller scale properties.
Although the markets in Wayne County are different from those in Chicago, the
following fundamental principle still applies: the creation of attractive housing can
change the expectations of local residents and encourage them to invest their savings, time, and energy in the community and in home ownership.
Second, job creation through the growth of small, entrepreneurial firms has been
minimal compared to the volume of jobs lost in manufacturing and industry. The
population of these communities has declined by half since the 1950's, with much
of that loss occurring in the last decade. This dramatic population drop has limited
the number of service and franchise firms in these areas, two sectors which have
been a source of job growth in other markets. The availability of ( 1) commercial
loans through the bank, along with aggressive use of SBA-guarantees and other
credit enhancements, and (2) business support services and non-bank risk capital
through the non-profit affiliate will provide a continuum of support for expanding
small businesses. These business support services will focus on marketing, new
product development, and financial management, complementing the more general
technical assistance resources already in place in the Detroit area.
Third, the social fabric in these communities has been deteriorating over time and
must be restrengthened. The non-profit's housing assistance activities will include
block clubs, community safety, and events to sponsor neighborhood pride. These
neighborhood-based activities help restore the bonds among neighbors, reestablish
communication networks, and help the restoration of social fabric.
Selection ofTarget Areas is Key
A development bank serving these communities will not have an easy task.
Changing both reality and perceptions (such as deep-seated pessimism about the future of these communities) will take time and persistent effort. To be profitable and
self-sustaining, a development bank will have to select its niche markets very carefully and husband its capital prudently by concentrating its activities in small
neighborhoods until they are stabilized and from there, branch outward. Encouraging investment rather than disinvestment is critical to achieving change, but very
difficult to accomplish.
Selecting a target area is the hardest step in designing a development finance institution. The location of a development bank dictates its design, the organizational

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structure, the strategies, and the tools it employs. Although the principles of development banking are transferable, a development institution must reflect and build
upon its local context. For example, our targeted communities in Wayne County
have an abundance of low-cost real estate that makes home ownership possible for
households earning less than $20,000 per year. Focus groups indicated that some
demand exists for housing within certain sub areas within the target communities.
The housing stock is attractive, the cost of land and buildings is low, and rehab expenses are minimal.
In Wayne County, the primary strategy will be to target specific opportunities in
housing development within the proposed target communities of Hamtramck, Highland Park, and portions of the East Side of Detroit . In choosing the target areas,
management must balance the need for the bank to maintain its profitability with
the opportunity to undertake large scale, non-bank development projects in areas
of need. Certain parts of these communities have experienced such prolonged and
severe disinvestment that they cannot support a self-sustaining development bank.
II. WHY A DEVelopment Bank COMPLEMENTS CONVENTIONAL Lending
A comparison with the purposes of conventional banks may help clarify the
unique properties of a development bank for community investment. As discussed
above, development banks bring much more than credit to the task of community
revitalization. There are several reasons why conventional banks should not be expected to do the same.
1. Community development lending is not their primary mission. Development
banks have a specialized mission, structure, management team, and operating plan
that all focus on restoring healthy market forces that transform underinvested communities. These institutions evaluate their performance on both financial return
and development outputs. If only one of the two goals is met, management has
failed to walk the tightrope. In contrast, conventional lenders have a clear primary
obligation to generate a financial return to their shareholders. Community development lending is a sideline that is not part of their core business .
2. Conventional banks do not engage in demand-generating, non - bank activities
that compliment the provision of credit. Through its non-bank activities, a development bank provides support to individuals to narrow the gap between the bank
product and what the market needs. If the market needs educating about how to
use the product, or how to prepare for eligibility, the non- profit can answer their
questions. If the market needs assurance that the community is improving and an
investment in a home makes sense, the actions of the real estate developer can send
them a signal .
3. There are legitimate disincentives for conventional lenders. Distressed economies
need smaller loans, a detailed knowledge of local market conditions, and sophisticated lenders who can judge the intent and ability of a borrower to repay. All of
these increase the costs of making these loans . They reduce profits and are therefore
less attractive to bank management than lending in more familiar and more profitable markets.
4. Consolidation and heightened competition among banks have desensitized them
to the credit needs of local communities. As industry consolidation has created regional institutions and bank mergers, credit policy decisions are now made in a
downtown office and applied in a uniform way to all branches regardless of their
local market . The pressure to achieve economies of scale and reduce costs focuses
management decisions on uniformity, high volume, and efficiency of loan approvals
and administration . Although Detroit has some of the best-capitalized banking institutions in the country, recent mergers and consolidations have greatly reduced the
number of small banks serving the city and its adjacent communities .
5. The shift to uniformity has constrained character lending within larger institutions, as credit decisions are made on the basis offinancial ratios and collateral values. This trend is exacerbated by the regulators who are scrutinizing portfolios for
signs of " poor" credit decisions . Banks tend to be product-driven, but when they
offer a new first-time homebuyer product and there is minimal demand, their market expectation is confirmed.
The economic challenges facing the older Wayne County communities will require
some "heavy-lifting." A development bank will need to work together with conventional banks and private sector leadership. The activities of development banks and
conventional lenders are complementary . Development banks nurture and cultivate
demand for credit where none existed previously. As the volume of transactions increases and conventional lenders become more familiar with a new market, they can
begin to compete with the development lender. From this vantage point, it appears
as if Shorebank has kept shifting its niche in response to the changing conditions .
The bankers with whom we have met to discuss the development bank for Wayne

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County concur that development banking is a niche business. Since we began discussing the business plan with individuals from the private sector, we have received
several telephone calls from individual bankers expressing their support for the creation of a new type of financial intermediary.
III. THE ROLE OF GOVERNMENT
As Government, we at Wayne County have had to recognize our limits in the creation and operation of a development bank. Wayne County considers itself to be the
convener, bringing the Shorebank model to Wayne County and convincing private
sector actors of its merit as an additional tool in the economic development arsenal.
Our lessons from the experience of Shorebank include:
• The most effective economic development institutions are market-driven and accountable to the customers and markets they serve.
• There must be a professional management team with a single focus on renewing
the underinvested communities in which it works.
• An apolitical institution maintains continuity despite changing administrations
and keeps its credit judgment separate from any political influence.
• A development bank is unique in its ability to combine and deliver a wide range
of public and private sector resources to disinvested communities.
This last point merits some discussion. Too much effort in turning around urban
America has focused on the demands of the political cycle and on programs designed
to meet isolated needs rather than to coordinate a response to interrelated problems . Economic development programs tend to be fragmented, run by separate Government agencies, and often with incentives for shallow, short-term investments
that fail to cumulate into lasting change. With rare exceptions, there are few institutions in place to drive a long- term development agenda for neighborhoods. These
communities have fallen into this disinvested condition over three decades; it will
take a sustained, long-term investment to reverse it.
Specific Recommendations
It appears that Shorebank has achieved a great deal with few special privileges
and with long-term, patient capital. If experience is any guide, perhaps the Committee should keep in mind 4 or 5 guiding principles as it drafts this legislation:
• First, do no harm. The fundamental premise of a development bank as an entrepreneurial, adaptive, organization able to tap multiple resources and deliver them
to disinvested communities must be preserved. Government assistance should
take care not to blunt the market-driven approach, its entrepreneurial use of resources, or its ability to define niche markets that evolve over time.
• A separate regulatory structure for development banks sounds suspiciously like
the spread of unnecessary bureaucracy. The standards for operation should remain as high as those for other banks.
• Matching Government funds for private capital commitments will allow these institutions to build a sound capital base, a constraint that has limited the creation
of new development banks. Such matching commitments should be no more than
1:1 and public funds should not exceed more than 49 percent of total bank capital.
Subsequent requests for additional capital should be based on performance of the
recipient.
• Grant funds to the non-profit affiliate could also match private sector commitments.
• The organizational and legal costs for a development bank are significant, as are
the costs of preparing management and preparing fund raising materials. Grant
funds to finance these startup costs for individual development banks might be
committed up front, yet disbursed in increments based on achievement of "milestones."
• There should be some funding for the development of a support system for emerging development banks, such as partial funding for a training institute or internships for management existing development banks, or other forms of management
and staff development.
In conclusion, this country has established public purpose, permanently capitalized, professionally managed institutions to carry out activities important to society.
Museums, hospitals, and universities are all examples. Perhaps it is time to create
similar institutions for urban neighborhoods .

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TESTIMONY OF PAULINE NUÑEZ-MORALES, EXECUTIVE DIRECTOR,
THE NEW MEXICO COMMUNITY DEVELOPMENT LOAN FUND

FEBRUARY 3, 1993
Thank you, Mr. Chairman, and members of the Senate Banking Committee. My
name is Pauline Nuñez-Morales and I am the Executive Director of the New Mexico
Community Development Loan Fund, a statewide organization. Today I am representing my own organization and the National Association of Community Development Loan Funds (ÑACDLF), an association representing 41 community development loan funds.
NACDLF is active in an ad hoc coalition of community_development financial institutions (CDFI's) that also includes the Association for EnterpriseOpportunity in
Chicago, IL, the Center for Community Self Help in Durham, NC, Community Capital Bank in Brooklyn, NY, First Nations Development Institute in Falmouth, VA,
the National Federation of Community Development Credit Unions in New York,
NY, and Woodstock Institute in Chicago. This coalition comprises representatives of
all segments of the CDFI industry that has pioneered the business of community
development lending over the past several decades. We have prepared a position
paper comprising our best thinking at this time on the issues involved in setting
up a Federally supported network of CDFI's . A copy of the paper is attached to my
testimony.
The Work of the New Mexico Community Development Loan Fund
The New Mexico Community Development Loan Fund (NMCDLF) is a private,
non-profit financial intermediary created in 1989 and dedicated to the economic and
social empowerment of the people of our state. The fund borrows capital from 29
socially responsible investors and lends it in support of affordable housing, community-based business, basic human services, and community development in general.
NMCDLF is the only community development lending vehicle in a state that has
one ofthe highest percentages of people living below the poverty level in the United
States. As a primarily rural state, New Mexico faces a unique set of economic challenges for many people, major markets are distant, there are limited job opportunities, and access to all types of services (particularly, financial and public services)
is inadequate.
Over a third of the state's population is Hispanic. Native Americans comprise 10
percent of the population . Both populations make up the majority of rural residents.
Within these traditional communities, language and racial barriers can contribute
to their inability to access traditional capital sources.
The NMCDLF's mission is to help create long-term solutions to poverty by placing
resources back into communities to create jobs, retain community services, and improve housing opportunities. To this end, the fund has helped to expand rural
health facilities, support organic agriculture, reduce program costs for transitional
housing groups, and expand rural enterprises.
NMCDLF currently has $820,000 in capital under management. Our capital has
come from Catholic women religious groups, Protestant religious groups, Jewish
synagogues, foundation program-related investments, corporations, and Federal economic development programs, as well as individuals.
We have eleven loans outstanding totaling $209,694. Cumulatively, we have made
17 loans totaling $284,571 . All loans are current, and the fund has experienced no
losses to date.
Like other NACDLF member funds, our role is:
(1) to provide credit to economically disenfranchised and disinvested communities
and individuals
(2) to provide technical assistance to help borrowers plan and implement successful development projects
(3) to leverage financing from public agencies and conventional lenders
(4) to give people and organizations the skills, credit histories, and development
track records necessary to enter and succeed in the mainstream financial markets.
I would like to give you a few examples of how the NMCDLF works.
• Homemakers Association of Amalia and Costilla (HAAC) supports the development and training of local women. A $5,400 NMCDLF loan enabled HAAC to
purchase industrial sewing machines to expand a cottage industry creating Southwestern fashions. The new machines helped the organization diversify the kind
of contracts it could work on, hire an additional person, and support a unique
business venture in an isolated rural Hispanic village in northern New Mexico.
The business has diversified its product line and has hired two additional women.

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• We have also participated with other institutions in making loans. Recently, we
participated in a loan to a non-profit housing organization, St. Elizabeth's Shelter, that purchased a nine-unit apartment building to house families in transition
in Santa Fe. A locally owned bank provided a $ 170,000 loan for permanent financing, and a local donor contributed $50,000 for the down payment. NMCDLF provided a short-term $80,000 loan that helped to make the project happen.
Concilio Campesino del Sudoeste, Inc., provides a variety of health and
human serves to more than 300 people per day, most of who are farm workers
or elderly residents of Doña Ana County in southern New Mexico. With a $25,000
loan from the NMCDLF, the Concilio has been able to correct health safety code
problems and add 1,500 square feet to its 8,000 square foot facility. The threeyear, 9 percent loan will be repaid by rent revenue paid by La Clinica de Familia,
Inc., the rural, migrant health care provider that will occupy most of the new
space, and by other tenants.
The Concilio is the lone health, social services, and community center. Without
it, area residents-many of whom do not have cars- would have to travel to the
town of Las Cruces, 18 miles away.
As you can see, the NMCDLF lends for both housing and business projects, recognizing that distressed communities need to develop both aspects of their infrastructures. We provide as much technical assistance as is required to ensure that
our loans and the projects they fund are properly planned and managed. This assistance often precedes underwriting and continues through the life of the loan.
Our underwriting criteria are rigorous but they are not standardized in the way
that underwriting is for conventional lending. They are individualized to reflect the
unique characteristics of differing communities and borrowers. Our experience highlights the fact that conventional approaches to risk assessment and security must
be re-examined when serving borrowers with little or no credit history, business or
development experience, or collateral.
Our model is self-sufficiency. We recognize that traditional Federal assistance programs meet the needs of some individuals, but we focus our work on projects that
will enable individuals, institutions, and communities to achieve economic and social
independence. Our borrowers gain not only a home or a business or a decent income
but also the skills they need to participate fully in the mainstream economy.
This approach is different from traditional human service analysis which tends
to look at what is wrong with a community to identify its needs. As a community
development organization, we go beyond that and question what is right with a community-what are its strengths-and use our dollars to enhance what is there.
The Loan Fund Industry
NMCDLF is a relatively young and small organization in the loan fund industry.
The 41 NACDLF member loan funds have loaned more than $ 100 million, which
has leveraged $760 million in public and private capital to finance 15,000 housing
units and to create 3,500 jobs for poor Americans. NACDLF members' loss rate on
loans is less than 1 percent. Within our chip there is a growth ladder on which
small funds seek to grow into large funds, and some of our larger funds are exploring the possibility of adding depository arms and other financial and technical services . NACDLF members serve large metropolitan areas like New York, NY, and Los
Angeles, CA, while others work statewide (e.g., New Hampshire, Vermont), or on
a multi-state basis (e.g., upper midwest, mid-Appalachia).
NACDLF's strongest member funds such as the Delaware Valley Community Reinvestment Fund (DVCRF) in Philadelphia, PA, the Low Income Housing Fund
( LIHF) in San Francisco, CA, the Boston Community Loan Fund (BCLF), and the
Cascadia Revolving Loan Fund in Seattle, WA, provide leadership for the NMCDLF
and other growing loan funds. They are the pioneers in our field, and their experiences and success are models for growth in our industry. They and other loan funds
have demonstrated that non-profit, non-depository revolving loan funds can:
• Aggregate significant amounts of private capital from individual and institutional
Social investors.
• Successfully fill gaps in credit markets in urban, rural, and Tribal communities.
• Work hand-in-hand with conventional lenders to their mutual benefit.
• Finance new forms of ownership such as mobile home park cooperatives and land
trusts.
These institutions are now planning to significantly increase the scope of their efforts. For example, DVCRF is studying the possibility of adding a depository arm.
My colleague from DVCRF, Jeremy Nowak, is here today and would be glad to answer your questions about these plans. Other NACDLF members considering similar plans include the Boston Community Loan Fund in Massachusetts, the Federa-

94
tion of Appalachian Housing Enterprises in Berea, KY, the Cascadia Revolving Loan
Fund in Seattle, WA, and the Vermont Community Loan Fund in Montpelier, VT.
NACDLF's largest member, the Low Income Housing Fund, currently manages
$20 million of private capital from social investors, including the Ford Foundation,
Metropolitan Life Insurance Company, and the Prudential Insurance Company.
LIHF believes that adding a depository arm is not the only way for it to meet its
goals . Instead, LIHF has concentrated on building bridges between conventional
Tenders and distressed communities. Toward that end, the LIHF has created several
bank pools in northern California, Los Angeles, and New York City totaling some
$21 million. These pools reduce the risk and costs of low-income lending for conventional financial institutions while significantly expanding the credit available in
some ofthe poorest communities.
At the other end of this growth ladder, new and developing funds such as the
NMCDLF are models for emerging loan funds and start-up efforts in places like
Maine, western New York, Delaware, South Carolina, and Chicago. We share our
experiences through an Annual Training Conference and mentoring programs sponsored by NACDLF.
Seven years ago, the 18 loan funds then in existence realized that they needed
a national association to set performance standards for the industry, offer financial
and technical support, and provide training necessary for the growth ofthe industry
and the creation of new loan funds in under-served communities. Loan funds are
uninsured non-profit intermediaries whose growth is contingent on continued strong
performance.
Today, the National Association of Community Development Loan Funds has in
place rigorous performance criteria based on the "best practices" of the industry over
the past ten years. NACDLF enforces these performance standards through:
• Member fund evaluations to assess organizational capacity, management systems,
financial strength, and lending performance.
• Performance-based loans and grants through which NACDLF advances loan capital and makes grants to member funds to build institutional capacity and financial strength .
• Technical assistance and training through an Annual Training Conference, regional workshops, technical assistance publications, and work with individual
member funds.
NACDLF believes that a performance-based lending and grants program
should be the model used to create a national network of community development financial institutions. It fosters discipline in business activities
while allowing institutions the flexibility to provide loan products and related services that are appropriate to the communities they serve.
Let me explain how our performance-based lending and grants program works.
NACDLF makes unsecured term loans from its Central Fund to help members finance development projects at the local level. These loan moneys from national investors such as the Episcopal Church and the John D. and Catherine T. MacArthur
Foundation can only be accessed once a member fund has achieved certain performance objectives.
In addition, NACDLF recently received a $1 million start-up grant from Citibank,
N.A., to launch an Equity Grants Program to build the net worth of member funds.
This program Is particularly important to new organizations such as the NMCDLF,
which does not yet have the financial strength to qualify for a loan from NACDLF's
Central Fund. These moneys are disbursed to the loan funds as loans, contingent
on the fund meeting certain performance objectives. At that time, the loan converts
to an equity grant which enhances the ability of member funds to attract private
capital.
NACDLF plans to increase the Equity Grants Program to $25 million. It is currently negotiating with other potential corporate and foundation donors. For loan
funds, as for all ČDFI's, equity is critical to continued growth and to the establishment of new institutions. Equity allows us to take the risks inherent in serving
first-time borrowers and provides the earnings to pay for the technical assistance
so critical to first-time borrower success.
Lack of equity capital is the single greatest barrier to the growth and development of CDFI's at all levels. NMCDLF has only $130,000 in equity capital at
present. NACDLF requires member funds to have at least a 20 percent capital to
asset ratio. Increasingly, NACDLF and its member funds are realizing that a 30
percent to 50 percent capital to asset ratio may be necessary to serve all borrowers
and for CDLFs to raise large amounts of private capital. I know for NMCDLF to
serve the start-up, small businesses critical to the revitalization of New Mexico's
rural economy, achieving a capital to asset ratio of 50 percent is imperative. Public
entities are the only reasonable source for these dollars. Unless CDFI legislation

95
deals with this issue, NMCDLF, DVCRF, LIHF, and others will not become the
large-scale development finance organizations needed to transform America's poorest urban centers and rural communities.
Strategic Federal Support
On behalf of my colleagues within NACDLF, I want to offer some comments on
the creation of a national community development lending initiative.
Collectively, the existing CDFI industry provides a baseline against which the
progress of a Federal program could be measured. Capitalized with more than $700
million-much of which is raised from within the communities or constituencies
they serve development banks, credit unions, and loan funds have extended more
than $2 billion in loans. Loss rates are comparable to those of the best conventional
lending institutions. We offer a solid foundation for a bold community development
lending initiative that might include new institutions, community organizations,
conventional lenders and others.
Our mission before you today is to help build support for a CDFI industry that
is: (1) sustainable and growth-oriented, (2) committed to lending in rural, urban,
and Tribal communities that have been under-served in the past, (3) complementary
to lending by conventional lenders, (4) operated under a demanding system of performance-based investment.
The Ad Hoc Coalition of CDFI's has set forth six key principles in meeting credit
needs in lower-income communities, and NACDLF endorses these principles:
1. Community development "banks" should be defined to include the spectrum of
CDFI's comprising community development loan funds, community development
credit unions, micro-loan funds, and community development banks.
2. Expand the scope of community development lending beyond small business
credit to also include housing credit and consumer financial services.
3. Consult experienced CDFI's in crafting legislation, as the Committee is doing
today and has done over the past several months, and in setting up and evaluating
the CDFI network.
4. Emphasize expansion of existing CDFI's rather than simply undertake wholesale efforts to create new development banks.
5. Recognize that successful development lending institutions are built over time
and with incremental performance-based financial support.
6. Clarify the different interests and responsibilities of conventional lenders, public agencies, and CDFI's. NACDLF and the ad hoc coalition strongly believe that the
Community Reinvestment Act should be strengthened and expanded. The demand
for credit in under-served communities is beyond the scope of any community development lending program and will remain so for the foreseeable future. Conventional
lenders should be required to meet quantifiable lending goals.
Investment in this network of community development financial institutions
should not exempt banks from fulfilling their full obligations as lenders under the
Community Reinvestment Act. Last year, the Federal Financial Institutions Examination Council explicitly stated that banks could qualify for CRA credit by supporting and entering into partnerships with loan funds and other CDFI's, as a growing
number of banks are doing. This is not and should not be an either-or proposition,
however. Banks that are involved with CDFI's must also continue lending directly
into the communities they serve. In addition, the Federal Government could support
community development in general by extending the reach of the CRA to other financial institutions such as finance companies, money market funds, insurance companies, and mortgage banks that are not covered by ČRA.
We also believe that creation of a Federal network of CDFI's must be linked to
future financial support for and regulation of the conventional financial industry.
The substantial restructuring of the conventional industry over the past two decades
has been made possible through myriad Government subsidies (e.g., Federal deposit
insurance, state insurance guarantee funds, Federal Reserve Discount Window borrowings, etc.). Government subsidies and new powers should be granted to the conventional financial industry only if it meets quantifiable community lending objectives and provides ongoing financial support to the developing national network of
CDFI's.
Funding
We believe that Congress and the Clinton Administration must make a clear financial commitment to the CDFI system to signal their support for the long-term
viability of the industry, but this should be just one part ofthe funding mechanism.
The $850 million figure reportedly under consideration by the Administration for
disbursement over five years seems to be at an appropriate scale . We respectfully
suggest that this money should be committed primarily as equity support in increas-

96
ing amounts over the five years in accordance with a performance-based lending investment program that provides support to all rungs of the CDFI industry growth
ladder. Those CDFT's that perform up to industry standards would gain access to
increasingly large amounts of the $850 million. This ensures that the money is not
distributed without due accountability measures.
Federal support is just one part of the funding that is necessary for this effort,
however. No less important are below-market and long-term deposits and loans that
afford CDFI's the ability to properly underwrite their loans, creation of a human
capital development training program to prepare a new and expanded generation
of CDFI professionals, and support for technical assistance and new loan products
customized to individual communities.
We see this funding coming, as I stated, not only from the Federal Government.
CDFI funding should also draw on the public responsibilities of federally insured
and subsidized conventional financial markets. Those institutions that benefit from
public subsidy should be expected to contribute in various ways to meeting credit
needs they are not addressing directly.
The ad hoc coalition of CDFI's has identified several possible financing mechanisms that merit consideration:
• Commercial bank commitments of equity capital and other support as an outcome
of CRA negotiations or mergers that create mega-banks.
• A share of the profits from appreciation of federally sold assets (e.g., a percentage
recapture levy on Resolution Trust Corporation properties).
• A share of profits from Government-sponsored enterprises such as Fannie Mae
and Freddie Mac.
• CDFI set-asides within major legislation to bail out the savings and loan industry
or to inject capital into other parts ofthe financial services industry.
We also support efforts to encourage commercial financial institutions to provide
long-term, low-cost capital to the CDFI sector. Measures such as requiring conventional lenders, pension funds, investment banks, insurance companies, mortgage
companies, and finance companies to place a small proportion of their overall assets
with CDFI's would yield enormous public benefits in the form of jobs , affordable
housing, and increased ownership opportunities. It would also underscore the fact
that commercial financial institutions have obligations to see that community credit
needs are met.
Tax incentives providing tax-free interest to individuals who make below- market
investments in CDFI's would give investors (or depositors) the equivalent of marketrate returns while ensuring a steady capital flow for the CDFI's. Individuals are already the core support for many CDFI's, but a strong incentive such as this would
substantially strengthen the CDFI industry.
Human Capital Development
Our greatest resources are our board, our staff, and our committed volunteers.
The NMCDLF currently operates with only two employees and as we grow one of
our greatest challenges will be recruiting and training loan and technical assistance
officers. This challenge is shared across the industry.
Efforts to create a national system of community development financial institutions will only be successful if a generation of directors, managers, and loan officers
can be recruited and trained to operate these intermediaries . Development lending
and public purpose bank management require specialized knowledge and technical
skills , strong social commitments, and extensive community experience, all of which
differ in important ways from the skills needed to run a conventional financial institution. Community development lenders should undertake, with Federal support,
several initiatives to develop the next generation of community bankers and trustees needed to operate and to govern an expanded network of community development financial institutions. These initiatives could include :
• Creation of a three-year internship/apprenticeship program at community development financial institutions . This internship would be similar to in-house conventional
/investment bank training programs but would also attend to the economic, social, and intellectual formation of participants.
This program could dovetail with President Clinton's plans for a National Service
Corps by placing talented young adults in training for productive careers in community development and community development finance.
• Forging cooperative training agreements with select university business schools
and conventional financial institutions to complement the apprentice program outlined above.
• Sponsoring regular seminars on capital access, community leadership, public investment, and economic democracy issues for CDFI board and staff members.

97
The Federal program also should include a research program to assess the longterm economic and social issues affecting the CDFI industry and the communities
its members serve.
Corresponding Federal Policy Changes
An effort to create a national network of CDFI's would benefit by a series of related administrative and legislative initiatives:
• Simplify public sector credit enhancement programs to non-profit
CDFT's. Partial and full loan guarantees, for example, could significantly increase
the ability of CDFI's to leverage both public and private investment dollars. Similarly, non-depository CDFI's could increase their business lending if SBA rules
were modified to simplify the requirements on non-bank lenders. This adaptation
would also increase the number of minorities, women, and rural businesses receiving SBA support.
• Require Government-sponsored enterprises (GSEs)—Fannie Mae, Freddie
Mac, Ginnie Mae to develop customized secondary market programs for
housing and business loans originated by CDFI's. To date, GSE's have been
almost completely unresponsive to CDFI's . CDFI's performing loans are judged by
standardized underwriting criteria that are largely irrelevant to CDFI's lending
market. CDFI's cannot grow and prosper unless an active secondary market is fostered for their loans.
That concludes my prepared testimony. Thank you for this opportunity to discuss
the work of the New Mexico Community Development Loan and our peers in
NACDLF. I would be pleased to answer any questions you may have.
TESTIMONY OF RONALD L. PHILLIPS, PRESIDENT,
COASTAL ENTERPRISES, INC.
COMMUNITY DEVELOPMENT CORPORATIONS AND THE COMMUNITY
REVITALIZATION SYSTEM
FEBRUARY 3, 1993
Introduction
Senator Riegle and members of the Senate Banking Committee, thank you for inviting me to testify on the proposed Community Revitalization System. My name
is Ron Phillips. I am President and principal founder of Coastal Enterprises, Inc.,
a nonprofit community development corporation located in Wiscasset, ME.
The Community Revitalization System is a strategic step to accelerate job-creating community development initiatives. It is an investment in America that will
grow businesses, create jobs, build housing, and generate assets for low-income and
working families. The return on taxpayer investment will multiply, and will recycle
year in and year out.
We are especially interested how the Community Revitalization System will benefit Maine, including community development banking, partnerships with existing
banks, access to venture capital, and resources for micro and community loan programs. I encourage your support for, and crafting of, legislation that is both flexible
and inclusive, and that will provide a menu of opportunities for community development banks, credit unions, CDCs, micro and community loan funds, a network
which enthusiastically awaits a resurgence of Federal support for their efforts.
Purpose of Testimony
As a practitioner of community development for over 15 years, and board member
of the National Congress for Community Economic Development, the 325 member
trade association for CDCs (please refer to the attached recent membership list), I
want to share with you the exceptional accomplishments of my colleagues and CEI
in community development, and our readiness as a national industry to partner
with the Federal Government's Community Revitalization System.
My remarks will be brief, focusing on the legacy of CDCs, CEI's accomplishments,
and recommendations.
The Legacy of Community Development Corporations
What are CDCs?
CDCs originated in the latter 1960's with the Title VII amendment to the Economic Opportunity Act of 1964-to develop businesses, housing, commercial real estate, and create economic opportunities for disenfranchised residents. This amendment was introduced in the U.S. Senate by the late Senators Robert Kennedy and

98
Jacob Javits. What we contemplate today for a national Community Revitalization
System is owed, in great part, to the accomplishments of CDCs.
CDCs share in common the mission of targeting development to distressed urban
neighborhoods and rural communities and regions to create jobs, decent housing,
education and training, and social services. CDCs are in virtually all States. Their
development activities are diverse and responsive to the needs of their communities.
They develop day care facilities, community health centers, affordable and sup
ported housing, industrial and business parks, small business incubators , and shopping centers. They finance franchises and joint ventures, and provide small, micro
and medium size loans and venture capital to businesses that cannot secure conventional capital. They are responding to worker dislocation resulting from defense cutbacks, and the need to create new jobs through economic conversion, business diversification, and investment in new technologies. They are comprehensive in their
strategies, knowledgeable about their communities, create, new income and assets
for residents, and leverage funds with the economic mainstream.
CDCs are nontraditional financial intermediaries. They work in partnership with
the public sector-Federal, State and local government-and the private sectorfoundations, banks, private business-to attract investment and lending capital to
low- and moderate-income communities. According to our recent research studies,
between 1985 and 1990 alone, 1,160 CDCs across the U.S.:
-built or rehabilitated 320,000 units of low income housing
-developed over 17.4 million square feet of commercial
/industrial real estate
-made 3,500 business loans
-created or sustained over 90,000 jobs.
CEI Profile
Now let me briefly describe CEI as a model, rural community development corporation. Maine's is a small business economy, with 90 percent of the businesses
employing fewer than 20. It also has a high rate of self-employment. Yet Maine has
traditionally been at the end of the capital pipeline, ranking among the lowest nationally in bank deposits per capita.
CEI was organized in 1977 to address the capital needs of small businesses and
communities, and to create income, employment and ownership opportunities for
low-income people. CEI is a private and publicly funded CDC. We provide financing
and technical assistance in development of job-creating, value-added, natural resource industries, export marketing companies, start-up and expanding small manufacturers, microenterprises, women in business, family and center-based child care,
and affordable housing.
We have loaned or invested $20 million, leveraged $60 million in partnership with
banks, and created or sustained some 3,500 jobs. We are an SBA 504 certified lender, and operate the SBA's microloan demonstration, and the FmHA's Intermediary
Relending Program. We participate in private foundation Program Related Investments, such as with the Ford Foundation. We are also a certified borrower with the
Finance Authority of Maine. We employ 24 people. We are a membership organization, with a 15-member board representative of business, banking, community organizations and the public sector.
Examples of CEI Projects
What are some examples of CEI projects. We have a growing portfolio financed
on the continuum of capital need, from less than $5,000 to over $ 300,000 (please
refer to the attached chart on CEI funds).
Our smallest loan is less than $700 to Sweet Deceptions in Lewiston, a self-employed starting microentrepreneur producer of sugar- free sweets and baked goods
with only a few thousand in sales; our largest, over $400,000 in subordinated debt
loan and equity investment to a producer of advanced technology geographic and
recreational maps with over 100 employees and sales above $ 10 million. Examples
of our economic development impact are:
-sectorial financing of the natural resource industries, such as the fisheries benefiting over 800 fishermen, crew and employees;
-investment in 70 start-up and expanding small business manufacturing operations employing 1,500 ;
-loans to 200 small, self-employed and microenterprises representing a range of
producer, retail and service businesses;
-development of 50 family and center-based child care operations for over 1,600
pre-schoolers, and 200 jobs for providers;
-business counseling in planning, marketing, and technical assistance in $10 million of financing for over 4,000 small businesses that employ as many as 10,000

99
people, including women in business, refugees, dislocated workers, unemployed
professionals, and AFDC recipients.
Filling the Credit Gap
What role does CEI play in filling the credit gap? We are a nontraditional financial intermediary, and integrate this role with community development, technical
assistance and market research programs. Financing is the last step in the process
development process. We are the community development bank without the bank,
working in partnership with Maine banks to provide guarantees, subordinated debt
and equity capital for the very small, self-employed micro enterprises, to more sophisticated businesses. We make the deal happen by filling the credit gap.
As you know well, the banding industry has undergone significant changes in the
last five years that have impacted the availability of credit. In many cases, risk assessment of loans have resulted in the application of more stringent criteria. Even
small businesses with long-standing credit histories have seen their relationships
with banks strained. These trends have increased the need for alternative sources
of commercial credit. CDCs offer flexible, individualized credit attention, and leverage additional loan dollars from banks.
Let me illustrate for you how our funds-flexible, subordinated debt or equity capital-function in the financial structure of a business, over and over again, no matter how small, or how big, to ensure more conventional credit sources are accessed,
and that the project has a chance to start up or expand.
Example of Gap Financing
During the Presidential election campaign, Senator Gore visited Moulded Fibre,
Inc. in Westbrook. His purpose was to demonstrate the relationship between job creation and environmental sensitivity. Moulded Fibre processes recycled newspapers
into a packaging fibre substitute for environmentally destructive styrofoam.
But Moulded Fibre, which now employees 44-and I might add they have hired
AFDC recipients, dislocated workers and people with disabilities-was a start-up.
To finance the nearly $ 1.1 million project, $375,000 in equity and subordinated debt
was needed. CEI and other investors provided this financing. The SBA 504 program
came next with a $325,000 debenture, and only then could the bank provide the balance of $400,000.
Recommendations
And now, let me close with some recommendations that could ensure a successful
Community Revitalization System.
1. Provide funding for qualified existing and emerging nonprofit, community-based
development organizations using any one of four models listed below:
a) community development banks and credit unions
b) partnerships with banks
c) small-scale, community-based venture capital
d) micro and community loan programs
These approaches will allow organizations to test strategies to build on CRA to
accelerate targeted investment. Partnerships with banks will ensure their participation in the Community Revitalization System.
2. Consider special assistance to nonprofits to form a community development
bank, or acquire a troubled bank.
3. Provide technical assistance and planning grants to enable community organizations to analyze their market and develop a business plan for forming a community development bank or partnership.
4. Provide first-year funding for the Community Revitalization System adequate
to support 100 projects for community development banking and credit unions, partnerships with banks, micro and community loan funds, planning, technical assistance, and evaluation.
Conclusion
A Community Revitalization System will create jobs, income and ownership opportunities, reinforce CRA and leverage private capital to economic sectors, regions
and populations in need of help.
There is a tested, experienced and dedicated network of community development
practitioners prepared to renew and expand their roles in development of distressed
urban neighborhoods and rural regions . On their behalf, I urge your support for legislation that would enhance and build on the current community development system, community development banks , community credit unions and loan funds, and
the 25-year finance development legacy and expertise of community development
corporations.

100
Neal Peirce, syndicated columnist, and writer Carol Steinbach, in their 1990 Enterprising Communities stated that the thought of the community development
movement failing is unthinkable. They said:
"In an age of social fragmentation and indifferent bureaucracies, the
movement promises a personalized, neighborhood-based renewal for the
most disadvantaged Americans .
community development corporations
are not just a minor local phenomenon. They are an absolute national necessity."
Thank you, and I would be glad to answer any questions or provide additional
information.

on 20
Family
Care
Day

TWETO EVER DIMONOS
Women's
Business

Housing

$.84

Fund

Refugee

,Rental
&
Ownership
Cooperative

Small
Self/
Employment
Enterprise

Supported
Housing

SelfAFDC
Employment

oparons

venture
mil
5
$
*A
in
is
fund
planning
the
stage

Social
Services

Enterprise
Fund

pourts

Natural
Resources

$8

Development
Fund

$19.14

231
101230 000

Small
Medium
Business

1$.2

Venturo
Fund
Capital

SBA
504
6$.1
91263
Hlapna 20 J
STY Cynay

ATERNA
ECOLONICDEA

Fund
Investment

Targeted
Sectors
)a
millions
Capitalization
(innd

9475
INVESTMENT Grehodon
TYDEV CORP.
SORHOOD
LOPMENT
HECTIC
all 32
ty.com
N FEDERA
LITATE
CTEBE VMD

Total
Loan
and

UC DEA

-1991
CEI
FUNDS
FINANCE
DEVELOPMENT

SBA
-EMicro
Self
mplymt

101
101

UKTE JAOAS
R3991221 2201

102

NCCED Organizational Members

City
Anchorage,
Anchorage,
Anniston ,
Tuscaloosa ,
St. University ,
Tuoson,
Forrest City ,
Pine Bluff,
Phoenix,
Chinle,
San Francisco,
San Francisco,
Saticoy ,
Berkeley,
San Francisco,
Salinas,
Santa Monica,
East Palo Alto,
Los Angeles,
Oakland,
Los Angeles,
Richmond,
San Jose ,
Huntington Park,
Oakland ,
Los Angeles ,
Los Angeles,
Los Angeles,
San Francisco,
El Monte,
Berkeley ,
Oakland ,
Los Angeles,
Los Angeles,
Santa Cruz,
Hayward,
Los Angeles,
Long Beach,
Los Angeles,
Los Angeles ,
Monrovia,
Sydney, Nova Sootia
Nova Scotia
Sydney, Nova Scotia
Denver,

State
AK
AK
AL
AL
AR
AR
AR
AR
AZ
AZ
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CA
CN
CN
CN

82222

Organization
COMMUNITY ENTERPRISE DEV.
CEDC of Alaska
CAA OF CALHOUN , CLEBURNE AND
COMMUNITY SERVICE PROGRAMS
CENTER FOR ECONOMIC DEV.
PORTABLE PRACTICAL EDUCATIONAL
SCF-MISSISSIPPI RIVER
THE GOOD FAITH FUND
CHICANOS POR LA CAUSA
DINEH COOPERATIVES
ASIAN NEIGHBORHOOD DESIGN
BANK OF AMERICA
CABRILLO ECONOMIC DEY. CORP.
CALIFORNIA CEDA
CHINESE COMMUNITY HOUSING CORP.
CHISPA
COMMUNITY CORP . OF SANTA MONICA
COMMUNITY DEV. INSTITUTE
DREW ECONOMIC DEVELOPMENT CORP.
EAST BAY ASIAN LOCAL
EL CENTRO HUMAN SERVICES CORP.
GREATER RICHMOND CDC
HOUSING FOR INDEPENDENT
HUB CITIES CONSORTIUM
KOREAN COMMUNITY CENTER
KOREAN YOUTH CENTER
LOS ANGELES COMMUNITY
LOS ANGELES URBAN LEAGUE
MISSION ECONOMIC DEY.
NATIONAL CENTER FOR AMERICAN
NATIONAL ECON. DEV.
NEIGHBORHOOD HOUSING SERVICES
NEW ECONOMICS FOR WOMEN
PACIFIC ASIAN CONSORTIUM
SANTA CRUZ COMMUNITY
SPECTRUM COMMUNITY SERVICES
TEL ACU
UNITED CAMBODIAN COMMUNITY, INC
VERMONT-SLAUSON ECON .
WARD ECONOMIC DEVELOPMENT CORP .
WORLD VISION
CENTRE FOR COMMUNITY
COLCHESTER /TRURO /STEWIACKE REDTF
NEW DAWN ENTERPRISES , LTD.
ASSOCIATED NETWORK OF MINISTRIES

103

State
CO
CO
CO

DC
DC
DC
DC
DC
DC
DC
FL
FL
FL
FL
FL
FL
FL
FL
FL
FL

៥ ៥៩៩ ៨

City
Denver,
Denver,
Denver
Denver,
Bridgeport,
Hartford,
Danielson ,
New Haven,
Yestport,
Washington,
Washington,
Washington,
Washington,
Washington,
Washington,
Washington,
Miami,
Jacksonville,
Pensacola,
Miami,
Quincy ,
Miami,
Hallandale,
Miami,
Miami Beach,
Miami,
Mhami,
Belle Glade,
Miami,
Miami,
Jacksonville,
Decatur,
Valdosta,
Honolulu,
Chicago,
Chicago,
Chicago,
Kankakee,
Chicago,
Chicago,
Chicago,
Chioago,
Chicago ,
Chicago,
Chicago,

188885566688888882ZZ

Organization
DENVER COMMUNITY DEY. CORP.
HOPE COMMUNITIES, INC.
NEIGHBORHOOD REINVESTMENT CORP.
NEWSED COMMUNITY DEV . CORP.
BRIDGEPORT NEIGHBORHOOD
BROAD PARK DEVELOPMENT CORP.
NORTHEASTERN CONNECTICUT CDC , INC.
NUTMEG HOUSING DEV. CORP .
SAVE THE CHILDREN FEDERATION
ACTION TO REHABILITATE
CORPORATION FOR ENTERPRISE DEV.
H STREET COMMUNITY DEV. CORP.
MANNA, INC.
MARSHALL HEIGHTS COMMUNITY
NATIONAL COOPERATIVE BANK
UNIVERSITY LEGAL SERVICES
CODEC, INC.
COMMUNITY ECONOMIC DEV. COUNCIL
COMMUNITY EQUITY INVESTMENTS , INC.
DADE EMPLOYMENT AND ECON.
FLORIDA FEDERATION OF CDCs
Greater Miami United
HALL AND ALE COMMUNITY DEV . CORP.
METRO-DADE COMMUNITY &
MIAMI BEACH DEVELOPMENT CORP.
MIAMI-DADE NHS
NEW CENTURY DEVELOPMENT CORP.
NOAH DEVELOPMENT CORPORATION
TACOLCY ECONOMIC DEV . CORP.
WEST PERRINE CDC
First Union National
DEKALB COUNTY ECON. OPPORTUNITY
QUITMAN/BROOKS COUNTY CDC
ALU LIKE, INC.
AMOCO CORPORATION
BETHEL NEW LIFE
CHICAGO ASSOCIATION OF
CITY OF KANKAKEE
CLARENCE-DARROW COMMUNITY
COMMUNITY ECON. DEV. ASSOC.
COMMUNITY WORKSHOP ON
JANE ADDAMS RESOURCE CENTER
LAWRENCE AVENUE DEV. CORP.
SHOREBANK ADVISORY SERVICES , INC.
THE NEIGHBORHOOD INSTITUTE

FL
FL
FL
GA
GA
HI

L
L
L
IL
IL
L
L

104

Organization
BUSINESS OPPORTUNITIES SYSTEMS
EASTSIDE COMMUNITY INVESTMENTS, INC.
HISTORIC LANDMARKS FOUNDATION
HOOSIER UPLANDS ECONOMIC
INB NEIGHBORHOOD
INDIANA ASSOCIATION FOR CED
INDIANA CAP DIRECTORS' ASSOC. , INC.
INDIANAPOLIS NEIGHBORHOOD
INTERFAITH HOMES, INC.
LINCOLN HILLS DEVELOPMENT CORP.
MARTIN LUTHER KING CDC
NEAR NORTH DEVELOPMENT CORP.
RILEY AREA REVITALIZATION
WESTSIDE COMMUNITY DEVELOPMENT
COMMUNITY VENTURES CORPORATION
KENTUCKY HIGHLANDS INVESTMENT CORP .
MOUNTAIN ASSOCIATION FOR CED , INC.
NEW DIRECTIONS HOUSING CORP.
CORPORATION FOR NEW
DESIRE COMMUNITY HOUSING
SOUTHERN COOPERATIVE DEY. FUND
CHINESE ECONOMIC DEV . COUNCIL
CODMAN SQUARE HOUSING
COMMUNITY DEV . CORP . OF BOSTON
COMMUNITY DEV. CORP.
COMMUNITY ECONOMIC DEV
DORCHESTER BAY EDC
EAST BOSTON COMMUNITY
FENWAY CDC
FIELDS CORNER CDC
ICA REVOLVING LOAN FUND
INQUILINOS BORICUAS
LENA PARK CDC
MADISON PARK DEVELOPMENT CORP
MASSACHUSETTS ASSOCIATION OF CDCs
MASSACHUSETTS COMMUNITY DEV.
NEIGHBORHOOD OF AFFORDABLE HOUSING
NUESTRA COMUNIDAD DEV. CORP .
QUINCY-GENEVA HOUSING CORP .
THE SOMERVILLE CORFORATION
URBAN EDGE HOUSING CORP .
YOUTH ACTION PROGRAM
ANNE ARUNDEL COUNTY
COMMUNITY ASSISTANCE NETWORK
DEVELOPMENT TRAINING INSTITUTE

City
Indianapolis,
Indianapolis,
Indianapolis,
Mitchell,
Indianapolis,
Indianapolis,
Indianapolis,
Indianapolis,
Indianapolis ,
TellCity ,
Indianapolis,
Indianapolis ,
Indianapolis,
Indianapolis,
Lexington ,
London,
Berea,
Louisville,
Natchitoches,
New Orleans,
Lafayette,
Boston,
Dorchester ,
Boston ,
Fitchburg,
Boston,
Dorchester ,
East Boston,
Boston,
Dorchester,
Somerville,
Boston,
Dorchester ,
Roxbury ,
Boston ,
Boston,
East Boston,
Roxbury ,
Roxbury ,
Somerville,
Jamaica Plain,
Belmont,
Annapolis ,
Baltimore,
Baltimore,

State
IN
IN
IN
IN
IN
IN
W
IN
N
IN
IN
IN
IN
IN
KY
KY
KY
KY
LA
LA
LA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MA
MD
MD
MD

105

City
Columbia ,
Salisbury ,
Baltimore,
Wiscasset,
So. Paris,
Pontiao,
Caro,
Lansing,
Lansing,
Pontiao,
Detroit,
Ecorse,
Detroit Lakes,
Minneapolis,
Saint Paul,
St. Louis ,
Kansas City,
Kansas City ,
Kansas City ,
St. Louis,
Greenville,
Bozeman,
Durham ,
Raleigh,
Henderson ,
Durham,
Hendersonville,
Durham ,
Research Triangle Park,
Raleigh,
Durham,
Chapel Hill,
Raleigh,
Charlotte,
Rocky Mount,
Raleigh,
Durham,
Wilson ,
Omaha ,
Manchester,
Newark,
Trenton,
Albuquerque,
Embudo ,
Belmont,

2332

Ürganization
ENTERPRISE FOUNDATION
SHORE UP INC .!
SOUTHEAST COMMUNITY
COASTAL ENTERPRISES, INC.
COMMUNITY CONCEPTS, INC.
CITIZENS COALITION FEDERAL
HUMAN DEVELOPMENT COMMISSION
MICHIGAN COMMUNITY ECON.
MICHIGAN STATE UNIVERSITY
OAKLAND LIVINGSTON HUMAN
WARREN/CONNER DEVELOPMENT
WAYNE-METROPOLITAN COMMUNITY
MIDYEST MINNESOTA COMMUNITY
MINNESOTA CENTER FOR CED
TWIN CITIES HOUSING
ANHEUSER-BUSCH COMPANIES , INC.
BLACK ECONOMIC UNION
CDC OF KANSAS CITY
CITIZEN HOUSING INFORMATION
NORTHSIDE RESIDENTIAL HOUSING
DELTA FOUNDATION
HUMAN RESOURCE DEV . COUNCIL
CENTER FOR COMMUNITY SELF-HELP
DIVISION OF COMMUNITY
GATEWAY CDC
HAYTI DEVELOPMENT CORPORATION
HOUSING ASSISTANCE CORPORATION
LAND LOSS PREVENTION PROJECT
NORTH CAROLINA ALTERNATIVE
NORTH CAROLINA ASSOCIATION
NORTH CAROLINA COALITION OF
N.C. REAL ENTERPRISES, INC.
NORTH CAROLINA RURAL CENTER
REID PARK NEIGHBORHOOD
ROCKY MOUNT/EDGECOMBE CDC
SOUTHEAST RALEIGH CDC
UDI COMMUNITY DEY. CORP.
WILSON COMMUNITY IMPROVEMENT
OMAHA ECONOMIC DEV. CORP.
NEW HAMPSHIRE COLLEGE
NEW COMMUNITY CORPORATION
NON-PROFIT AFFORDABLE HOUSING
HOME EDUCATION LIVELIHOOD PROGRAM
SIETE DEL NORTE CDC
ACCORD CORPORATION

State
MD
MD

ME
MI
MI
MI
MI

MN
MN
MO
MO
мо
MO
MO
MS
MT
NC
NC
NC
NC
NC
NC
NC
NC
NC
NC
NC
NC
NC
NC
NC
NC
NE
NH
NJ
NJ
NM
NM
NY

106

Cita
Bronx,
New York,
New York,
New York ,
Malone,
Yonkers,
• Elizabethtown,
Ithaca,
New York,
Brooklyn,
Nanuet,
Pearl River,
Rochester,
New York,
Bronx,
Elmira,
Bath ,
Troy,
Rochester,
Indian Lake,
Rochester,
Canton,
Cincinnati,
Cleveland,
Toledo,
Cleveland,
Cleveland ,
Cleveland ,
Cincinnati,
Columbus,
Cincinnati,
Cincinnati,
Cleveland,
Cincinnati,
Toledo ,
Columbus ,
Lima,
Dayton,
Columbus,
Cincinnati ,
Fremont,
Dayton,
Portland,
Milwaukie,
Portland,

State
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OH
OR
OR
OR

ន

Organization
BRONX VENTURE CORPORATION
CITICORP /CITIBANK
CED LEGAL ASSISTANCE CENTER
COUNCIL FOR COMMUNITY-BASED DEV.
FRANKLIN COUNTY COMMUNITY
GREYSTON FOUNDATION
HOUSING ASSISTANCE PROGRAM
ITHACA NEIGHBORHOOD HOUSING
LOCAL INITIATIVES SUPPORT CORP.
PRATT INSTITUTE CENTER
ROCKLAND COMMUNITY ACTION
ROCKLAND ECONOMIC DEV . CORP.
RURAL OPPORTUNITIES, INC.
SETTLEMENT HOUSING FUND, INC .
SOUTH BRONX OVERALL ECON.
SOUTHERN TIER OFF. OF SOC. MIN.
STEUBEN CHURCHPEOPLE AGAINST
TROY REHABILITATION &
URBAN LEAGUE OF ROCHESTER ,
WARREN-HAMILTON HOUSING CORP.
Rural Opportunities, Inc.
ASSOC. FOR A BETTER COMMUNITY
AVONDALE REDEVELOPMENT CORP.
CENTER FOR NEIGHBORHOOD DEV.
CITY OF TOLEDO
CLARK-METRO DEVELOPMENT CORP.
CLEVEL AND NEIGHBORHOOD DEV. CORP.
COLLINWOOD COMMUNITY SERVICE
DEY. CORP. FOR CINCINNATI
FRIENDS OF THE HOMELESS
JOBS FOR PEOPLE
LOWER PRICE HILL CURC
NATIONAL CITY CDC
NDC ASSOCIATION OF
NORTHRIVER DEVELOPMENT CORP.
OHIO CDC ASSOCIATION
REHAB PROJECT
SRD-NEIGHBORHOOD DEVELOPMENT
STATE OF OHIO CDFF
WALNUT HILLS REDEVELOPMENT
YSOS COMMUNITY ACTION
SRD-Neighborhood Development
NORTHEAST COMMUNITY DEV. CORP.
NORTHWEST HOUSING
OREGON COUNCIL FOR

107

Organization
REACH COMMUNITY DEVELOPMENT
SOUTHEAST UPLIFT
ALLIED HUMAN SERVICES
BUREAU OF HUMAN RESOURCES
CENTRAL PENNSYLVANIA COMMUNITY
COMMUNITY HUMAN SERVICES CORP.
COMMUNITY TECHNICAL ASSISTANCE
DUQUESNE BUSINESS ADVISORY
EAST OF BROAD COMMUNITY
HISPANIC ASSOCIATION OF
HOMEWOOD-BRUSHTON REVITALIZATION
MANCHESTER CITIZENS CORPORATION
MAYOR'S OFFICE OF COMMUNITY
NORTH SIDE CIVIC DEV.
PENNSYLVANIA DIRECTORS ASSN.
PENNSYLVANIA FARMWORKER
PHILADELPHIA COMMUNITY
ECONOMIC DEVELOPMENT CORPORATION
JUBILEE INNER CITY DEVELOPMENT CORP.
OIC OF RHODE ISLAND
YAHID COOPERATIVE ENTERPRISES, INC.

Cita
Portland,
Portland,
New Castle,
Harrisburg,
Clearfield,
Pittsburgh,
Pittsburgh ,
Duquesne,
Philadelphia,
Philadelphia,
Pittsburgh ,
Pittsburgh,
Philadelphia,
Pittsburgh,
Harrisburg,
Camp Hill,
Philadelphia,
San Juan,
Providence,
Providence,
Newport,

NORTHEAST SOUTH DAKOTA ECC
SISSETON-WAHPETON SCHOOL BOARD
THE LAKOTA FUND
CHATTANOOGA NEIGHBORHOOD
EAST TENNESSEE COMMUNITY
FISK AREA DEVELOPMENT CORP.
M. L.KING BOULEYARD CDC
MATRIX, INC.
TENCO DEVELOPMENTS, INC.
TENNESSEE NETWORK FOR CED
WEST GREENVILLE CDC
AVENIDA GUADALUPE ASSOCIATION
EAST AUSTIN ECONOMIC
FREEDMEN'S TOWN ASSOCIATION , INC.
QUIN RIVERS AGENCY FOR
RICHMOND BETTER HOUSING
SOUTHWEST VIRGINIA COMMUNITY
TASK FORCE FOR HISTORIC PRESERVATION
VIRGINIA WATER PROJECT
TRI-ISL AND ECONOMIC DEV . COUNCIL

Sisseton,
Agency Village,
Kyle,
Chattanooga,
Knoxville,
Nashville,
Chattanooga,
Knoxville,
Lewisburg,
Knoxville,
Greenville,
San Antonio,
Austin,
Houston,
Providence Forge,
Richmond,
Roanoke,
Richmond,
Roanoke ,
St. Thomas,

TX
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NORTHERN COMMUNITY INVESTMENT CORP.
TOWN OF ROCKINGHAM

St. Johnsbury ,
Bellows Falls,

VT
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State
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PA
PA
PA
PA
PA
PA
PA
PA
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PA
PR

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RI
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TN
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55

108

Organization
BENTON-FRANKLIN COMMUNITY
COLUMBIA BASIN MINORITY
EL CENTRO DE LA RAZA
GRANT COUNTY COMMUNITY ACTION
PIC OF SNOHOMISH COUNTY
PLYMOUTH HOUSING GROUP
THE OPPORTUNITY COUNCIL
UPPER TACOMA RENAISSANCE
WASHINGTON ASSOCIATION FOR CED

Cita
Pasco,
Pasco,
Seattle,
Moses Lake,
Everett,
Seattle,
Bellingham ,
Doma ,

ADVOCAP , INC.
CAP SERVICES, INC.
CENTRAL WISCONSIN CAC, INC.
COMMON WEALTH DEVELOPMENT , INC.
COMMUNITY RELATIONS-SOCIAL
COOPERATIVE WEST SIDE ASSOCIATION
DANE COUNTY COMMUNITY
IMPACT SEVEN , INC.
INNER CITY REDEVELOPMENT CORP.
LA RAZA UNIDA , INC.
NEWCAP, INC.
NORTHWEST SIDE CDC
WEST CENTRAL WISCONSIN CAA, INC.
WESTERN DAIRYLAND E.0.C.
WISCONSIN COULEE CAP
MATEWAN DEVELOPMENT CENTER
TELAMON CORPORATION

Fond du Lac,
Stevens Point,
Lake Delton,
Madison,
Milwaukee,
Milwaukee,
Madison,
Turtle Lake,
Milwaukee,
Fort Atkinson,
Oconto,
Milwaukee,
Glenwood City ,
Independence,
Westby ,
Matewan,
Martinsburg,

State
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WK

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2
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WI

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109
STATEMENT OF ROBERT JACKSON, TREASURER, QUITMAN COUNTY
FEDERAL CRÉDIT UNION
Mr. Chairman, members ofthe Committee, I am Robert Jackson, Treasurer ofthe
Quitman County Federal Credit Union. We are located in Marks, Mississippi, a lowincome rural community in the Mississippi Delta about 80 miles south of Memphis.
I also serve on the Board of Directors of the National Federation of Community Development Credit Unions, a coalition of credit unions that serve low- and moderateincome communities throughout the United States. The Federation is affiliated with
the Credit Union National Association, the national trade organization for credit
unions. Speaking for my small credit union and for the larger credit union movement, I would like to express strong support for the new administration's initiative
for expanded community development financial institution activity. The story I have
to tell you about the situation in the Mississippi delta will show very clearly just
how urgent our needs are.
Community Development Credit Unions
Before talking about the particular experiences of my credit union, I would like
to say a few words about the national community development credit union movement. Of the 14,000 or so credit unions in the United States, more than 300 serve
low-income communities in rural communities, inner-city neighborhoods and Indian
reservations. The primary mission ofthese institutions is to provide credit and other
financial services to people who are considered "unbankable" by mainstream financial institutions. The need for credit in these areas is desperate.
One CDCU in central Florida makes loans to migrant farm workers who need second-hand trucks in order to commute to work in surrounding counties. Another
CDCU in San Francisco has made small loans that allow newly-arriving Vietnamese
immigrants to continue earning a living as fishermen. A Harlem CDČU once lent
funds to an entrepreneur who wanted to expand his auto repair business but had
been turned down by 10 different banks. In this case, the borrower repaid his credit
union loan three years early. In central Appalachia, a CDCU works with public assistance recipients who want to start their own businesses and get off welfare. This
group's efforts were recently described in a front-page Wall Street Journal article.
Hispanic and Haitian migrant farm workers, Vietnamese immigrants, small business owners in Harlem and welfare mothers in Appalachia are not the kind of lucrative clients that other institutions are looking to serve. Frankly, in my opinion,
many institutions don't even want these folks coming in the front door because they
can't make a profit serving this kind of clientele.
The Story of Quitman County
In Quitman County, our credit union was formed 11 years ago in order to cope
with a lack of access to credit. Like so many other places in the Mississippi delta,
Quitman County is a place where African-American residents are mired in poverty
and trying to cope with the legacy of centuries of economic and political discrimination. My town, Marks, was one of the key sites of civil rights activity that was visited by Dr. Martin Luther King, Jr. which was highlighted in newspaper publications across the country on Sunday, January 17, 1993.
To this day, however, there is persistent rural poverty. Unemployment in the area
is 18 to 20 percent in the African-American community and 9.8 percent overall . The
per capita income in the county is $6,450 annually. The per capita income for African-Americans is $4,133. Many African-Americans are living in substandard housing without running water. They would like to buy new homes or repair the old
ones, and they would like to start a small business or borrow money to send a child
to school.
Until 1977, there was only one bank in the Marks area and it was owned by a
local family that also controlled much of the land and political machinery in the
county. Since loans were routinely denied, many poor people, including my parents
who were sharecroppers, didn't even bother to go to the local bank.
Out of pure desperation, we organized a grass-roots movement for equality that
led to the creation of the Quitman County Development Organization and the
Quitman County Federal Credit Union. The credit union has $1,017,000 in assets
and serves 850 members and growing. Since the day we were organized, we have
lent more than $2,126,000 to local people, most of whom would not have any other
access to credit.
I would like to tell you the story of a typical loan that we make to a family that
has stayed on the farm or plantation all their lives up until 1989. The father got
sick and couldn't work on the farm anymore, and was asked to move out of the plantation owned house. The family had nowhere to move, no credit history to assume
a mortgage, and no breadwinner for the family. The family approached the credit

110
union for a housing loan to purchase a $ 10,000 house. The credit union made the
loan because we knew the family. I'm happy to say that they have made their
monthly payment like clockwork. An article on CDCU's in Credit Union Magazine,
October 1990 issue, tells of this story in more detail. A copy of this article is attached. What would have happened to this family? I'm afraid to think what may
have transpired if the credit union had not been there. This is not an exception, this
is the rule. Families being displaced from large plantations with nowhere to go, and
no money to move anywhere else. No sympathy from the landowners, and no severance pay, no retirement, nothing. I believe that CDCU's are financial institutions
with a conscience . And we need more of them.
While we have been successful in providing credit to people who would otherwise
be shut out of the capital market, there is a great deal more that we would like
to do. We are particularly interested in duplicating the successes of the Nation's
largest CDCU, the Self-Help Credit Union of North Carolina. Self-Help has more
than $40 million in assets and has extended loans throughout the State of North
Carolina. This success is due in large part to an innovative structure that combines
the credit union and a non-profit development organization. Working together the
two institutions can provide a full spectrum of services needed to further economic
development.
We have the same structure in Quitman County. Our credit union provides credit
and savings services, while the non-profit, Quitman County Development Organization is able to conduct fundraising and take on larger and higher risk development
projects. All this is done in coordination with each other and other non-profits in
the area.
I am confident that we can grow to Self-Help's size and scope in a safe and sound
manner. But that will require relief from current regulations imposed on us by our
regulatory agency, the National Credit Union Administration (NCUA) . We also need
more technical assistance from them and a strategic investment of Federal resources. In talking about public investment in CDCUs, an important ratio to keep
in mind is 10 to 1. For every dollar that a CDCU receives in reserve funds, the institution is able to extend 10 dollars in loans for home acquisitions and repairs, small
business development and other purposes. If my credit union had a $ 100,000 infusion of equity, I can guarantee you that we will make $ 1 million dollars worth of
loans in Quitman County, Mississippi, the poorest section of the United States.
As a county supervisor (commissioner), I understand your budgetary concerns. I
also understand the power that you have as a Federal lawmaker to change policy
from the top.
As you go about the process of creating a community development banking program, and I'm confident you will, there are a few positive steps that you can take
to help credit unions like mine and others throughout the United States. I support
the following recommendations of the National Federation of Community Development Credit Unions for steps which Congress can take to improve access to credit
for consumers and small businesses.
• Through Community Development Banking legislation, provide equity infusions to
CDCUs and other community development lenders. This is the single most important step that Congress can take. Despite all the good work that CDCUs are doing,
our impact has been limited by our small size. Most CDCUs and other community
development lenders will need to be bigger institutions in order to have a meaningful impact on the credit crisis. By providing equity capital to community development lenders, you allow them to expand and sustain their work, which might
otherwise be discouraged as "high risk" by regulators.
• Recognize and establish that lending for small and micro-businesses is a valid and
valued function of credit unions , especially in low-income and other underserved
areas. This would mean, among other things, preserving the tax exemption on
credit unions and getting the National Credit Union Administration to ease current regulatory restrictions on business lending. We have seen significant improvement in the treatment of CDCUS by our regulators during the last year. We
would like to see legislative action that will enhance, reinforce, and institutionalize those improvements.
• Facilitate access to existing secondary markets, and create, if necessary, a specialized secondary market for community development loans.
• Provide funding for technical assistance to new and growing community development lenders.
• Keep CRA in place. The Community Reinvestment Act (CRA) has been a very important part of our success in the last decade ; many of our CDCUs have received
financial support-including equity and operating grants, and interest-free deposits-from banks as a direct or indirect result of CRA. While we believe that banks
that support community development lenders like CDCUs should get CRA credit,

111
we do not want to see CRA weakened. It is an invaluable tool for producing productive partnerships in many low-income communities.
• Increase the level of funding for the Revolving Loan Program for CDCUs operated
by the National Credit Union Administration. At present, the program has $6 million to invest among hundreds of CDCUs nationwide. An increase in the program
will enable more institutions to be served.
In closing let me again emphasize the importance of easing the current regulatory
restraints under which we labor. To effectively do our job, we must never be held
back by limits on non-member deposits and we must have additional flexibility in
making small business loans to our members. Attached is a CUNA position paper
on these issues with amendments which I support.
This concludes my statement. I will be glad to answer any questions.
POSITION PAPER-COMMUNITY DEVELOPMENT BANKING
The Credit Union National Association and Affiliates (CUNA) fully supports the
concept proposed by the Clinton Administration to expand the role of community development banking. This paper is to share some of our preliminary ideas and recommendations concerning this important and potentially far-reaching initiative.
CUNA is the primary trade association representing this country's 13,400 credit
unions and their 65 million members. One of its affiliates is the National Federation
of Community Development Credit Unions.
The credit union movement continues to exist separately from the banking system
of this country for very basic reasons: ( 1) it can still demonstrate its unique and
different approach to providing consumer financial services; and (2) this unique approach continues to bring substantial benefits to consumers that are worth preserving. Some people are able to get a loan at a credit union when they were unable
to find credit elsewhere. CUNA is committed to preserving this credit union philosophy. Certainly the work done by low income, or community development credit
unions, exemplifies the credit union difference.
We welcome this renewed interest in providing credit at reasonable rates to those
who have been left out of the traditional financial system and especially in providing small business loans to assist in the rehabilitation of low income areas. It is
easier, even within the credit union community, to concentrate on the more routine
extensions of credit and to lose momentum in the seeking of new avenues to reach
those with limited access to credit. This tendency has been exacerbated by changes
to the legislative and regulatory atmosphere which have occurred over the past several years. For instance, the National Credit Union Administration (NCUA) and its
predecessor, the Bureau of Federal Credit Unions, once placed a high priority on
the actual promoting of credit unions and the credit union movement. Awards were
given to examiners who had chartered the most credit unions or contacted the most
groups informing them about credit unions, technical assistance was given to struggling credit unions, and it was recognized and acknowledged that many differences
would exist among credit unions depending on their missions and the agency adjusted itself to accommodate for these differences.
However, circumstances occurred which greatly influenced this agency's perspective. As a result of the savings and loan crisis and the large number of bank failures, the Congress sent strong legislative signals to all financial regulators to vastly
increase their supervisory activities. Advocacy roles by regulators came under criticism. This coupled with tremendous growth in the credit union movement and the
advent of Federal share insurance for credit unions led the agency to begin operating from a new set of priorities. It retreated from its advocacy role and centered its
efforts on eliminating any and all perceived threats to the National Credit Union
Share Insurance Fund (NCUSIF). While a healthy concern for safety and soundness
is an essential component of the credit union movement, it is not its primary purpose or "raison d'étre." Regulatory pressures have ensued which seek more standardized credit unions and credit union lending. Non-traditional lending activities are
often viewed as potential threats to the insurance fund. Unnecessary restrictions
have been placed on the amount of non-member deposits which community development credit unions can seek. New charters, especially community development ones,
had become extremely cumbersome and rare. Restrictions on small business loans
to credit union members are excessive.
Merger and liquidation actions have become so commonplace they scarcely raise
an eyebrow. What was formerly resorted to as a last resort is often used now as
a supervisory tool to improve the overall safety and soundness scorecard of the credit union movement or to facilitate the movement toward fewer and more standardized credit unions. Because of the virtual elimination of new charters and the ex-

112
tremely high merger and liquidation activities, the number of credit unions in this
country has gone from a high of 22,200 in 1978 to today's figure of 13,400.
In general, the emphasis has shifted from assisting credit unions to carry out
their chosen missions in a safe and sound manner to an over emphasis on safety
and soundness at the expense of individual missions. For example, some community
development credit unions in existence for a number of years have been liquidated
because their measured financial condition was marginal and it was determined
that they "would never succeed. " This view of what constitutes success is too narrow
and fails to see that in terms of struggling to bring hope and change to individuals
lacking access to credit and financial services, the credit unions were already demonstrable successes. It is unfortunate that many of these credit unions are no
longer in existence. Further, the combined assets of these credit unions is so relatively small as to make any potential insurance losses very limited.
Some would argue that these changes have produced a credit union movement
that is more efficient, more standardized, more streamlined, and easier to control
and supervise. While these observations are true, that is not necessarily the best
public policy. Public policy is best served by a secure financial system that provides
opportunity to those of modest means, not simply one that lends itself to efficient
regulation. Tens of thousands of credit union volunteers have been eliminated along
with their ideas and service at the local level; decision-making has become more
centralized and thusly more standardized; communities and groups have lost the
closeness and sense of ownership control which their own credit union brought to
them; and diversity and uniqueness have been reduced.
Therefore we are pleased that the focus is now on the promotion of imaginative,
case-by-case initiatives where individual financial institutions seek to best meet the
particular needs of their locales (and their members), rather than seeking standardized methods of delivering only those types of services which have a proven track
record . Hearings such as these and the use of a new Government entity such as a
National Trust for Community Development Financial Institutions should afford the
necessary impetus and advocacy to fully embrace this important objective of reaching out to those communities which are in the greatest need. Under this new plan,
we assume that NCUA would continue to charter, insure, and regulate and that the
National Trust would designate those credit unions eligible for loans, capital infusions, technical assistance etc. and make decisions on the dollar amounts to be
awarded to each institution . These two forces should provide a more balanced approach to the goals of extending credit union services and maintaining safety and
soundness. We strongly recommend that credit unions be included as an integral
component of the Community Development program. The statement of the National
Federation of Community Development Credit Unions gives an excellent overview
of the positive benefits of CDCUs as well as some specific models that should be
replicated in the future. CUNA concurs with the recommendations which have been
made by the NFCDCU .
Attached are three recommended legislative changes to the Federal Credit Union
Act designed to add impetus to credit union participation not only in community development activities but other lending activities which could assist in economic recovery.

AMENDMENTS
1. Expediting charters of low income credit unions (includes CDCUs).
Amend Section 104 of the Federal Credit Union Act ( 12 USC 1754 ) by adding
after the current first sentence, a new sentence which reads : "The Board shall give
a high priority to considering the organizational certificate of a low income credit
union."
Suggested report language: "The Congress intends that the credit union chartering activities be simplified and expedited by NCUA and that special efforts be made
in the case of low income credit unions.
2. Small business loans to members.
Amend Section 107(5 ) of the Federal Credit Union Act ( 12 USC 1757) by inserting
immediately after "(5) to make loans," the following: "including small business loans
to their members,".
Suggested report language: "The Congress, by specifically including the phrase
small business loans to credit union members wishes to signal its recognition that
many credit unions serve a membership where their primary focus is not on
consumer lending but rather on providing modest size loans for business purposes
to their members. NCUA should recognize the needs of such credit unions and pro-

113
vide the necessary flexibility to enable these credit unions to meet the needs of their
members ."

3. Non-member deposits.
Amend Section 107(6) of the Federal Credit Union Act ( 12 USC 1757) by adding
at the end thereof the following new sentence: "In prescribing limitations, the Board
shall avoid limitations which preclude credit unions (especially low income credit
unions) from providing services to their members."
Suggested report language: "
The Congress instructs the NCUA to avoid wherever
possible the placing of limitations on the receipt of payments (deposits) by credit
unions, especially low income credit unions, which would impair the ability of the
credit union to successfully carry out its mission."
TESTIMONY OF MICHAEL SWACK, CO-DIRECTOR, INSTITUTE FOR
COOPERATIVE COMMUNITY DEVELOPMENT
COMMUNITY DEVELOPMENT LENDING AND MICROENTERPRISE
Microenterprise programs work with entrepreneurial individuals seeking to start
or expand small businesses. Microenterprises range from self-employment businesses to businesses employing five people. These businesses usually require small
amounts of capital-typically between $250-$ 10,000 in order to operate or expand.
Microenterprise programs represent a community-based economic development
strategy for business development and job creation among those traditionally left
out of the economic mainstream. They provide individuals with the capital and
skills they need to turn their businesses or business ideas into reality. The individuals served by microenterprise programs are predominantly women, often people of
color, and almost all are welfare recipients, unemployed or the working poor. The
creation of small businesses is just one goal of microenterprise programs-they are
also designed to increase incomes, stabilize families, raise self-esteem and self-confidence, develop skills, create role models, and spark a process of community renewal. Over 150 microenterprise development programs are represented nationally
by the Association for Enterprise Opportunity (AEO) in Chicago.
Many microenterprise programs include loan funds or offer financial services
through partnerships with local banks or credit unions. Micro loan funds usually are
capitalized with grants or loans from foundations or Government agencies. But
microenterprises face many barriers. The loan sizes required by microenterprises
are typically too small to be considered by traditional financial intermediaries. The
cost of transacting such loans is unprofitable for these traditional intermediaries.
Additionally, the borrowers are considered to be too “risky”—they do not have much
equity to put into the businesses, they have very little collateral, and they do not
have histories of running profitable businesses.
Although these loans are considered too "risky" by traditional intermediaries,
many community-based organizations have successfully loaned to microenterprises.
My own organization, the Institute for Cooperative Community Development has
run a program called Working Capital for the past two years. During this time we
have made over 425 loans in Northern New England. We have utilized a model of
lending called "peer" lending, a model utilized extensively overseas in places like
Bangladesh and throughout Latin America. In this model, people join borrowing
groups . Members start out by borrowing small amounts of money for their businesses. If any member ofthe group fails to repay his or her loan, other members
or the group must either make this payment or they will be denied access to further
credit. We have enjoyed close to a 97 percent repayment rate over the life of the
program.
In addition to providing capital, many microenterprise programs provide training,
technical assistance and in some cases support services such as child care and
transportation to borrowers. The provision of these non-fee generating services, combined with the small loan sizes, means that microenterprise programs are not able
to support themselves on fee and interest income.
Although it is not within the purview of this committee, it is important to note
that microenterprise programs face barriers other than the barrier of access to capital. For microenterprise programs to succeed the Government must eliminate barriers and penalties for transfer payment and public assistance recipients who pursue self-employment. We need to allow AFDC recipients to accumulate business assets and deduct business related expenses in calculating net income; change unemployment insurance laws to exempt recipients from looking for work while starting
a business; and, change public housing rent provisions to minimize increases for
residents generating wage or self-employment income.

114
Any legislative initiative to create community development financial institutions
needs to explicitly recognize and encourage microenterprise lending, whether
through microenterprise loan funds or other community-based intermediaries engaged in microenterprise lending. An investment of Federal funds into
microenterprise funds could be done in a variety of ways. Our Working Capital program has worked out a unique arrangement with three New England banks (Vermont National Bank, Fleet Bank, and Meredith Village Savings Bank) whereby we
have access to bank lines of credit for microenterprise lending. In exchange for access to credit, we establish small loan loss reserve funds at the bank. The small investment into loan loss reserve funds (currently made by foundations) has enabled
us to leverage substantial amounts of credit from banks to microenterprises.
A legislative initiative that supports investment in microenterprise funds and
training and technical assistance to borrowers could greatly enhance the success
and growth of microenterprise programs-programs that have already demonstrated
success in improving the quality of life for a wide range of people.
Finally, as someone who has been an active participant in community investment
for 14 years- with a variety of institutions (including microenterprise funds, community development loan funds and quasi -public agencies), I have four specific recommendations for any Government-sponsored financial initiative to promote community-based economic development.
1. A wide range of community development financial institutions ( CDFI), (including commercial banks, community development credit unions, community-development loan funds, microenterprise funds and specialized public agencies) should be
eligible to receive investment from a Federal initiative for community development
financial institutions. However, any institution receiving investment from a Federal
initiative should specify how they will help achieve goals of community development
and community investment . Community investment means more than simply investing money in a particular geographic place. A successful program of community
investment will stimulate the demand for development capital by supporting the formation of community organizations (like community development corporations and
community land trusts), and encouraging these organizations to develop and plan
more housing and economic development projects. Organizations I have worked
with, such as the Institute for Community Economics and the New Hampshire Community Loan Fund, have helped create new community development organizations,
which have in turn created housing and jobs for low-income people.
2. A key need in community development finance is the need for equity investment in low-income communities . A Federal initiative should provide equity to
CDFI's and encourage CDFI's to invest equity in community housing and economic
development ventures. Traditional loan products are not sufficient to meet community capital needs. My experience as Chairman of the New Hampshire Community
Development Finance Authority (CDFA), a quasi-public agency, has demonstrated
how critical equity can be to the success of projects. Through equity investments
(such as preferred stock and sharing of net operating income), the CDFA can invest
the kind of capital that is typically not available to low-income individuals and
projects that are developed by organizations serving low-income communities.
CDFA's investment improves the capital structure of the venture, leverages private
debt, and enhances the probability of success for the venture.
3. Encourage additional private investment in CDFI's by the private sector and
State and local government . The New Hampshire Community Development Finance
Authority (CDFA) provides an interesting example of how to encourage investment
in community development by the private sector. The State provides a tax credit to
businesses that commit funds to the CDFA-the CDFA can then use these funds
to make equity and debt investments in community-based housing and economic development projects. Federal legislation should include mechanisms that encourage
the private sector to invest in CDFI's .
4. A Federal initiative must seek to promote the development of secondary market
mechanisms to support the growth and liquidity of CDFI's . One of the primary problems CDFI's face is liquidity. CDFI's originate loans and investments that are nonstandard-that is, they do not fit the standard underwriting criteria of traditional
lenders. We hold these loans in our portfolio for several years-during this time
many risk factors are reduced. If we could sell these loans in the secondary market,
we would have more capital to originate the kinds of loans that only CDFI's originate. Federal legislation should require Government- sponsored entities like Ginnie
Mae and Freddie Mac to serve our market.

115
MICHAEL SWACK
Michael Swack is a professor and the Director of the Community Economic Development Program at New Hampshire College where he teaches courses in economic
development, finance and negotiations. He is also the Co-Director of the affiliated
Institute for Cooperative Community Development (ICCD), a nonprofit organization
involved in applied research, technical assistance and training. ICCD currently runs
the Working Capital program, the largest peer-lending microenterprise program in
the United States and the Capital Networks program, a pilot project that provides
assistance and credit to businesses participating in flexible manufacturing networks.
Mr. Swack has worked in the field of development finance for 14 years as a practitioner, consultant and teacher. He is a trustee and past President of the Institute
for Community Economics in Springfield, MA, the Chairman of the New Hampshire
Community Development Finance Authority, a founding and current board member
of the New Hampshire Community Loan Fund, a founding trustee of the National
Association for Community Development Loan Funds and a past member of the
Housing Advisory Board for the Federal Home Loan Bank in Boston. He received
his doctorate from Columbia University, his masters degree from Harvard University and his bachelors degree from the University of Wisconsin.
ADDITIONAL TESTIMONY BY MICHAEL SWACK AND DONALD MASON
THE INSTITUTE for Cooperative CommunITY DEVELOPMENT

Summary of Priority Issues
1. A wide range of community development financial institutions (CDFI), (including commercial banks, community development credit unions, community development loan funds, microenterprise funds and specialized public agencies) should be
eligible to receive investment from a Federal initiative for community development
financial institutions. However, any institution receiving investment from a Federal
initiative should specify how they will help achieve goals of community development
and community investment. Community investment means more than simply investing money in a particular geographic place. A successful program of community
investment will stimulate the demand for development capital by supporting the formation of community organizations (like community development corporations and
community land trusts), and encouraging these organizations to develop and plan
more housing and economic development projects. Organizations I have worked
with, such as the Institute for Community Economics and the New Hampshire Community Loan Fund, have helped create new community development organizations,
which have in turn created housing and jobs for low-income people.
2. A key need in community development finance is the need for equity investment in low-income communities. A Federal initiative should provide equity to
CDFP's and encourage CDFP's to invest equity in community housing and economic
development ventures. Traditional loan products are not sufficient to meet community capital needs. My experience as Chairman of the New Hampshire Community
Development Finance Authority (CDFA), a quasi-public agency, has demonstrated
how critical equity can be to the success of projects. Through equity investments
(such as preferred stock and sharing of net operating income), the CDFA can invest
the kind of capital that is typically not available to low-income individuals and
projects that are developed by organizations serving low-income communities.
CDFA's investment improves the capital structure of the venture, leverages private
debt, and enhances the probability of success for the venture .
3. Encourage additional private investment in CDFI's by the private sector and
State and local government. The New Hampshire Community Development Finance
Authority (CDFĂ) provides an interesting example of how to encourage investment
in community development by the private sector. The State provides a tax credit to
businesses that commit funds to the CDFA-the CDFA can then use these funds
to make equity and debt investments in community-based housing and economic development projects. Federal legislation should include mechanisms that encourage
the private sector to invest in CDFI's.
4. A Federal initiative must seek to promote the development of secondary market
mechanisms to support the growth and liquidity of CDFI's. One of the primary problems CDFI's face is liquidity. CDFI's originate loans and investments that are nonstandard—that is, they do not fit the standard underwriting criteria of traditional
lenders. We hold these loans in our portfolio for several years—during this time
many risk factors are reduced. If we could sell these loans in the secondary market,
we would have more capital to originate the kinds of loans that only CDFI's origi-

116
nate. Federal legislation should require Government-sponsored entities like Ginnie
Mae and Freddie Mac to serve our market.
I. FEASIBILITY
a. To establish a certain specific number of community development financial institutions (CDFI's) to be developed over the next four years is irrelevant. No specific
number should be set as a goal, instead, the development process should be allowed
to proceed based upon the need, the skill and expertise of those developing the institutions, and the level of capital available for the formation of these institutions. Of
course, this process will be determined by the nature of the rules, procedures and
policies developed through this legislation . It seems more important to develop a
process by which community development financial institutions will be encouraged,
rather than set a specific goal . However, any CDFI receiving money from the Federal Government needs to specify how they will measure their own success.
b. Community investment means more than simply investing money in a particular geographic place. Community investment involves a commitment to addressing
social issues as well ; that is, recognizing that the allocation of capital in the community requires a commitment to meeting the needs of those people and groups who
have typically been ignored by the traditional capital markets . Promoting local control of local resources and stopping the "leakage" of capital from poor communities
are important goals of community investment . Community investment seeks not
only to make capital available but to encourage the types of efforts and institutions
that will make the best use of capital in the community. A successful program of
community investment will stimulate the demand for development capital by supporting the formation of community projects and businesses and encouraging existing groups such as community development corporations (CDCs) to plan more
projects .
One of the greatest impediments to the formation of community development financial institutions is the lack of skills within the community economic development
world to design, develop, and run community development financial institutions.
This is especially true if community development banks have the mission of providing capital to communities, individuals and businesses that have traditionally been
shut out of the capital markets. Over the last twenty years, many community economic development practitioners have focused on specific areas of development, i.e.
housing, business development, job training, etc. The number of individuals truly
committed to community economic development who have the necessary skills to operate a community development financial institution is relatively small. Without a
plan to upgrading and training these individuals, such a program as the one proposed runs the risk of being overwhelmed by people who do not have a good understanding of community economic development.
If only traditional financial institutions (i.e. commercial banks) are permitted to
become community development banks, we could find that these institutions begin
to develop an approach to community lending that is similar to what they already
do. This would defeat the purpose of establishing community development banks in
the first place. To successfully do community lending in the first place, those involved with the bank must have a broader perspective of the capital needs of a community than that now shared by traditional lenders. Community development financial institutions must be flexible to develop and utilize underwriting criteria that
reflects the reality of the people, projects, and community in which they are lending.
They must be able to establish underwriting criteria that would not necessarily
match the criteria now used by traditional financial institutions. They must be able
to offer a wider range of financial instruments including equity and subordinated
debt.
If community development financial institutions are really intended as institutions that can fill a needed gap (i.e., lack of capital for control of community resources), then community development financial institutions must provide or have
access to a wide range of services including training and technical assistance to
business borrowers, organizational development for organizations embarking on
housing projects, and other support services for development. Of course, it may not
be possible for a CDFI to provide this wide-range of services, but there should be
some mechanism for other organizations to fill these roles. Without the ability to
provide these services, community development financial institutions will begin to
develop underwriting criteria that matches traditional banks, due to their perception of greater risk in lending to underdeveloped communities.
Community development financial institutions must be able to offer a wider range
of financing tools than traditional banks. These tools need to include the ability to
provide equity, as well as a range of debt instruments. The present regulatory environment would make it difficult for commercial banks to address these financing

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needs. This regulatory environment limits the types of risks that the bank can take,
and limits the range of financial tools available to a bank. Development banking is
common in many developing countries. These institutions provide financing in a
manner that enhances the financial viability of the project or business seeking financing. The goal is a successful business or project, not necessarily a large return
on investment.
II. WHAT IS COMMUNITY DEVELOPMENT BANKING?
a. Community development financial institutions must be permitted to develop
and hold a long-term strategy for the economic development of the community that
they serve. This will require that community development financial institutions
(CDFI) be permitted to engage in long-term investment decisions of the community.
This implies necessarily that CDFI's have the ability to actually invest, rather than
loan money, to community development ventures. A primary goal of this initiative
should be to support those CDFI's that have the ability to acquire equity positions
in businesses through instruments such as preferred stock or royalty agreements.
A CDFI should also be allowed to be a participating partner in housing and commercial development in the community. Return on equity can be realized in the
form of a share of the net operating income of the project. Rather than be only a
source of loans for development, a community development financial institution
should have the authority and the purpose of truly investing in the community's
ventures, and therefore in the community's future. This can not be done if the bank
is restricted to lending alone.
One of the primary goals of a CDFI should be to leverage private participation
in the financing of ventures through its own investment in that venture. Financing
by CDFI's should tie into broader financial markets, and utilize these markets as
sources of investment. This can only be accomplished if CDFI's have the ability to
utilize a wide range of financing tools suitable to each deal.
b. A CDFI's primary goal should be providing access to capital to individuals, organizations, businesses, and communities that have traditionally be denied capital .
Its goal should also be to assist the community in gaining control over the community's own resources . These goals can either take the form of revitalization of distressed areas, as well as improving the well-being of the residents of such areas.
However, as a community starts to gain control over its resources through control
of its land base, housing stock, and circulation of capital within the community, both
of these objectives can be met.
c. Any financial intermediary, profit or non-profit, including commercial banks,
community development loan funds and community development credit unions
should be eligible to receive investment from a Federal initiative. States and localities that have created or create specialized CDFI's should also be able to participate
in a Federal initiative. For example, New Hampshire has created a Community Development Finance Authority (CDFA) that invests both equity and debt into community development projects and businesses. The money from CDFA comes from private business, which gets a tax credit for putting money into the CDFA. The Federal Government should review the CDFA legislation and experience in drafting its
own initiative.
d. One of the primary purposes of a community development financial institution
should be to leverage and develop partnerships with the private sector. For example,
a community development financial institution such as a community development
loan fund should be encouraged to enter agreements with traditional lenders so as
to leverage its own investment with money from the broader capital markets . The
development of secondary market mechanisms is critical for CDFI's . Current secondary market mechanisms have been unresponsive to CDFI loans even when the pool
of loans being offered by the CDFI is of extremely low risk . A Federal initiative for
CDFI's should target the development of secondary market mechanisms as a priority of the initiative and/or stimulate existing Federally supported secondary markets
to be more responsive to CDFI's.
e. CDFI's should be permitted to offer a wide-range of community economic development programs under one roof. They should be permitted to operate micro-loan
revolving funds, venture capital funds, housing loan funds, and programs that encourage the acquisition by community based organizations of their community's resources, especially land. They should also be able, through direct investment or
loans, to participate in specific infrastructure projects that allow a community to develop. For instance, on many Native American reservations, access to electricity,
water and sewers makes economic development difficult. A Community Development Bank should be permitted to become a partner, either through equity investments, or loans, with tribes seeking to develop these facilities.

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III. HOW TO Finance CommuNITY DEVELOPMENT BANKS
a. CDFI's can be financed through capital provided by the Federal Government,
State government, private investors, and community organizations. Some of the financing can be through direct grants by the Federal, State and local government
for initial capitalization and operating expenses. Other funds could be raised by
changing the tax laws and the securities laws.
b. States and local governments could be encouraged to either invest or provide
loans to CDFI's through their CDBG funds . For every dollar invested of CDBG
money in equity, the state of local government could receive 50 percent of additional
CDBG funds. If the CDBG money is a loan, they could receive three (3) points above
the interest charged to the CDFI for each year of the loan. In order to qualify, the
CDFI must serve either the State or local government making the loan/investment.
c. The Federal Reserve and its member banks should be allowed to loan to CDFI's
at the Reserve or Banks' cost of funds. Other banks who make loans to CDFI's
should be allowed to borrow money from the Fed or its members at reduced rates.
d. Direct tax credits to private investors should also be considered as a possible
way to finance community development banks. While this approach would have an
impact on Government revenues, it is not inconsistent with the Administration's position on investment tax credits . The New Hampshire Community Development Finance Authority (CDFA) is a good example for utilizing tax credits to assist in the
capitalization of CDFI's. Under this legislation, New Hampshire businesses are able
to donate money or property to the CDFA, and receive a tax credit against their
business profit tax. This tax credit may be spread out over more than one year, and
the total amount any business can receive is limited.

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PRINCIPLES OF

COMMUNITY DEVELOPMENT

LENDING

&

PROPOSALS FOR

KEY FEDERAL SUPPORT

Association for Enterprise Opportunity
Chicago, IL
Center for Community Self- Help
Durham, NC
Community Capital Bank
Brooklyn, NY
First Nations Development Institute
Falmouth, VA
National Association of Community Development Loan Funds

Philadelphia, PA
National Federation of Community Development Credit Unions
New York , NY

Woodstock Institute

Chicago, IL

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Contents
1. Overview
2. Statement ofNeed
3. AVision of Community Development Lending
4. Key Principles in Meeting Credit Needs in Lower-income Communities
5. Strategic Federal Support
6. Potential Funding Sources
7. Corresponding Federal Policy Changes

1. Overview

Page 1
Page3
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Such institutions can only be established and
grown gradually.

resident Bill Clinton has dedared his intention to create a national system of 100
P community development
banks over the
next fouryears. Fortunately, an emerging industry
of community development financial institutions
(CDFIs) offers a solid foundation for this bold
initiative, which might include new institutions,
community organizations, conventional lenders,
and others, in addition to CDFIs.
The industry lends to low-income and , increasingly, to middle-income wage earners, small businesses,American Indian reservations, and communitydevelopment projects, complementingthework
ofconventional lenders. Two factors argue in favor
of the CDFI industry playing a lead role in a
federally-assisted community development lending program.

(1) The successful track record of community
economicdevelopmentandgrowth fosteredby
affordable credit through CDFIs is evidence
that good borrowers come in greater variety
than traditional underwriting methods often
recognize. It is worth noting that CDFIs often
provide a bridge between conventional lenders
and unconventional borrowers, by creating
new borrowers and opening new markets for
thelenders while givingthe borrowers access to
capital sources.
(2) Effective community development lendingprograms are rooted in thecommunities they serve
and are customized to fit those communities.

This memo lays out the key principles that we, as
communitydevelopmentlenders, believemustguide
theClintonAdministration's communitydevelopment lending program and suggests several ways
that the federal government can support the growth
of the CDFI industry. To date, with almost no
public support, CDFIs have proved that it is possible to mobilize and lend significant amounts of
capital for development in low- and moderateincome communities. Our track record and experience can and should serve as a foundation for
growth. With appropriate federal involvement,
community development lending can help reduce
poverty,countersocial and political disenfranchisement, and stoke the engines ofeconomic growth.
The CDFI industry has developed over the last
fifteenyears out of the determination and entrepreneurial spirit ofthousands of community activists,
social investors, non-profit developers, and small
business persons who correctly perceived that lack
ofaccess to credit is a principal barrier to social and
economic development. This industry comprises
diverse institutions that serve a variety of credit
needs in urban and rural communities. Included
are:
CommunityDevelopment Banks (CDBs), which
are federally insured and regulated depository
institutions that have been organized specificallyto provide capital to rebuild lower-income
communities. Just four community develop-

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ment banks operate in the U.S. today. South
Shore Bank in Chicago, Elk Horn Bank and
Trust in Arkansas, Community Capital Bank
in Brooklyn, NY, and the Self-Help Credit
Union in North Carolina. South Shore Bank,
Elk Hom Bank and Trust, and Self-Help
Credit Union are part of larger bank or nonprofit holding companies that include independent, non-depository credit and support
mechanisms such as venture capital funds,
development loan funds, and technical assistance agencies. These non-depository institutions are able to be more pro-active in their
development activities.
• Community Development Credit Unions
(CDCUs), which are regulated financial cooperatives owned and operated by lower-income
persons. Typically, CDCUs provide consumer
banking services (e.g., savings accounts, check
cashing) that may not be locally available to
their members, as well as personal loans for
consumer goods purchases, home rehabilitation, and car purchases. A growing number of
CDCUs are making development loans for
small business expansion and start-up, home
purchases, and housing rehabilitation . Prominent development lending credit unions include the Self-Help Credit Union in North
Carolina,theAlternatives Federal Credit Union
in Ithaca, NY, First Americans Credit Union in
Window Rock, AZ, and the Santa Cruz Community Credit Union in Califomia CDCUs
offer deposit insurance up to $ 100,000 per
account through the National Credit Union
Administration, which regulates the credit
unions' activities. CDCUs are represented nationally by the National Federation of Community Development Credit Unions
(NFCDCU) in New York City.
•CommunityDevelopment Loan Funds (CDLFs),
which are unregulated financial intermediaries
that aggregatecapital from individual and institutional social investors at below-market rates
and re-lend this money primarilyto non - profit
housing and business developers in urban and

rural lower-income communities . CDLFs place
strong emphasis on financing projects that
provide new economic opportunities and resources to borrowers and others in their communities. This generates economic leverage,
enabling individuals and communitygroups to
have avoice in communitybusiness, social, and
political affairs. CDLFs have been leaders in
financing community land trusts, cooperative
housing (including mobile home parks), and
worker/community-owned businesses. Prominent CDLFs indude the Low Income Housing
Fund in San Francisco, the Federation ofAppalachian Housing Enterprises in Berea, KY, the
Industrial Cooperatives Association Revolving
Loan Fund in Boston, MA, and the Delaware
Valley Community Reinvestment Fund in
Philadelphia, PA. Loan funds are represented
nationallybythe NationalAssociation ofCommunityDevelopmentLoan Funds (NACDLF)
in Philadelphia, PA.

•Micro-loan funds (MLFs) are most often components of micro enterprise development programs that integrate both economic and human development strategies. These programs
aredesigned to fight poverty, increase incomes,
raise self-esteem, stabilize families, develop personal, business and technical skills, createjobs
and role models, as well as to spark a process of
communityrenewal . The individuals served by
these programs are predominantly women,
often people of color, and almost all lowincome welfare recipients, unemployed, orthe
workingpoor. Loans to micro enterprises range
typically between $250 and $ 10,000 to startup or expand self-employment or micro businesses employing up to five people, normally
family members. Theseventures include home
day care, alterations and repair, fashion design
and tailoring, catering and food service, hair
and nail care, engine repair, trucking, retail and
merchandising. Many micro enterprise development programs also offer additional financial services through partnerships with local
banks or credit unions. Micro loans funds
usually are capitalizedwith grants or loans from

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foundations or government agencies or loans
from banks or other financial institutions. Pioneered in the developing world by Accion
International andBangladesh's Grameen Bank,
microloan funds are relatively new to the U.S.
Prominent micro enterprisedevelopment programs with MLF's indude Women Venture
(formerly WEDCO) in Minneapolis, Minnesota, the Lakota Fund in South Dakota, Micro
IndustryCredit Rural Organization (MICRO)
in Tucson, Arizona, the Women's Self-Employment Project Chicago, Illinois, the Good
Faith Fund in Arkansas, and the North Carolina Rural Economic Development Center.
Over 150 micro enterprise development programs are represented nationally by the Association for EnterpriseOpportunity (AEO) in
Chicago, Illinois.
There are also a number of hybrid CDFIs that
do not fit exactly into these categories but that
provide critical financing to community development efforts. These hybrid institutions include
NewYorkCity's Community Preservation Corporation , which has mobilized capital from banks,
insurance companies, and pension funds for lowand moderate-income multifamily housing, and
First Nations Development Institute's Oweesta
Fund, which serves American Indian reservations.
Inaddition, venture development funds like Northeast Ventures in Duluth , MN, Coastal Enterprises
in Wiscosset, ME, and Eastside Community Investments in Indianapolis, IN, finance start-up
businesses in urban and rural communities using
equitycapital raised through foundations and government grants . These institutions are very much a
part ofthe CDFI industry. They serve as models for
other community development lenders, and they
will be important to any effort to expand credit
access in underserved markets.

All of these CDFIs share certain public purpose
values:
⚫tooffercreditto the poor and to thosewhose credit
needs are not otherwise being met;
• to spur community-wide economic and social
development;

⚫ to provide the necessary technical assistance to
borrowers to ensure the success ofloans andto
build the capacity ofborrowers;
⚫ to use the lending process in away that encourages
borrowers to participate in decision-making
within their organizations and communities;
⚫ to enable individuals to gain self-sufficiency; and
⚫ to lend primarily for community development.
Capitalized with more than $700 million-much
ofwhich is raised from within the communities or
constituencies they serve-development banks,
credit unions, and loan funds have extended more
than $2 billion in loans. Loss rates are comparable
to the best conventional lenders. These CDFIs are
proving:
• that lower-income people and communities are
credit-worthy;
• that efforts to overcome chronic poverty depend
on both access to credit and resources for
capacity-building byindividuals and organizations, and
⚫ that conventional approaches to risk assessment
andsecurity must be reexamined when serving
borrowers with little or no credit history, business or development experience, or collateral.

2. Statement ofNeed
The need for CDFIs and the affordable
credit theyprovide has never been greater.
TMuch as access to credit is a precondition
for growth in small to large businesses, local access
to affordable credit is a necessary antidote to poverty, economic disenfranchisement, and communityeconomic stagnation. Chronic poverty continues to increase in America. Government statistics
released in the last quarter reveal that more Americans live inpoverty today than at any time in the last
twenty years. Common ideas about poverty often
overlook the fact that it is as prevalent in rural
communities as it is in urban ones, while recent riots
in Los Angeles and Washington Heights, NY, are
evidence of the desperation such economic and
social decline has caused.
Poverty results not simply from a lack of resources
or capacitybut also from patterns ofownership and

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control ofland, housing, businesses, and financial
institutions that draw resources out of lower-income communities and limit the ability of local
residents and Tribes to invest in their own future.
This is exacerbated by credit barriers and social
divisions that limit or deny lower-income and
working dass communities access to capital for
community economic development.

Providing development credit in low- and middleincome communities is vital to our nation's economic prospects. Small businesses will provide the
greatest employment growth over the next two
decades. CDFI lending programs encourage entrepreneurship, self-sufficiency, andcreative solutions,
qualities thatwill be essential to economic recovery.
CDFIs measuretheirsuccess not only bytheir own
economic gains but also by their contributions to
rebuilding the civic infrastructure of businesses,
voluntary organizations, social services, and housing central to revitalization ofAmerica's working
dass and poor communities.
Current economic and political facts—the recent
recession, astronomical government deficits, the
savings andloan bailout, andthe health carecrisispreclude significant increases in federal, state, and
local aid for existing community and economic
developmentprograms. Bank industry mergersand
proposed regulatory reforms have created and will
create mega-financial institutions with minimal
obligation, and ability to serve poor and middleincome communities. Financial institution consolidations will continue throughout the 1990's,
reducing the number of banks in the U.S. from
12,000 to 8,000, while many of the remaining
banks will focus not on the conventional banking
and credit needs ofnew and small borrowers but on
larger and more profitable customers. Most conventional lenders are further restrained by class and
cultural barriers, the high cost of operations, and
their commitment to profit maximization .
The 1992 elections made it clear that the American
public is looking for new ways to rebuild the civic
infrastructure of businesses, voluntary organizations,communityservices, and housing upon which

astrong democracy rests. President Clinton's proposal for a National Service Corps is a reflection of
this spirit. Italsooffers an opportunity to linkpublic
service to public support for community development lending by using the corps as the training
ground for a new generation of community development lenders (see Section 5.C. below), one ofthe
most important needs that must be met for community development lending to succeed.
3.AVision for Community Development
Lending
To servethe unmetandgrowingcredit needs
oflocal communities, a national network
TofCDFIsmust be fostered.)Existingpublic
purpose lenders, particularly community development banks, communitydevelopment creditunions,
community development loan funds, and microloan funds, comprise a solid basis for a nationwide
network of community development financial institutions. Initially, efforts should be made to
expand and adapt the models pioneered by North
Carolina's Center for Community Self Help,
Chicago's South Shore Bank, Arkansas's Elk Hom
Bank & Trust, and Brooklyn, NY's , Community
Capital Bank.
Multi-service CDFIs have the greatest potential for
growth, community development impact, and selfsufficiency. The bank or non-profit holding company structure enables the development intermediary to aggregate capital from within and outsidethe
community through an insured depository institution . It also allows the institution to set up other
credit and technical assistance affiliates. This type of
organization can then pursue a coordinated development strategy that achieves an economy ofscale
and the significant impact necessary for the revitalization ofurban and rural communities . This multiservice model should be considered the first-tier of
CDFIs.
•New organizations, conventional lenders, and insutuaons
other than those mentioned here are also expected to be part
ofthis network. This paper focuses on the types ofCDFIs
described in Section 1.

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At the second tier, the number ofCDFIs that have
the capacity to step immediately into the multiservice model is limited to some 25-30 institutions.
Indeed, significant support for capacity building
will be needed to achieve President Clinton's goal of
100 multi-service CDFIs. This support will enable
somemicro-loan funds to evolve into loan funds or
• credit unions, small loan funds and credit unions to
grow larger, and large, successful CDLFs and
CDCUs to become multi-service institutions. A
growth ladder ofthis typewill provide an important
legacy for President Clinton-a national network
of more than 100 multi-service CDFIs, as well as
strong and enduring local institutions and revitalized communities across America.
Pilot projects should be launched over the next four
years to build on the foundation for 100 multiservicedevelopment financial institutions that will,
in turn, demonstrate the value and feasibility ofa
broader community development bankingsystem.
Theseprojects must include support at bothtiers of
the CDFI industry. Strong CDFIs should be selected for these efforts because they have:

• Clear missions of communityeconomic development;
•Demonstrateddevelopment lendingtrack records;
• Accountability to investors or depositors and to
the communities they serve,
• Effective management, lending, investment, and
technical assistance capabilities;
• Established networks of investors and borrowers
from which to launch a large-scale community
revitalization initiative; and
• Strong community support.
Fivefactors will be critical to the success ofsuch pilot
ventures and to a long-term effort to build a public
purpose banking system :
( 1 )A base ofequity or net worth capable ofsustainingthe organizations as they grow;
(2) Access to and control over longer-term, lowercost capital;
(3)A long-term strategy for human capital development;
(4) Public sector grants to support borrower techni-

cal assistance services and new credit product
development ventures; and
(5) Continuedaccess to federal housing, enterprise,
and social service development programs, as
appropriate.

4. Key Principles in Meeting Credit Needs
in Lower-Income Communities
ix key principles should guide Clinton administration officials and Congressional
Sleaders formulating this initiative:
A) Community development "banks" should be
defined to include the spectrum of community
development financial institutions. A diversity of
credit needs exist in poor communities; therefore, a
range of institutions has evolved to serve these
needs. To be effective, any Federal program must
support a spectrum of institutions that have the
following common attributes:
1 ) offer credit to low-and moderate-income people,
small businesses, and communitydevelopment
projects whose need for credit is not otherwise
being met;
2) provide the necessary technical assistance to
borrowers to ensure the success ofloans and to
expand the capacity ofborrowers;
3) make credit decisions within their own institutions so that local , regional, or state factors, as
appropriate, are properly weighed;
4) foster community-wide economic and social
development; and
5) empower disenfranchised individuals and communities to gain self-sufficiency.
B) Expand the scope ofcommunity development
bank lending beyond small business credit. The
Clinton plan articulated during the campaign seems
to assume that community development lending
would be primarily, if not entirely, business oriented. We strongly recommend that a successful
program must also include housing lending, consumer lending, retail banking, and other credit
needs (e.g., working capital and facilities development loans for non-profit social service providers
andTribes) in working class and low-income com-

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munities. Healthy communities are made up of a
variety of institutions and persons with diverse
credit needs. Failure to respond to this broad range
ofcreditdemands will needlesslylimit any community revitalization strategy.
C)Consult experiencedcommunitydevelopment
⚫• financial institutions in crafting legislation and
operatingtheCDFI network. 42 loan funds, 100
community development credit unions, and 4 development banks manage approximately $700
million in private capital and have proven lending
track records.

•SouthShoreBank in Chicago, CommunityCapital Bank in Brooklyn, NY, Elk Hom Bank &
Trust in Arkansas, and the Self-Help Credit
Union in NorthCarolina have loan loss rates at
or below the level of their peer depository
institutions.
•Accordingto the National Federation ofCommunityDevelopment Credit Unions (NFCDCU),
community development credit unions have
loaned more than $2 billion. NFCDCU's
members' loss rate on loans on average is less
than 2%.
•NACDLF members have loaned more than$ 100
million, which has leveraged $760 million in
public and private capital to finance 15,000
housingunits and to create 6,100 jobs for poor
Americans. NACDLF members loss rate on
loans is less than 1%.
D) Emphasize expansion of existing community
development financial institutions rather than
simply undertake wholesale efforts to create new
development banks. Existing institutions should
be supported to expand their activities because they
know their markets and because they have proven
that they can lend successfully in low- and moderate-income communities. Most CDFIs are undercapitalized and operate with inadequate net worth
levels, requiring them to divert resources from
workingwith borrowers to seeking potential funding sources. At the same time, the demand for
affordable credit in most cases far outstrips the
supply.

An attempt to franchise or otherwise mass produce
CDFIs is not likely to be able to meet this demand.
Successful CDFIs are, as we have noted, rooted in
the communities, states, and regions that theyserve.
Most draw their lending capital from their service
areas, and their boards ofdirectors reflect the composition oftheir communities . This makes it possible for them to gain therequisite understanding of
credit needs and borrower capacity to gauge their
lendingproperly. Institutions created without these
strengths and operating with a mandate to lend
quicklyand in a safe and sound manner will carry a
heavy burden ofunachievable expectations. In areas
not presently served by a CDFI , the federal government consider fostering development ofa newone.
E) Recognize that successful development lending
institutions arebuilt over time andwithincremental performance-based financial support. South
Shore Bank in Chicago and the Center for CommunitySelf-Help in North Carolina have reached
their current levels after 20 years and 10 years
respectively. Development finance is a highly specialized enterprise requiring uniquely skilled personnel,detailed market knowledge, and local institutional credibility. This skill and trust cannot be
bought with massive federal appropriations but
must be built over timethrough sound lendingand
borrower capacity-building programs. Any other
approach invites repetition of past federal antipoverty initiatives that produced fraud and abuse.
F) Clarifythe different interests and responsibilities ofconventional lenders, public agencies, and
CDFIs. The notion that CDFIs will take business
away from conventional lenders is not likely to
come to pass. Loan funds, credit unions, and development banks operate almost entirely in separate
markets from those served by conventional lenders.
Historically, CDFIs have been a breeding ground
for new borrowers from conventional institutions ,
serving as bridges giving banks and others access to
new markets. The difficulties of gauging credit risk
among new or unestablished borrowers, lack of
market knowledge, inadequate development lending expertise, and changes in the global financial
system pose significant-though not insurmount-

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able-hurdles for conventional lenders interested
in playing an expanded role in these communities
under the Clinton Administration's community
development lending initiative.
Public agency programs often are bureaucratic
andhighlypoliticized. Instead ofservingborrowers'
needs,these programs can stifle the entrepreneurial
initiative that community development financial
institutions successfully foster. Community developmentlendingrequires highly specialized business
skills and a commitment to sound business practices. It is often difficult to foster these qualities in
the public sector..
As a result, we believe that existing CDFIs
shouldbethefoundation foran expanded communitydevelopment lending initiative, as stated above.
Twokey responsibilities ofconventional lenders as
part ofthis program need to be articulated, however, to ensure that the broader purposes of the
Clinton community development banking program are met:
• Continue the Community Reinvestment Act
(CRA) and expand community reinvestment
lending. The creation of a CDFI network
underthe Clinton Administration must notbe
a substitute for the CRA. It is our experience
that even ifthe Clinton plan for 100 CDFIs
were fully realized in 1993 there would still be
anoverwhelmingdemand for affordable credit
in America's distressed urban, suburban, and
rural communities. New York City alone has a
$30 billion affordable housing credit shortfall.
The federal government could support community development in general by extending
the reach ofthe CRA.
At the same time, an expanded CDFI
industrywill provide conventional lenders with
ameans to participate in community development lending at substantially reduced risk and
lower transaction costs. Many CDFIs have
worked successfully with conventional lenders.
The Low Income Housing Fund (LIHF) of
San Francisco, CA, has pioneered the use of
innovative financing mechanisms such as loan
packaging to help conventional lenders make
community development loans. LIHF cur-

rendy manages some $ 16 million in two loan
pools in San Francisco and Los Angeles.
• Link creation of a national system of CDFIs to
future financial support for and regulation of
the conventional financial industry. The private banking system and capital markets have
undergone a profound restructuring over the
past 20 years. Banking industry deregulation,
growth in the conventional paper markets,
insurance industry expansion , and the increasingrole ofunregulated financial intermediaries
such as mortgage banks andfinance companies
have left manylowerand middle-incomeAmericans, small businesses, and poor communities
without access to affordable credit. This restructuring has been made possible through
myriad government subsidies to conventional
financial institutions (e.g. , federal deposit insurance, state insurance guarantee funds, Federal Reserve Discount Window borrowings,
etc.). Government subsidies and new powers
should begranted to the financial industryonly
if it meets quantifiable community lending
objectives and provides ongoing financial support tothedeveloping nationalsystem ofCDFIs.
5. Strategic Federal Support
ederal support should be provided to foster
the development ofa national system ofcomF munity development financial institutions:

A) EquityCapital orNet Worth Grants: Sufficient
levels of equity(for for-profit lenders) or net worth
(for non-profit lenders) is critical to the long-term
viability ofany financial institution . Access to adequate amounts of equity or net worth is the
principal impediment tothe creation and/orgrowth
ofmostCDFIs . Only four development banks have
been created in the past 20 years , primarily because
of the difficulty in raising equity or net worth
capital . Distribution of equity funding under a
federal program should use a performance-based
process (see Section 7).
Equity or net worth capital is critical to all financial
institutions:

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•Itpermits greater risk in lendingto borrowers with
limited credit histories by providing investors
adequate protection;
•It enablesflexible loan pricing and longerterms, as
needed;
•It permits lenders to refinance balloon loans made
toborrowerswhen designated take-out financing is delayed;
• It protects investors from borrower defaults if
allocated loss reserves are exhausted;
• It gives CDFIs the financial clout to attract new
investments from sources thar traditionallyhave
not supported them— such as insurance companies, banks, mutual funds, and universities-and that require minimum net worth
levels; and
• It generates 100% earnings as "spread," giving
CDFIs the financial independence to forge
creativepartnershipswith borrowers. Thespread
subsidizes borrower technical assistance, which
makes development lending viable.

B) Below-Market & Long-Term Deposits or
Loans: The costs of doing community developmentlending are higherthan the costs oftraditional
conventional lending, in large part because each
loan requires the lender to provide technical assistance to the borrower. In addition, the underwriting process is unique for each loan. To insure
borrowersuccess, ongoing technical assistance often is required long after loans are closed. The
interestearned on below-market deposits or capital
helps to payfor this assistance.
ManyCDFIs also facethe challenge of using shortterm capital (for non-depository institutions) or
deposits tofund long-term projects. Housinglenders by necessity often make balloon loans without
take-outfinancingin place . Conventional banks are
hesitant to participate in or to refinance these loans
for various reasons, including ( 1 ) lack offamiliarity
with the nonconforming, original underwriting of
most CDFI loans, (2) terms and pricing that maybe
unattractive, (3) the lack of credit enhancements
such as loan guarantees and interest rate subsidies,
(4) the lack of a specialized secondary market for
community development loans, (5) lack ofexperi-

ence with development lending markets, (6) high
transactions costs, and (7) a misperception ofsubstantially higher risk in development lending.
Longer-term deposits make longer-term lending
feasible for CDFIs.
C)Human CapitalDevelopment: Efforts to create
a national system of community development financial institutions will only be successful if a
generation ofdirectors, managers, and loan officers
can be recruited and trained to operate these intermediaries. Development lending and public purpose bank management require specialized knowledge and technical skills, strong social commitments, and extensive community experience, all of
which differ in important ways from the skills
needed to run a conventional financial institution.
Community development lenders should undertake, with Federal support, several initiatives to
developthe next generation ofcommunity bankers
and trustees needed to operate and to govern an
expanded network of community development
financial institutions. These initiatives could include:
• Creation of a three-year internship/apprenticeship program at community development financial institutions. This internship would be
similar to in-house conventional/investment
bank training programs but would also attend
tothe economic, social , and intellectual formation ofparticipants.
This program could dovetail with President Clinton's plans for a National Service
Corps by placing talented young adults in
training for productive careers in community
development and community development
finance.
• Forging cooperative training agreements with
select university business schools and conventional financial institutions to complementthe
apprentice program outlined above.
· Sponsoring regular seminars on capital access,
communityleadership, public investment, and
economic democracy issues for CDFI board
and staff members.
The federal program also should include a

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research program to assess the long-term economic
and social issues affecting the CDFI industry and
the communities its members serve.

•

D)BorrowerTechnicalAssistance andNewCredit
Products Development Funding: CDFIs serve a
market of institutions and individuals who have
been unable to gain access to credit. Typically,
CDFI customers arefirst-time borrowers with little
credit historyor development experience. Ongoing
technical assistance is critical to successful CDFI
lending to housing developers, first-time homeowners, small businesses, and non-profit service
providers. The business planning, financial management, and marketing assistance CDFIs provide
to their borrowers to build skills is labor intensive
and raises transaction costs, ultimately lowering
profit margins. It is necessary because it helps to
ensure loan repayment and long-term borrower
success. To serve this market effectively, CDFIs
have created specialized technical assistance programs. CDFIs also continually develop and market
new loan products to serve emerging credit needs.
The marketanalysis, product research, andproduct
development costs incurred by CDFIs are substantial. Support forthese capacity building programs is
essential in three areas:

• Technical assistance to first-time borrowers or
organizations undertaking new housing/business development ventures;
• Technical assistance to help secure conventional
lenderfinancing for current CDFI borrowers;
and
• New credit product development by CDFIs to
meet emerging credit needs of new borrowers.

6. Potential Funding Sources
DFIs offer the Clinton Administration a
unique opportunity to demonstrate its
commitment to economic programs that
eschew the "hand out" model, that encourage and
abet entrepreneurship, that foster economic selfsufficiency, that support economic growth at the
community level where its impact is greatest, and
that reward economic and social accountability.

CDFI funding should not come exdusively
from adirectfederal appropriation but should draw
also on the public responsibilities of the federally
insured and subsidized conventional financial markets. Those institutions which benefit from public
subsidy oftheir lending or other financial services
(eg., deposit insurance, insurance and pension
fund guarantees) could reasonably be expected to
contribute in various ways to meeting credit needs
they are unable to address directly.
Several possible financing mechanisms could
complement direct Congressional appropriations
for the Clinton CDFI program. These include:
commercial bank commitments of equity capital
andothersupport to CDFIs as an outcome ofCRA
negotiations or mega-bank mergers; a share ofthe
profits from appreciation of federally sold assets
(e.g., a percentage recapture levy on Resolution
Trust Corporation properties); a share of profits
from government-sponsored enterprises such as
Fannie Maeand Freddie Mac; and CDFI set-asides
within major legislation to bail out the S&L industry or inject capital into other parts ofthe financial
services industry. A combination of such modest
measures couldyield hundreds ofmillions ofdollars
of capital needed to build a vibrant, large-scale
CDFI sector.
Inaddition, theClinton Administration should
considercarrots and sticks for commercial financial
institutions to provide long-term, low-cost capital
to the CDFI sector. Measures such as requiring
conventional lenders, pension funds, investment
banks, insurance companies, mortgage companies,
andfinancecompanies to place a very small proportion of their overall assets with CDFIs would yield
enormous public benefits in the form of jobs,
affordable housing, and increased ownership opportunities. It would also underscore the expectation that such institutions that receive public subsidies have special responsibilities to see that community credit needs are met.
Finally, the Clinton Administration should
considerincentives to increase investmentin CDFIs
by America's major wealth-builders- individuals.
CDFIs have proven their ability to raise private
capital for community investment from individu-

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als. This could be significantly enhanced iffederal
tax laws were amended to provide tax-free interest
to individuals who make below-market communitydevelopment investments or deposits in loan
funds, credit unions, micro-loan funds, and developmentbanks. This incentive would be available to
individuals at all incomelevels, would give investors
(or depositors) the equivalent of market-rate returns, and would- via CDFIs-strengthen communities socially and economically.

7. Corresponding Federal Policy Changes
federal policy of supporting community
development finance must extend beyond
Athe proposed network of 100 CDFIs. The
ClintonAdministration can back up its investment
inCDFIs bya series ofadministrative and legislative
initiatives:
• Simplify public sector credit enhancement programs to non-profit CDFIs. Partial and full
loan guarantees, for example, could significandy increasethe ability ofCDFIs to leverage
both public and private investment dollars.
TheCommunity Preservation Corporation in
New YorkCityhas successfullyused municipal
and state guarantee programs to direct more
than$1 billion in bank, insurance industry, and
municipal pension fund moneys to affordable
housing lending. Farmers Home Administration, Federal Housing Administration, and
Veterans Administration programs could be
usedto replicate this model with CDFIs across
the nation. Similarly, South Shore Bank isthe
largest Small Business Administration (SBA)
lender in Chicago. Beneficiaries are primarily
minority-owned businesses. Non-depository
CDFIs could increase their business lending if
SBA rules were modified to simplify the requirements on non-bank lenders. This adaptation would also increase the number ofminorities, women, and rural businesses receiving
SBA support.

•
Require government-sponsored enterprises
(GSES)-Fannie Mae, Freddie Mac, Ginnie

Mae-to develop customized secondarymarket programs for housing and business loans
originated byCDFIs. To date, GSEs have been
almost completely unresponsive to CDFIs.
CDFIs' performing loans are judged by standardized underwriting criteria that are largely
irrelevant to CDFIs' lending market. CDFIs
cannot grow and prosper unless an active secondary marketis fostered fortheir loans. Existing GSES have an obligation to serve this
market aggressively and can do it profitably.
CDFIs' lending track record has spurred great
interest among social investors-such as religious and municipal pension funds-to purchase performing community development
loans through private placement mechanisms.
• Ensure public accountability ofall CDFIs. Limited federal oversight will be necessary to administer the CDFI initiative and to ensure
publicaccountability. Regulatoryand program
evaluation standards, however, mustbefounded
in the current policies and practices of the
diverse range of CDFIs. We recommend that
the Clinton community development initiative relyprimarilyon performance-based funding to encourage the use of "best available”
practices and to enable the industry to grow
into a highly effective national system . This
approach ensures that recipients offederal support build capacity as they grow. We recommend that two principles should guide this
approach:
(1) Oversight and evaluation should be performance-based. Anewfederal communitydevelopment program would be remiss ifit used a
strict selection process for participants that
excluded a significant sector of the CDFI industry. The only way to build a national network of 100 or more depository CDFIs is to
seed the existing industry broadly and then to
allocate resources to those organizations that
meet negotiated performance targets. This process will allow a range of approaches while
ensuring a fairlevel ofreturn. In addition, itwill
allow the most innovative and determined

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lenders togrowwhile the others dropout ofthe
national system .

1January
, 993
25

(2) Performance evaluation should be outcomebased. No two CDFIs will operate alike. Each
willhave uniquetargetgroups, activities, methods, procedures, and priorities, depending on
thecharacteristics ofthecommunities in which
they lend. A federal attempt to micro-manage
all CDFI lending by requiring, for example,
federalsign-offs on individual loans oruniform
underwriting or loan servicing guidelines will
be counter-productive. Ultimately, it will fail.
Instead, federal oversight officials should nego-

tiate expected institutional outcomes with each
recipient within a range ofstatutorily acceptableoutcomes that are related to theinstitution's
primary mission ofproviding credit for community and economic development. Performance evaluation should focus on the CDFI's
success at achievingthese outcomes. Outcome
criteria should be established for, among other
things,lendingvolume, portfolio performance,
capacity building, and program results (e.g. ,
service to targeted constituencies), and should
be measured overan extended time period that
allows for accurate assessment ofsuccess.

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ACORN
February 17 , 1993
The Honorable Donald W. Riegle
Chairman
Committee on Banking , Housing, and Urban Affairs
U.S. Senate
Washington, D.C. 20510
4
Dear Chairman Riegle:
I appreciate the opportunity to offer comments on aspects of
the Clinton Administration's proposal to create a network of
community development banks .
I wish to make absolutely clear that ACORN strongly opposes
any initiative that would dilute the community reinvestment
obligations of existing insured depository institutions . In
particular , we oppose efforts to allow existing institutions to
receive oredit" under the Community Reinvestment Act ( CRA) for
equity investments or loan participations with community
development banks . "
The Clinton community development bank proposal can be an
important vehicle for focusing attention on development needs ,
targeting funds, and rallying local communities in revitalization
efforts. As part of a comprehensive strategy to increase credit
availability for underserved sectors and distressed communities ,
the creation of new community development banks can make a real
difference .
The appropriate role of such institutions will , however,
probably be to act an incubator of innovation, and to demonstrate
to the industry at large that community lending can be done
profitably and with minimal risk. Expecting such institutions to
solve by themselves the range of credit availability problems in
America, however, will be a recipe for failure.
I would like to lay out six broad principles for the
Committee as it considers various proposals .
a. Do not lessen the existing community reinvestment
responsibilities of depository institutions , and work with the new
Administration to realize CRA's immense potential.
Community development banks , whatever their structure , cannot
Association of Community Organizations for Reform Now
National Office: 739 8th Street S.E. , Washington, D.C. 20003 - 202-547-9292 FAX 202-546-2483

132
Reinvestment Act (CRA) enforcement .
As always happens when a new program is created, the vultures
appear on the scene to grab whatever advantage possible. The
banking trade groups are clearly seizing on the community
development banks as a backdoor means of escaping their
responsibilities under the CRA. They want to contribute a few
pennies to the new banks --maybe a desk blotter and handful of
ballpoint pens-- and then get an "outstanding" CRA rating. This
way the bankers figure they'll be free of low-income people in
their lobbies and hassles about home mortgages from the wrong side
of town .
In addition, providing CRA "credit" for contributions to
community development banks would unfairly penalize banks that
have learned how to land in low-income neighborhoods profitably
and with minimal risk, and reward the negligent portion of the
industry that has never complied with the law.
1
A report by the Senate Subcommittee on Housing and Community
Development last year highlighted how much can be accomplished by
a new Administration committed to vigorous enforcement of the
Community Reinvestment Act (CRA) .
The Report on the Status of the Community Reinvestment Act
found in November, 1992 that CRA had had "noteworthy success , " and
that " [ c}ommunity groups working with the private sector have
generated more than $30 billion in the last decade for
reinvestment in underserved communities . " The report credited CRA
as "the impetus for developing partnerships between financial
institutions and communities; for providing access to capital to
communities traditionally underserved ; and for creating new,
innovative methods for meeting the credit needs of all segments of
the community. "
The report want on to note that CRA had not achieved its
potential because of regulatory malfeasance .
"It is clear from the Subcommittee's review that the
regulatory agencies have yet to fulfill their obligation
to ensure that the CRA is properly and completely
implemented . The supervisory agencies record of
inconsistent and lax enforcement has encouraged the
indifference and disinterest by the financial
institutions . As a consequence , the agencies bear
significant reponsibility for the poor performance of
many of the financial institutions ... Inconsistent
implementation and enforcement dininishes the CRA's
tremendous potential , deprives neighborhoods and
communities of one of the most effective Federal tools
available to assist in meeting their credit needs , and
denies financial institutions the benefits of a
consistent , fair regulatory regime ... The message is
clear. CRA is a law whose purpose is as relevant today
2

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as when it was written 15 years ago. The issue is obt
the law, but: its implementation and enforcement .
Among the flaws in regulatory performance identified by the
report were: grade inflation, uneven quality of evaluations , lack
of clarity about CRA's goals, inattention to identified cases of
discrimination , | infrequent use of enforcement powers , lack of
attention to lending data in assessing performance, and
obstruction of community input into the regulatory process .
With reference to community development banks, the report
specifically cautioned that " community development banks can only
be one component of a CRA program. Financial institutions cannot
"buy out" of their CRA responsibilities to the entire community by
simply participating in a community development bank. "
' Great strides can be made in increasing credit availability
for distressed urban and rural commnities by strengthening
enforcement of the CRA. Specifically, the Committee should work
with the new Administration to:
1
*require the agencies to conduct more rigorous evaluations of
lenders , and establish more rigorous standards for evaluations ;
!
*nake greater use of performance data in examinations and
evaualuations ;
*conduct more frequent exams, particularly in the case of the
Occ, and provide better training for examiners ;
*make more frequent use of available enforcement tools , such
as cease and desist orders and the denial of merger applications ;
*facilitate , rather than obstruct , community input into the
CRA process , and recognize partnerships between community groups
and other local groups with lenders as an important component of a
sound CRA program;
*collect more data in a more useful form, particularly on
lending to small businesses ; and
*in the case of banks operating in multiple MSAS in a state,
conduct separate CRA evaluations for each MSA served by the
institution, and one for rural portions of the state .
b. Use federal funds to support a range of community lending
initiatives.
Different communities have different needs , and no " cookie
cutter" solution imposed from Washington , D.C. will solve the
problem. Community development banks , credit unions, and loan
funds, as well as credit programs established by non-profit
community and housing development organizations are all legitimate
mechanisms to increase the flow of credit into underserved

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134
communities .

Specifically, the proposal could:

dramatically increase the $6 million available at the
National Credit Union Administration for promotion and creation of
CDCUS .
explore ways of focussing the National Cooperative Bank -created and capitalized by the federal government in 1978-- on
providing credit and technical assistance in underserved areas .
+
* allow local communities that wish to apply for federal funds
to select the most appropriate vehicle for extending credit : a
community development bank, a community development credit union,
a community development loan fund, or a credit program run by a
community or housing development organization .
o. Mazinize participation of local residents in the creation
and governance of new institutions in low-income neighborhoods i
Credit programs imposed on communities by outsiders are
doomed to failure . Community ownership, control, and governance
must be at the heart of any community development bank proposal .
Low- and moderate-income and minority neighborhoods have suffered
for too long from loan policies imposed from downtown by boards of
directors and loan officers who cannot grasp the realities of life
in their communities and cannot understand why " one size fit all"
loan standards impose unnecessary barriers . We must have people
on the boards of directors of these new institutions who are from
the community and have a lifetime commitment to improving it , and
who know the neighborhoods and its needs .
We recognize the importance
run these institutions . But the
must be drawn from the community
truly contribute to neighborhood
they are not to be resented.

of having qualified management to
directors --the policy makers-if these institutions are to
revitalization, and indeed if

Sufficient funding must be provided for a strong outreach and
technical assistance program. The administrative entity
overseeing the disbursement of federal funds --HUD or a new
independent agency-- must have field staff whose job is to work
with residents of low-income neighborhoods , organize meetings ,
build support and ownership, and assist in the development of
proposals to establish new institutions.
d. Prioritize the creation of new institutions in truly
distressed areas , and require applicants for federal funds to
direct the bulk of their lending to projects which benefit lowincome families..
There is an "upward creep" with regard to many federal
programs , so that initiatives that start with inner-cities in mind
often end up serving a middle- or upper-income constitutency in
practice. It is essential that priority in funding be given to

135
proposal that will serve a demonstrably underserved population . We
strongly urge the Committee to target funds for new institutions
only to communities with a median Income that is less than 80% of
the Area Median Income (AMI) .
In addition, applicants for federal funds should be required
to state a commitment to directing the overwhelming bulk of their
lending to a target distressed community, and be held accountable
failing to meet those targets . We suggest that applicants for
• for
federal monies be required to commit that no less than 80% of
their total originations be in neighborhoods at or below 80% of
AMI, and further than they maintain a loan-to-asset ratio no less
than 70%..
e . Recognize the constraints facing many community-based
organizations , and do not impose unreasonable "match" requirements
on them
Many underserved communities may be able to "match " public
equity contributions with private capital. Given, however, the
scarcity of socially responsible investors --upon which many
existing alternative financial institutions rely-- and the
realities of low- and very-low income communities , a 1 : 1 or 2 : 1
match may not be realistic in all cases.
We suggest allowing for a reduced match --or a waiver-- for
applicants proposing to serve a low- or very-low income community.
1. Fund the program at a reasonable level , to ensure the
viability of new institutions .
We have been disturbed by news reports that suggest that the
President might allocate only $850 million for 100 development
banks. This would suggest almost a boutique, demonstration
program, creating institutions with little equity capital and
therfore with little lending muscle . These institutions must not
be established on a shoe string. They must be put on a solid
footing, even if that means proceeding at a more deliberate pace
or creating fewer institutions .
We appreciate the opportunity to comment, and look forward to
working with the Committee as it crafts community lending
legislation.
Sincerely

Deepak Bhargava
Legislative Director

136

STATEMENT

OF THE

NATIONAL ASSOCIATION OF HOME BUILDERS

SUBMITTED TO THE

SENATE COMMITTEE ON BANKING , HOUSING
AND URBAN AFFAIRS

CONCERNING

COMMUNITY DEVELOPMENT BANKS

FEBRUARY 3 , 1993

137
The National Association of Home Builders (NAHB) , representing 157,000
member firms, would like to take this opportunity to present its views on the role of
community development banks in alleviating the credit crunch for small business and
creation of economic growth. As an Association which is comprised of builders who
are primarily small business persons , NAHB supports the concept of " community
development" banking . Some institutional structures to support community
development banks already exist. Specifically, the Federal Home Loan Bank (FHLB)
System could provide not only a supportive structure , but a variety of programs and
services, which would enable community development banks to better carry out their
mission. This could be accomplished with no budgetary impact.

HOME BUILDERS ARE PRIMARILY SMALL BUSINESS PEOPLE
The nation's home building industry is dominated by a great many small builders
operating in limited geographic areas, generally local markets. The last census of the
construction industry ( 1987) estimated the number of residential builders with at least
one employee on the payroll at about 120,000 firms . About 75 percent of home
building companies build 25 units or fewer per year, and more than two-thirds of
these build only ten units or fewer. Only 8 percent of home builders are considered
to be "large; " that is, building 100 or more units per year. In addition , most of the
subcontractors and many of the suppliers to these builders are small businesses
themselves and are heavily reliant on home builders for their livelihood . In view of the
structure of the industry and the heavy reliance of builders on thrifts and banks for
housing production credit, it is not hard to see why home builders have been
particularly hard hit by the credit crunch affecting small businesses.

THE CREDIT CRUNCH AS A FACTOR IN THE NATION'S ECONOMIC RECOVERY
The impact ofthe credit crunch on small business and the resulting debilitating
repercussions throughout the economy has been widely acknowledged both during the
presidential campaign and by the current Clinton administration . On November 18,
1992 , Alan Greenspan , Chairman of the Federal Reserve Board made the following
observations about the credit crunch , its impact on small business and the nation's
economic recovery :
"One of the most disturbing elements of the current subpar recovery has been
the extraordinary debilitation of our financial intermediation process...This is
especially distressing because banks are the major , and in many areas , almost
the sole marginal suppliers of credit to small and medium sized businesses.
Small firms are the core of entrepreneurial effort in the American economy and
historically have been ... a major force for job creation .

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Hence, it is essential that the bank loan markets be restored to a semblance of
vigor if adequate financing of overall economic growth is to reemerge...the
credit crunch is not the only reason for the disappointing performance of the
economy...But the state of bank loan markets certainly is a key element...
An impressive number of worthy applicants has been rejected ...When real
estate loans became a black mark against bank credit ratings, such loans were
reduced, not only by write-offs but by pressing solvent borrowers to repay
because they were the only ones who could . That sounds more like fear than
sound banking practice. "
As Chairman Greenspan points out, residential lending has been particularly
hard hit in the past three years as many loan worthy applicants have been rejected by
banks because of their association with commercial real estate loan problems. This
failure to distinguish residential real estate loans from commercial real estate loans has
added insult to injury for small business persons , who are also home builders. First,
as small business persons, to whom lenders have tended toward extreme caution
when making loàns , and second , as home builders seeking real estate loans.

HOME CONSTRUCTION AND ITS IMPACT ON ECONOMIC GROWTH
Economic data provide salient evidence that home construction can provide a
powerful stimulus to the economy. The home building industry stands poised to
spawn such economic growth . According to the Bureau of Labor Statistics , the direct
and indirect impact of construction of one single family home with a median price of
$120,00 and a median size of 1,890 feet, generates 1.759 work-years of
employment in construction and related industries. Construction employment
accounts for .627 work-years, land development for .235 work-years, and other
industries for.897 work-years. Based on the average wages for these industries in
1990, this employment impact translates into an additional $45,700 in wages and
$18,800 of tax revenues at all levels of government. (For additional details , please
see Table I on page 9 and accompanying explanation . )
The cumulative annual impact on the economy as a whole can be determined
by using 1990 figures for single-family housing starts and hourly wages. In 1990,
there were 895,000 housing starts and the " average " price of a single-family home
was $ 128,000 . The construction of one average priced home generates 2.15 workyears of employment in construction and related industries. Based on the average
wages for these industries in 1990, this employment impact translates into a total of
1,924,000 labor years which generates $ 226.6 billion , or 4.1 % of the gross domestic
product.

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COMMUNITY DEVELOPMENT BANKS
Since the presidential campaign, the public has heard a great deal of President
Clinton's vision for a nationwide system of 100 " community development banks" .
The concept of " community development banks" and their place in the overall banking
scheme is still taking shape . However, the general consensus appears to be that
"community development" banking would spawn development, and the ripple effect
would be felt throughout the community in terms of credit availability, growth and
development, employment and wages, leading to greater prosperity: These banks
would receive some federal assistance in the form of grants, to be matched by the
individual bank, and would restrict their lending to true community development
activities such as housing and small business loans in their areas. As a presidential
candidate, Mr. Clinton frequently pointed to the South Shore Bank of Chicago as the
model for his vision of a " community development bank".

CHARACTERISTICS OF THE SOUTH SHORE BANK OF CHICAGO
The South Shore Bank is a subsidiary of a bank holding company, which is
regulated by the Federal Reserve Board . The South Shore Bank is a state-chartered,
full-service commercial bank whose investors and depositors are willing to accept less
competitive returns in order to promote community development. The bank is owned
by a holding company whose affiliates include: (1) a for-profit real estate
development corporation ; (2) a non-profit subsidiary providing technical and
community services; and (3) a small business investment corporation . Although the
bank restricts itself to community development lending , it operates under a traditional
charter and does not require a new chartering system.

RECOMMENDATIONS OF INNOVATIVE FEDERAL SUPPORTS FOR HOUSING
PRODUCTION CREDIT
Public and private institutional structures that can support housing production
are already in place and may be built upon with little or no federal budget outlays.
These structures already provide a variety of federal supports for the home mortgage
finance system, including mortgage insurance and guarantee programs, secondary
market agencies, and the Federal Home Loan Bank System that lends to member
depository institutions that provide housing finance. However, the federal government
has provided virtually no support to the markets for housing production loans. Thus,
when the credit crunch developed at the traditional sources of housing production
finance--thrift institutions and commercial banks--there were no secondary market
channels or credit instruments to attract funds from alternative sources.

140
Enhanced credit supports that are grounded on loan guarantees, purchases of
loan participation or loans to private lenders would be powerful supplements to
housing production lending by thrifts and banks operating in a more positive regulat: ry
environment. Such support mechanisms would be important factors in achieving the
goals of community investment initiatives, such as community development banks.
NAHB believes that a network of " community development banks" could be sustained
and enhanced by the Federal Home Loan Bank (FHLB) System .

:

THE FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System , comprised of 12 regional Federal Home
Loan Banks , was established in 1932 to bolster housing lending by providing a credit
support mechanism for home mortgage lending by depository institutions. The
membership of the System has traditionally been dominated by savings institutions.
In 1989 , commercial banks and credit unions were given the option of membership;
and now comprise one-third of the System's members. Nevertheless , thrift members
continue to enjoy more beneficial treatment in borrowing than bank and credit union
members.
The FHLB System has been an important component of the nation's housing
finance system for decades. However, shrinkage in the number of savings
institutions , and the impediments to banks' more recent participation in the System,
have made it difficult for the FHLBanks to fully utilize their resources in support of
housing. The nation's housing credit needs have also changed and restructured , and
the System finds itself in search for new roles to play as demand for its traditional
services declines. The System has a strong capital base . Under current operating
limitations, however, it is unable to generate the levels of business and earnings
needed to attract new members and maintain its vital role in supporting the funding
of housing.
The FHLBanks currently may invest in only one type of credit product to their
member thrifts and banks -- advances that must be fully secured with narrowly
defined collateral . The types of residential real estate collateral that members
currently can use, without restriction , to secure advances are limited to whole first
mortgages and mortgage- backed securities. If the FHLBanks are to take a more
positive role in supporting housing, then their credit products for their members and
their collateralization requirements must be expanded . Although new credit products
and more flexible collateralization requirements would mean that the FHLBanks could
assume some direct or indirect credit risk , the FHLBanks have more than enough
capital to support such expanded services. Furthermore , the FHLBanks are capable
of successfully managing and diversifying additional activities having favorable riskreturn relationships that are needed to attract and retain members .

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CREDIT SUPPORT FOR HOUSING PRODUCTION LENDING
An area of great need for the housing sector, and of great potential for the
FHLB System , is housing production credit. There are several ways in which the
FHLBanks' current operating authority needs to be changed in order for them to be an
effective support for housing production lending by their members .
Loan Participations and Credit Enhancements . A change in the FHLBanks'
investment authority, to let them invest in more types of credit products than just the
existing type of advance , would allow member institutions greater flexibility in
structuring loans. In particular, the FHLBanks should be allowed to purchase
participation interests in housing production loans originated by member lending
institutions. The FHLBanks could hold these participations interests as investments,
or resell them to outside investors. This function would allow member institutions to
better leverage funds for housing production while observing regulatory constraints
on loans to one borrower, asset concentration , and geographic concentration .
In addition , the FHLBanks should be able to provide credit enhancements, such
as subordinated interests, for loan participations that they resell. This authority would
facilitate secondary market activity and liquidity for housing production loans.
Flexibility in Collateral for Advances . Advances must be fully secured by
government securities or certain housing-related assets. Currently, the only types of
housing assets that may be used , without restriction , are fully disbursed whole first
mortgages and mortgage securities backed by such mortgages. Member institutions
may also secure advances with real estate-related participation interests, residential
production loans, nonresidential real estate , and other types of mortgage-related
securities; these are very limited , however, and , in combination , cannot exceed 30%
of the member institution's capital .
Restrictions on the use of housing production loans and residential real estate
related participation interests as collateral for FHLBank advances should be removed .
In fact, all residential-related collateral should be eligible to secure Federal Home Loan
Bank advances.

EQUITABLE ACCESS TO ADVANCES BY NONTHRIFT MEMBERS
The Federal Home Loan Bank Act (FHLBA) establishes a maximum borrowing
limit for all members of twenty times the amount of FHLB stock owned by the
member. However, access to advances by nonthrift members is actually curtailed by
a subsequent provision , which imposes different borrowing limits tied to the level of
the Qualified Thrift Lender (QTL) test that thrifts must meet as part of their charter
requirements. Thus, while QTL thrifts may borrow $ 20 per $ 1 of stock owned ,
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nonthrifts (which almost by definition will not meet the QTL) may borrow only at ratio
that declines significantly in proportion to the size of their actual mortgage asset
portfolio. For example , a bank that has 10 % of its assets in mortgages can borrow
only $2 for every $ 1 of stock owned . This inequity makes it more costly for banks
and credit unions to use the FHLB System as active borrowers . Thus nonthrift
members may not avail themselves of the special Community Investment and
Affordable Housing Program advances to the same extent that thrift members can .

MEMBERSHIP IN THE FHLB SYSTEM
If the FHLB system is to be a true credit support system for housing , rather
than just for thrifts, then membership should be opened , on equivalent terms , to all
depository and nondepository lending institutions with a residential housing finance
focus. Such members would include mortgage banking companies, state and local
housing finance agencies, pension funds and housing- related lending affiliates of
insured depository institutions . (The FHLB System has been open to life insurance
companies since its inception . )
Transition to an entirely voluntary membership system will be necessary for the
FHLB System to serve as a comprehensive credit support mechanism for housing over
time. Currently, most savings and loan associations are required to be members, but
non-thrift membership is voluntary. The change to universal voluntary membership
must be accompanied by a transition process that will assure financial soundness for
the System and be fair to all members.
THE FHLB SYSTEM PROVIDES INSTITUTIONAL SUPPORT FOR COMMUNITY
DEVELOPMENT BANKS
The South Shore Bank of Chicago has a membership application pending before
the Federal Home Loan Bank of Chicago . NAHB applauds this step to join the System .
The policy objectives of the FHLB System and community development banks are
consistent in that lending activities focus on housing and community revitalization .
A nation- wide network of community development banks, as envisioned by the
Clinton Administration , could be sustained and enhanced by the FHLB System .
The FHLB System offers services and programs that would potentially buttress
the endeavors of community development banks. The FHLBanks are currently active
in low- and moderate- income housing initiatives through special , below- market
lending to member institutions under their Affordable Housing Program (AHP) and
Community Investment Program (CIP) . The latter program is also directed toward
small business and community revitalization . Such pursuits are a natural adjunct to
the activities of " community development banks " , and the ability of both entities to
leverage their funds should be enhanced by their working together.

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The existing institutional framework of FHLBanks would provide other benefits
to "community development banks" such as ready access to capital markets at very
favorable rates which could be passed on to " community development banks". Also,
the regional network of FHLBanks could provide technical assistance and services to
"community development banks" and serve as an information clearing house for loan
participants as well as provide a secondary market for community development loans.

RECOMMENDED LEGISLATIVE MODIFICATIONS TO ALLOW THE FHLB SYSTEM TO
SUPPORT COMMUNITY DEVELOPMENT BANKS
In order to allow all community-based lenders, including " community
development banks " to derive the benefits of the FHLBank System , legislation is
required . First, Congress should expand FHLBank authority to invest in participation
interests in residential construction loans originated by their member institutions, and
to provide credit enhancements for any such interests that they resell . Second,
Congress should expand the types of residential assets that may be used without
restriction to collateralize advances to include residential real estate-related
participation interests, residential production loans, and other types of mortgagerelated securities. Third, the current disparity between the borrowing requirements
for nonthrift institutions and thrifts should be eliminated . Currently, nonthrift
institutions, including community development banks, are at a competitive
disadvantage with respect to their access to advances , including those made under
the Community Investment and Affordable Housing Programs. Finally, authority to
broaden membership in the FHLB System is necessary to include all lenders with a
housing focus.
NAHB was pleased to see two important provisions included in S. 265, the
Economic Growth and Regulatory Paperwork Reduction Act of 1993 , recently
introduced by Senators Shelby, Inouye, Wallop, Mack, and Heflin . A House of
Representatives counterpart will be introduced shortly. The provisions included in S.
265 would permit member institutions to use housing production loans to collateralize
advances and authorize FHLBanks to invest in loan participations in residential
construction loans made by their member institutions.

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Economic Impact of Construction of One Single Family Unit

Characteristics of Individual Unit:
Equivalent to Median Priced Unit:
Less: Value of Raw (Undeveloped) Land
Equals: Base for Multiplier Calculation
Times: One Year Multiplier (1 )
Equals: Income Multiplier

National
Local
$120,000
($15.200)
$104,800 $76,744
1.98
1.45
$207.600 $111,300
National
Labor
Years
Wages
0.235
$6,110
0.525 $13.650
0.102
$2.652

Wage Impact:
Land Development
On Site Construction
Off Site Construction
Other Industries:
Manufacturing
Wholesale Trade , Transportation , and
Services
Mining and All Other
Total

Tax Impact:
Federal Personal Income Tax
Social Security Tax
State Personal Income Tax
Federal Corporate Income Tax
Local Real Estate Tax
Total

(1 ) Laurence H. Meyer and Associates

9

Local
Wages
$6,110
$13,650
$2,387

0.397

$10,322

$4,129

0.355
0.145
1.759

$9.230
$3.770
$45.734

$6,461
$754
$33,491

National
$9.604
$1,829
$1.329
$3.690
$1 597
S13.049

Local

$1.597
$1.597

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Direct and Multiplier Impact
of Home Construction

The estimates of labor requirements included in this table were
developed by the Bureau of Labor Statistics ' and have been updated
to recognize current wage levels and prices . We estimate that the
construction of a median-priced single- family house with a median
size of 1,890 square feet directly generates 1.759 work-years of
employment in construction and related industries . Construction
employment accounts for .627 work-years , land development for .235
work-years , and other industries for .897 work- years . Based on the
average wages for these industries in 1990 , this employment impact
translates into an additional $ 45,700 in wages and $ 18,800 of tax
revenues at all levels of government .
The top panel of this table calculates the full economic impact of
the increase in residential construction . The impact is calculated
by applying a consumption multiplier to the adjusted median sales
value of a single- family unit .

The item " multiplier" is used to reflect secondary economic
effects , primarily affecting consumption , over and above the direct
impact on income of home construction . For example , construction
workers purchase goods at local stores , and the stores step up
hiring and purchases which creates a " multiple " of the original
stimulus . Eventually the stimulant declines unless continually
renewed .
The stimulant resulting from the multiplier is greater in the
earlier periods since the stimulant " leaks " away . A recent study
by Price Waterhouse , conducted on behalf of The National
2
Association of Realtors , suggests that the first - year consumption
multiplier substantially varies based on the economic model
employed . The model of Laurence H. Meyer and Associates is used by
NAHB for economic and housing forecasts . The first - year multiplier
impact , assuming that interest rates are held constant , is 1.98 in
the Meyer model and we have applied that multiplier to the median
housing unit after adjustment for the value of raw land .
The local impact that appears in the right hand column adjusts the
national impact since some of the direct labor and materials are
purchased from other regions and therefore do not directly benefit
the local economy . The multiplier effects are also adjusted to
reflect the import of " imports " from other regions .

Robert
Ball ,
"Employment
Created
By
Expenditure , " Monthly Labor Review , December 1981 .

Construction

2 Price Waterhouse , Contribution of Single - Family Home Resales
to the U.S. Economy . Prepared for the National Association of
Realtors 1992 .

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BANKING ON COMMUNITIES:
DEVELOPMENT BANKING IN
THE UNITED STATES

(Working Paper)

By

Kathryn Tholin

February, 1993

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The Woodstock Institute

The Woodstock Institute is a not-for-profit organization based in Chicago.
For the past twenty years, the Institute has carried out applied research and
" developed and implemented programs which increase private sector investment in
modest-income and minority communities for the benefit ofthose who live there. It
designs programs which bridge the gap between the needs of communities and the
resources of banks, savings and loan associations, foundations, and others.
The Institute provides a variety of services to community- based
organizations, financial institutions, foundations, and government agencies,
including applied research, policy analysis, program design, and evaluation.

Malcolm Bush
President

Kathy Tholin
Executive Vice President

Ernestine Jackson
Vice President

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ACKNOWLEDGEMENTS

The Institute would like to thank those individuals who contributed to this
report: Jean Pogge, South Shore Bank; Robert Weissbourd, Shorebank Advisory
Services; Katherine McKee and Bryan Hassel, Center for Community Self Help. All
errors and omissions are the responsibility of the author.

This publication is a working paper, written and published by Woodstock
Institute. The complete paper will be published in March, 1993, and is the fourth in
a series of Woodstock Institute case studies on community development financial
institutions. Other titles in this series are:
Banking Services for the Poor: Community Development Credit
Unions
Lenders of First Resort: Community Development Loan Funds
The Business of Self-Sufficiency: Microcredit in the United States
The Community Development Financial Institution Case Studies were
funded by the Ford Foundation. The Community Development Bank study is also
supported by The Joyce Foundation.

For copies of these publications contact: Woodstock Institute, 407 S. Dearborn,
Suite 550, Chicago, Illinois 60605, (312) 427-8070.

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Table Of Contents

Page

Section I:

Introduction

1

The Need for Credit

33

Community Development Financial Institutions

4

Section II: What Is A Community Development Bank

What is a Community Development Bank?

Section III: The Current Experience Of Community
Development Banks

Shorebank Corporation

9

10
23

Center for Community Self-Help

12

Southern Development Bancorporation

13

Section IV: Key Components Of Development Banks

17

Section V:

21

22

Conclusion

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Section I: Introduction

In 1985 the Workers Owned Sewing Company (WOSCO) was in trouble.
Located in Bertie County, a low-income rural county in Eastern North Carolina, the
company's business came from contracts with other apparel companies for their
overflow work. This type of business was sporadic, unpredictable , and highly
competitive, operating on very thin margins.

To grow, the company needed to be able to by-pass the middleman and bid
directly to retailers. To do that, however, required credit for necessary materials
and supplies. The company had been unable to get credit from its suppliers, and
managed its existing business with a $10,000 line ofcredit from a small local bank.
The local bank, however, was purchased by a large regional bank, which cut
off the company's line of credit. Without a new source of credit, the company would
not be able to continue its current work, let alone expand.
With no other prospects for credit, WOSCO turned to the Center for
Community Self- Help , which had been providing technical assistance to the
company for several years. Through its credit union and ventures fund, Self-Help
made the company a $50,000 loan. They also continued to provide assistance in the
areas of marketing , financial management, business planning , and staff
development. Once the first loan was paid off, the Center continued to provide
working capital loans to the company.
Today WOSCO, with 80 workers, is the second largest employer in its county.
Seventy percent of its work is now direct contracts with retailers rather than other
manufacturers. It has secured contracts with Sears and K-Mart as well as a
regional department store chain. The company increased its sales from $760,000 in
1985 to $ 1.8 million in 1992. At the end of 1990, the company was able to distribute
$27,000 in profits to its workers, who are also its owners.
In Chicago's South Shore community, Vivian Wilson's $1 million city contract
to provide security services almost cost her 70-year old company when the city's
slow payments exhausted her operating reserves. When her bank wouldn't make
her a loan, and she was within two week of running out of cash, she turned to South
Shore Bank.

Ms. Wilson did not have the personal assets banks usually require an
applicant to pledge for such a loan. South Shore Bank lending officers , however,
were impressed by her business management, believed she would be able to deal
with the city bureaucracy, and went to work to structure a loan.
In two weeks, the bank was able to package a $250,000 line of credit that was
partially secured by an apartment building owned by Ms. Wilson, with half the loan

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guaranteed by a fund established by a purchasing managers ' group to help
minority-owned businesses. The bank's commitment to move quickly, willingness to
work with external credit-enhancement programs, and ability to spend the time to
package a deal that was good for both the bank and the applicant meant that Ms.
Wilson was able to make payroll and keep her business operating.
The institutions that made these loans were not ordinary financial
institutions. These are institutions that have staked their claim in markets that
• are not seen as desirable and borrowers that are often not seen as creditworthy by
⚫ conventional financial institutions. They are among a small number ofdepository
institutions organized both to address the credit needs of disadvantaged
communities and to have a lasting impact on the development of those
communities, the growth of local economies, and opportunities for advancement
and economic security for low and moderate income individuals and families.
While today there are only a handful of community development banks in the
United States, these institutions are demonstrating that a development bank can be
a powerful tool for building communities and strengthening local economies.

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Section II: What Is A
Community Development Bank?

The Need for Credit

Urban and rural community development practitioners have demonstrated
that access to capital and credit is critical to revitalizing housing and creating and
retaining jobs in disadvantaged communities. These communities may be inner city
neighborhoods, low-income rural areas, or particular groups of people (women,
minorities, low income families) across several geographic communities.

One way to see the critical role of credit is to look at a disinvested
community--that is, a community in which credit has stopped flowing. When credit
is not available for everyday community investment needs, the local economy starts
to fall apart at the seams. Buildings deteriorate when rehabilitation funds are
unavailable; housing values decline if buyers can't find mortgages; modest income
people can't purchase a home; businesses stagnate or relocate when they can't get
loans to expand or modernize. Disinvestment ultimately destroys the economic
assets of a community.
When it is available, however, credit serves as a catalyst for investment in a
community. the extension of credit by a financial institution is viewed by others as
an expression of confidence in the future of that community. Loans to housing and
economic development projects result in visible improvements which become
symbols of community improvements. The availability of credit has a multiplier
effect, leading to additional investment by developers, other financial institutions,
and homeowners, landlords, and business people within the neighborhood.
Credit gaps exist when lenders perceive particular markets or borrowers as
entailing higher risks or lower returns than other types of lending or when racial or
cultural barriers interfere with lending judgments. Such perceptions have resulted
in the disinvestment of entire communities, but they have also resulted in a lack of
available credit to lower income homebuyers, minority borrowers, small businesses,
and other types of unconventional borrowers. Financial institution consolidation
and increasing standardization of loan products further constrains the availability
of credit and the possibilities of economic development for distressed communities
and individuals.
While conventional credit can keep a healthy economy working , rebuilding a
deteriorated economy or making loans to people who have historically not had
access to credit requires more than conventional lending techniques. Borrowers
need more assistance, projects may need unconventional terms. These borrowers
and communities need lending institutions that understand local credit needs , have

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a commitment to community economic development, and have underwriting
standards that address local market realities. Perhaps most important, they need
institutions with an array of financial and non-financial interventions that reinforce
each other and rebuild or strengthen a local economy.

Community Development Financial Institutions

Over the last two decades a range of types of community development
financial institutions have developed to address the need for equal access to
traditional credit and the need for development credit. Beginning as individual
experiments in local areas across the country, these institutions have become an
emerging community development industry. They include community development
banks, community development credit unions, and community development loan
funds. In some cases these institutions are defined with a broad economic
development focus, in others they are narrowly focused on delivery of a small
number of development credit products.
Community development financial institutions share several common
characteristics:
They are organized to serve economically distressed communities
They serve a targeted geographic area or sometimes a targeted
constituency
They have as their primary mission the development of communities
and their residents, utilizing the provision of credit and other
development activities as a means to achieve that mission.

They fill credit and in some cases financial services gaps that are not
met by traditional financial institutions.

Earlier Woodstock Institute publications have examined in detail the work of
community development credit unions, community development loan funds, and
microenterprise funds. This paper provides a definition and overview of community
development banks.

What is a Community Development Bank?

A community development bank is the most broadly defined, and potentially
the most comprehensive, of the community development financial institution

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models. While other community development financial institutions tend to
specialize in a particular type of product or credit activity, a community
development bank can incorporate both a range of lending services and a broader
range of development-oriented activities.

·

A community development bank is a community development institution
that utilizes a commercial bank, credit union, or savings and loan as a vehicle for
providing development credit for a targeted community or population, and which
has proactive, development-oriented subsidiaries and affiliates. Community
development banks are the most extensive and best capitalized type of community
development financial institution. The depository institutions of community
development banks are chartered, regulated, and able to engage in the same types
of business as their conventional commercial financial institution counterparts.
A community development bank is distinguished from a traditional bank,
however, in two fundamental ways . First, a development bank has chosen as its
primary corporate mission the comprehensive development of a community or
communities , not the provision of credit and financial services . Second , a
development bank is based on an understanding that access to credit alone can not
revitalize a distressed economy; that additional development activities and efforts
are necessary to promote economic activity in disinvested communities.

Mission
A community development bank, like any financial institution , must be
concerned about the sound operation of a regulated financial institution.
While operating a sound and successful financial institution is essential for
the success of a development bank, the primary goal is focused on the impact
that institution, and its other activities, have on the institution's targeted
community(ies). A development bank has a dual standard of performance; it
must successfully operate a financial institution , and it must foster
community development and renewal. Ultimately, a community development
bank seeks to demonstrate that these are not inconsistent goals.

Additional Development Activities
A regulated financial institution is limited in its ability to have a significant
community development impact through credit alone. A development bank
has targeted communities and populations with needs that go beyond
traditional credit. A bank's lending is constrained by regulatory standards
designed to protect depositors and the public from losses. While a bank is not
simply a passive actor, a conventional financial institution cannot easily play
a proactive development role in a community.

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For example, a bank can declare its willingness to make multifamily building
rehabilitation loans in a particular area. It can market this product
aggressively in this area. But it cannot on its own purchase and rehab the
big abandoned building on the corner, even though this would give other
investors the confidence to invest in surrounding buildings.
A bank can make loans to small businesses in its area, but it can't make the
equity investments needed to start new businesses, and it can't provide the
training and job placement services to help ensure that local residents get the
jobs created through expanded business activity.
Without an approach which incorporates some of these types of activities , a
bank may make some loans, but not have a long term impact on the overall
development of a community or targeted area.
This blend of activities and goals means that a development bank combines
the structure and expertise of a for-profit financial institution with the
commitment to people and to place one normally sees in community-based
non-profit organizations.

Structure
A full-fledged development bank is formed by a holding company or parent
organization which owns (or, in the case of a credit union, operates) an
insured depository institution , and has subsidiaries and/or affiliate
organizations which can supplement the bank's lending with technical
assistance, direct community development activities, and/or higher risk or
more flexible financing.
The community development bank is able to utilize a depository institution to
channel ordinary deposits into community development lending . The
subsidiaries and affiliates allow the development bank to move beyond the
limits ofa bank structure , address deeper credit needs , make higher risk
investments, and more proactively address a broader range of community
development needs.
Affiliated development activities are determined by the mission of the
institution, and the particular needs of its targeted communities. They may
range from enterprises designed to provide equity financing to small
businesses or real estate development companies to efforts to provide
education and job training to community residents. Their purpose is to build
capacity and resources within the targeted community or constituency.

Through their ability to use the lending and deposit gathering properties of
insured depository institutions and the proactive community development

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properties of various types of subsidiaries , development banks can
implement a broad economic development strategy and achieve a critical
scale of impact in a targeted area or with targeted populations. One primary
premise of a development bank is that mobilizing a large volume ofcapital for
development lending is key to the revitalization of a particular
community/geographic area and the reestablishment of market forces to
sustain the community and its residents.
The sum total of these activities, both the regulated financial institution and
its affiliated activities, is the development bank.
There are only a few full-fledged development banks operating in the country
today. Shorebank Corporation, which owns South Shore Bank in Chicago, and
Southern Development Bankcorporation, which owns Elk Horn Bank and Trust in
Arkadelphia, Arkansas, are the two largest development bank models. Self-Help
Credit Union, operated by the Center for Community Self-Help in Durham, North
Carolina, is also organized on the development bank model. Community Capital
Bank in Brooklyn is the newest of the development banks. It is not currently
organized on the holding company model, but has established affiliated community
development activities.
The three oldest community development banks are profiled in the following
section.

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Section III: The Current Experience Of
Commmunity Development Banks

Each existing community development bank has a unique story. For a
development bank, location dictates design. Each community development bank
has chosen its specific focus and market based on the needs of the community it
seeks to serve. The existing development banks have chosen different development
strategies and developed differing types of lending and development expertise.
South Shore Bank's largest concentration is in housing purchase and rehabilitation
loans , particularly for multifamily buildings . Southern Development
Bankcorporation's mission is to catalyze economic development in a rural area
through financing for small, locally-owned businesses. The Self-Help Credit Union
focuses on business development and homeownership lending.
The three institutions profiled here have these key features in common:
A holding company or parent organization owns or operates (as legally
appropriate in each instance) the financial institution. This means
that the corporation's overall vision is held outside as well as within
the financial institution itself. While this may not be essential to a
community development bank model, it helps to ensure the financial
institution's long term accountability to the community development
mission , despite the pressures of operating a sound financial
institution. The umbrella structure enables the coordination of
multiple efforts towards the same goals.
Each institution has multiple strategies for community development.
This is true both within the financial institution subsidiary, where
different types of loan programs have been developed, and in affiliated
non-bank development activities.
The development banks have chosen their lending markets and their
development activities based on an assessment of the specific needs of
their targeted area and constituencies. Based on the particular needs
of their targeted communities, these three development banks have
very different lending strategies and different configuration of
nonlending development programs.
The institutions seek to capitalize on the synergies made possible
through the combination of their lending and development activities.
Both are designed to reinforce each other in building local markets and
capacities.

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The holding companies reinvest a portion of the return on revenuegenerating activities into other areas of their activity that require
capitalization or development funds.
The banks have evolved their current focus and activities over time as
they develop new programs and build their capacities, as their
knowledge and understanding of their target communities and
constituency deepens, and as their development activities themselves
generate new opportunities for lending.

Shorebank Corporation

The oldest and best known community development bank, Shorebank
Corporation was formed in 1973, when a small group of investors purchased a
troubled bank in a rapidly deteriorating inner-city neighborhood that had changed
from 90 percent white to 90 percent black in ten years. The flight of white residents
was accompanied by a flight of capital; banks redlined the area, landlords stopped
maintaining apartment buildings, store owners stopped improving their businesses,
people stopped upgrading their homes, and the community entered a spiral of
economic and physical decline.
Shorebank's founders, four bankers working in an adjacent , stable
neighborhood, formed a holding company and purchased South Shore Bank. The
community's last locally-based bank, South Shore Bank, had quit lending in the
area and its owners had unsuccessfully sought regulatory permission to relocate
downtown. The new owners set out to demonstrate that a regulated bank holding
company could serve as a vehicle to reach a scale of investment and targeted
activities which could stabilize and revitalize a community suffering from
disinvestment.
Barely able to raise enough capital from investors who shared this untried
vision, Shorebank began with the operation of the bank alone. Five years later, in
1978 , it was able to raise additional capital to create two other for- profit
subsidiaries and one non-profit affiliate. Since 1985 it has added three additional
subsidiaries and affiliates.
Shorebank's affiliates and subsidiaries provide a multifaceted package of
development components. South Shore Bank is a full-service commercial bank
offering both commercial and residential loans. City Lands Corporation is
Shorebank's real estate development company. It develops and manages residential
and commercial real estate for the benefit of low and moderate income residents. It
can target key anchor properties for development, opening the market to more
conventional investors who can receive financing from the bank to rehab smaller
properties nearby. The Neighborhood Fund is an SBA-licensed Minority

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Enterprise Small Business Investment Corporation, which finances businesses with
equity investments and long-term subordinated debt.
The Neighborhood Institute (TNI) is a nonprofit, exempt affiliate of the
holding company. TNI focuses on human development as well as housing
development. TNI operates GED and job training programs , job placement
programs , and manages three small business incubators . It also includes
community organizing, cultural activities, and senior services. TNI Development
Corporation, its for-profit subsidiary, develops rental and cooperative housing for
low income residents.
Shorebank Advisory Services is a consulting firm that offers technical
assistance nationwide on development banking and other community economic
development strategies.
In addition , Shorebank expanded in 1992 by establishing two business
development affiliates, which, combined with the loan production office of the bank,
will be providing lending and services in the Upper Peninsula of Michigan.
South Shore Bank itself makes both housing and business loans, but it is the
bank's unique approach to lending for multifamily purchase and rehabilitation that
has had the greatest impact on the community. The bank has successfully fostered
a large group of small-scale rehabbers who rehab , hold , and manage 24-36 unit
apartment buildings. In making these loans, the bank focuses on market and
character judgments more than on standard ratios--is the borrower paying a fair
price, can he/she stretch a rehab dollar, manage the building, deal with tenant
problems? All the bank's mortgages include rehabilitation . The bank's detailed
market knowledge , its status as the primary lender in this market, and its
commitment to say no to deals where the purchase price, rehab costs, or the afterrehab rents are too high means it has been able to significantly improve the
housing stock without gentrifying the neighborhood.
Since 1973, the holding company has made $ 340 million in development
financing. It has financed purchase and/or rehabilitation of more than 30 percent of
all housing units in South Shore. At the end of 1992, it had $55 million in business
loans. The bank has grown from $40 million to $211 million in deposits, 55 percent
of which come from depositors outside the South Shore community who support the
bank's development efforts. The bank itself has operated at a profit every year
since 1975. In 1991 alone, the bank's development subsidiaries rehabilitated more
than 1400 units of housing, and placed hundreds of residents in jobs. In 1986, the
bank expanded its lending operations into Austin, a west side Chicago neighborhood
suffering from longer-term disinvestment and deterioration.

Most importantly, Shorebank has stabilized the economy of South Shore,
created dramatic improvements in the quality of housing, brought in new business

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activity, and instilled a new outlook on the neighborhood by both residents and
outsiders.
While operating successfully and profitably, Shorebank has had to rely on
patient investors willing to see profits reinvested in bank expansion and in
subsidiary operations. In 20 years, its common stock investors have not received a
dividend. The value of their investment, however, has grown at an average annual
rate of 16.5 percent. Shorebank's investors include foundations, religious
institutions and a number of individuals.
Shorebank managers know their package works, but are the first to point out
that their specific formula won't work everywhere. " Our organization...is not a
cure-all for the most depressed places in America", says Ron Grzywinski, a founder
ofthe bank and chairman of Shorebank Corporation. "Our strategy relies on being
able to cultivate a group of private individuals who are working in their own selfinterest, which happens to be the best interest of the community. " Shorebank has
successfully targeted the development needs and opportunities of its particular
community. The interventions and development activities it chose have had a
substantial impact.

Center for Community Self-Help

In 1984, the Center for Community Self-Help, a four-year-old nonprofit
organization working to create economic opportunity for disadvantaged North
Carolinians, formed the Self-Help Credit Union. Starting with $77 raised at a bake
sale, Self-Help has grown to more than $40 million in assets , becoming the nation's
first statewide community development bank.
Self-Help's development strategies have targeted the creation of affordable
housing opportunities; assistance to women- and minority-owned enterprises,
especially in rural areas of the state; facilities development for nonprofits serving
low income and special needs families; and promotion of statewide programs by
both public bodies and private financial institutions to create development lending
programs on a broader scale.

The Center has developed an integrated set of tools to address this range of
development activities. The Center began its work in 1980 offering technical and
managerial assistance to struggling small businesses in the state. After four years
it concluded that it needed to provide access to capital as well, and in 1984 created
two lending vehicles--Self-Help Credit Union, a regulated depository institution,
and Self-Help Ventures Fund, a nonprofit revolving loan fund.
Self-Help Credit Union is the banking center of the Center for Community
Self-Help. Self-Help Credit Union is a state-chartered, federally insured credit

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union, whose membership is open to all members of the Center for Community SelfHelp. The credit union limits its lending to the state of North Carolina. The credit
union's main office is in Durham, with branches in Asheville, Charlotte, and
Greenville.
Unlike most credit unions, Self-Help Credit Union does not see retail services
as key to its mission. Instead, the credit union's primary function is as a proactive
lender gathering capital from supportive depositors across the country to use for
loans. As a result, the credit union offers only basic savings and checking accounts
(called share accounts and share draft accounts in a credit union) , does not provide
cash transactions, and does not place a priority on offering the highest possible
rates to attract depositors.
Self-Help's nonprofit loan fund allows it to extend credit that would not meet
the regulatory standards of the credit union. It attracts investments from sociallyoriented investors both within and outside of North Carolina. Its investments ,
unlike the credit union's deposits, are not insured.
The parent organization for Self-Help engages in non-financial activities
which address its overall mission. These include extensive educational and
technical assistance to borrowers, development of new lending programs which it
promotes with other lending institutions and public bodies, and training for loan
officers in conventional banks, among others.
Though very small by conventional financial institution standards, Self-Help
has grown rapidly to a level where it is able to have a substantial development
lending impact. By the end of 1992, Self-Help development bank made a total of
$40 million in loans, and is poised to make at least $12 million in additional loans
per year. It has made more than 450 mortgages for first-time homeowners who
were unable to receive conventional mortgages, predominately single minority
female heads of households. Self-Help piloted an innovative mortgage product, with
low down payments and relaxed debt-to-income requirements, which Fannie Mae
now offers nationwide. In Charlotte, more than 125 public housing residents
became homeowners through Self-Help programs.
Self-Help's 1992 business lending provided loans for 138 small enterprises,
with loans ranging from a few hundred dollars to several hundred thousand dollars.
Self- Help now manages government-funded pools of capital from state and federal
programs. It also provides small loans to day care providers to enable startup and
expansion of child care services. The loan fund's microenterprise program provides
loans to very small, often home-based businesses.
Despite its exclusive focus on borrowers who are unable to access
conventional credit, Self-Help's lending has performed extraordinarily well. In
1991 , the credit union averaged one percent delinquency, less than the industry
average.

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Average annual losses have been less than 0.1 percent of average annual
outstanding loans.

Southern Development Bancorporation

Southern Development Bancorporation was established to address the
economic development needs of rural Arkansas. Southern's mission is to stimulate
and expand the regional economy for the benefit of low and moderate income
residents by assisting people to establish and expand locally owned small
businesses.
Organized on the South Shore Bank holding company model , Southern was
established by 26 private, public, and non-profit investors, led by the Winthrop
Rockefeller Foundation in Arkansas. Southern began operations in 1988 with the
acquisition of the Elk Horn Bank and Trust Company in Arkadelphia, Arkansas.
Like Shorebank and the Center for Community Self-Help, Southern utilizes
for-profit and nonprofit, financial and nonfinancial vehicles to address its business
development mission. Southern's affiliates and subsidiaries assist enterprises
ranging from microenterprises employing only the owner to a company employing
165 people.
There are five components of Southern's development bank. Elk Horn Bank
and Trust is a regulated commercial bank which makes consumer, residential, and
business loans. Elk Horn's "development loans” are business loans which would not
be made on similar rates and terms by other banks. Opportunity Lands
Corporation is a developer of commercial and residential real estate.
Three components are grouped together within the Arkansas Enterprise
Group, a nonprofit affiliate of Southern. Southern Ventures , Inc. is a small
business investment company licensed by the SBA. It is the only active venture
capital company in Arkansas for investments of $50,000-$250,000. The Good Faith
Fund is a microenterprise loan fund inspired by the Grameen Bank of Bangladesh.
It provides extensive technical assistance and very small loans ($1000 average) to
low income individual entrepreneurs. AEG Manufacturing Services provides
nonbank financing (long term loans, leases on equipment, and working capital), as
well as financial consulting, market assistance,and accounting services for small
manufacturers.

Southern managers believe that it is critical to provide a range of
development resources for rural enterprises in order both to be successful with
individual companies and to improve the local economy. They also believe that it is
critical to provide these services for several levels of enterprise--from individual
microentrepreneur to medium-sized firms.

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Between May, 1988 and June, 1992, the Southern companies have extended
over $14 million in development investments in 145 enterprises and family farms in
rural Arkansas. (This does not include the conventional lending activities of Elk
Horn Bank.) Slightly more than half of the borrower businesses are minority
owned. The bank has lost less than one percent on the development loans it has
originated, and delinquency rates are below the industry-wide rates. Losses in the
nonregulated components ofthe development bank are somewhat higher, but in line
with expectations for these more risky loans . From 1989-1992, Southern has
earned at or above the industry bench mark of one percent return on assets.
Southern's integrated approach to business development has demonstrated
benefits in individual companies. Only in operation for four years, Southern cannot
yet measure its impact on the overall economy of rural southern Arkansas .
Ultimately Southern will measure its success on the extent to which it is able to
create jobs , diversify the economy and ownership of wealth , build stronger
companies, increase exports and decrease imports into the local economy over the
long term.

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Section IV: Key Components Of
Development Banks

Each of these institutional models share a number of common components
and structural characteristics. Each of these common characteristics play a crucial
role in the success and the impact ofthe overall enterprise.

· For these three institutions, the holding company is the creative
center of the model (in the case ofthe Center for Community Self-Help,
the 'holding company' is the parent nonprofit organization) . It
coordinates and manages the activities of the overall enterprise. It is
the place where the institution's overall community development
mission is formulated and redefined.
As the umbrella structure of the development bank, the holding
company has responsibility for business planning's strategic planning
and development for the depository institution and other subsidiaries
or affiliates. It seeks to coordinate the work of the various components
of the institution, both with each other and the overall mission. It
reviews and evaluates the work of the institution and its impact on its
targeted communities.
Another key responsibility ofthe development bank holding company
is fundraising: primarily the raising of investment capital for the bank
models, or in the case of the Self- Help model , the raising of funds for
operations, capital grants, and social investments. The holding
company or parent is also likely to be the mouthpiece for the
organization, telling the story of the institution and its work to a
broader audience.

In the case of Self-Help, the parent organization also directly operates
the development bank's non-financial programs. In addition, the
parent organization advocates for increased resources and supportive
policy and regulation for the types of programs it has implemented,
both from state government and from conventional financial
institutions.
The insured depository institution is the economic engine which
grounds the development lending and financial services of the
development banking operation.
There are several attributes of a depository institution which make it a
strong tool for community development. Depository institutions are

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known and trusted models. The actual presence of a financial
institution can increase community confidence in a disinvested
community. And , a regulated depository institution can convert
ordinary individual and institutional deposits into development
lending. This ability to utilize ordinary deposits can provide a
development bank with access to capital from outside, as well as
within, its targeted lending area, and provides access to deposits which
would not otherwise be available for this purpose.
Using a regulated financial institution as a community development
vehicle requires a market discipline not usually found in a community
development institution. Community development bank organizers
feel that this is an important aspect of their operation. The bank (or
credit union) must safeguard its depositors' money, make sound loans,
and be profitable. It must submit to regular examinations and keep its
performance in line with other banks and credit unions. The profitable
operation of the banking institution is what enables the development
bank to be self-sustaining and to expand. In addition, its presence in a
community itself develops confidence in the community, and sends a
message that the community is worth doing business in.
Because a development bank's primary mission is community
development, however, it does not seek to maximize profits for its
investors (or income for its members, in the case of a credit union). A
development bank utilizing a for- profit holding company structure
seeks investors willing to see the profits from bank operations partially
reinvested in subsidiary and affiliate operations. A development bank
utilizing a nonprofit depository institution seeks low cost deposits and
grants to capitalize its operations and reinvests net income in its
development programs.
As these examples show, the insured depository institution can be
either a bank or a credit union. It could also be a savings and loan or
mutual savings bank, although none of the existing development banks
are organized in that way. The permitted activities and operating
requirements differ somewhat between these types of institutions, and
each one brings both opportunities for and restrictions on development
lending activities. Credit unions and savings and loans , for example,
operate under more restrictions on business lending activities than
banks. The reduced capital requirements for starting a credit
union,however, mean that they are sustainable at a smaller scale than
banks, and are therefore more suited for making very small loans or
marketing to smaller depositors . The development mission ofthe
institution, available resources , and specific local opportunities
determine the most appropriate or feasible model in a given situation.

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As the examples in this paper indicate, while the availability of credit
is necessary for a healthy local economy, the existence of credit in and
of itself has a very limited development impact. In these institutions,
the proactive affiliates and subsidiaries play several essentia!
development roles:
They allow the institution to develop new lending, capacity
building, or technical assistance programs to address community
development needs.
The affiliates and subsidiaries are the development vehicles for
making deals happen. The development corporation can
proactively create and help implement new development
projects. A bank alone cannot play these roles.
They can mobilize existing sources of subsidies available from
public and private sources to make sure that programs and
projects can serve their targeted constituencies.
They are the vehicles for leveraging grant support for
nonprofitable development activities and expansion into new
programs which may eventually be profitable. In addition to
grants, the nonprofit arms of development banks are attractive
vehicles for contributions of real estate, donations of in-kind
services, and other resources.
They most clearly demonstrate the institution's commitment to
its mission to depositors, investors, and contributors
All of these roles can be played by for - profit and non - profit
development organizations unconnected to a depository institution.
The power of a community development bank, however, comes from
the combination of the depository and nondepository components.
The depository arm can leverage substantial resources through its
ability to offer deposit insurance, and , once established, is a selfsustaining institution which can operate without subsidies. This gives
the community development bank the potential for considerable scale
and impact, as well as the staying power to address access to credit
and non-financial assistance.
For each of these institutions, targeting lending and other activities
ensures that the development bank can have a significant impact in its
chosen areas. Targeting provides a means of concentrating investment
in a defined area so that its impact can be both measured and felt. It
is also a form of specialization which allows the institution to build the
detailed market knowledge necessary for successful development

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lending. Targeting can be either geographic or focused on particular
types of lending or constituencies (e.g. , minority-owned businesses,
microenterprise loans). A development bank's specific targeting is a
strategic choice governed by location, mission, and available resources.
The community development banks profiled here have each taken a
somewhat different approach to targeting their development programs.
For example, the focused geographic targeting of Shorebank reflects
the realities of neighborhood disinvestment patterns in Chicago. The
bank's early exclusive focus on South Shore allowed it to concentrate
its efforts on its primary goals--stabilizing and improving the housing
stock and restoring market forces into a disinvested local economy.
The bank has expanded its lending efforts as it determined that it had
sufficient resources to have a substantial impact in another
neighborhood or lending area.
The bank's specialization has given it unique knowledge of its target
markets , developed its reputation with potential borrowers, and
focused its limited resources for maximum impact.
The Center for Community Self-Help, in contrast, has not limited itself
to a single geographic area, but has targeted particular lending niches
statewide. This strategy has enabled Self-Help to specialize in very
specific types of lending while creating necessary economies of scale, as
well as to " cross-subsidize" more disbursed and therefore more costly
rural lending with loan volume from denser urban markets. In
addition, its statewide focus has enabled Self-Help to obtain significant
levels of state government support which would not otherwise have
been available and to effectively advocate for supportive policies and
programs on the state level.

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Section V: Conclusion

The experience of these institutions over the past 20 years has
demonstrated that well-managed, adequately supported community development
banks can successfully provide credit to address specific types of community
development needs which have been neglected by traditional financial institutions.
They have created and defined a new type of financial institution : a private,
profitable, public purpose institution.

The experience to date has demonstrated:

A community development bank can have broad economic impact, and
under the right conditions has the power to restore a functioning
market economy to a disinvested area.
Unconventional borrowers can be creditworthy --a community
development bank can target its lending to disadvantaged
communities and borrowers without access to conventional financing
while meeting or exceeding industry loan performance standards.
A community development bank can be operated profitably, and be a
self-sustaining institution able to deliver services over the long term in
its target markets.
Successful development banks require a clear understanding or local
community development needs , a variety of tools to meet those needs,
and creative approaches to filling credit gaps not being met by
conventional financial institutions.
Notwithstanding the successes of existing community development banks,
these institutions face enormous challenges in startup and operation . The
existence of only a handful of community development banks twenty years after the
establishment of the first successful model is testimony to the difficulties . Those
banks now in operation have built up to their existing capacities through careful,
incremental growth over an extended period.
While the growth of a community development banking industry
depends on many factors, three stand out as the most critical:
1.

Capital for startup and expansion. The availability of capital is
the greatest economic barrier to the establishment and growth of

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community development banks. Community development banks
require long-term, patient investors to enable startup and expansion.
Because investments in community development banks have not been
structured to maximize or provide market returns, the availability of
capital has been limited and therefore limited the expansion or
replication of development banks. A strong capital position also allows
a community development bank to grow and engage in more
development activities . The most recent start-up community
development bank, Community Capital Bank in Brooklyn, required $6
million to capitalize the bank alone.

2.

Long-term or stable deposits. A stable deposit base is important to
· community development financial institutions. It enables long-term or
fixed-rate lending, particularly when no secondary market is available.
In some cases, lower cost deposits allow particular lending programs or
products which can target special financing needs.

3.

Management development. Community development banks
require financial expertise, management skills , understanding of
community development needs, and creative, financially sound
approaches to addressing those needs. While conventional banks and
community development institutions develop persons with specialized
skills in one or more of these areas, this combination of expertise is
rare. A major expansion of institutional capacity will require
identification and training of a next generation of community
development financial institution managers.

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Statement
Francine C. Justa , Ph .
Neighborhood Housing Services of
February 3 ,

of
D. , Executive Director
New York City, Inc. ( NHS - NYC )
1993

INTRODUCTION :
I am pleased to be able to offer testimony to the Senate
Committee on Banking, Housing and Urban Affairs . Thank you for
this opportunity .
My testimony is based on my experiences as the Executive
Director of NHS- NYC , a 10- year old community development volume
lender operating citywide and in multi - neighborhood settings ,
a member of the Advisory Board of Community Capital Bank which
opened in Brooklyn, NY in January 1991 , and a past faculty
member in the Urban Studies Department of Queens College .
NEIGHBORHOOD HOUSING SERVICES OF NEW YORK CITY , INC . ( NHS -NYC )
AS A COMMUNITY DEVELOPMENT LENDER :
NHS - NYC operates a revolving loan fund for clients who fail to
qualify for conventional bank financing . NHS-NYC lends money
for rehabilitation to low-and-moderate- income owners of small
homes ( 1-4 units ) and to owners of mixed- use and multi - family
buildings . We also make emergency loans of up to $ 5,500 within
72 hours to income eligible homeowners citywide . Loans are
made at flexible interest rates and terms , based on the
borrower's ability to repay .
In 1992 NHS- NYC directly lent $4,114,183 by closing 226 loans
targeted to the rehabilitation of 477 residential units
throughout eligible neighborhoods of New York City . In the 10
years since 1982 NHS - NYC has directly lent over $ 11,500,000 by
closing 1,012 loans targeted to the rehabilitation of nearly
2,000 residential units . Our delinquency rate is less than 2 % .
we are a lender of last resort helping residents fix their
roots , repair a heating system or keep the bathtub from falling
through the ceiling . We provide a remedy for the ills of
deferred maintenance and we stem the tide of neglect turning
credit - starved neighborhoods into neighborhoods of choice .
NHS - NYC also purchases , rehabilitates and sells vacant
buildings to low and moderate income families . NHS - NYC was a
successful co - applicant with the City of New York Department of
Housing , Preservation and Development ( HPD ) for a HUD - funded
HOPE 3 award to develop 55 single - family homes for low- moderate
income first - time homeowners beginning in 1993 .

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In 1992 NHS-NYC began 2 new programs . One is a homeownership
counseling program which will help low- income people establish
credit histories and prepare for homeownership. The other is a
Foreclosure Prevention Program which will help forestall
foreclosure on the homes of low-and -moderate - income
homeowners . Both programs rely on partnerships with
conventional lending institutions which recognize the ability
of NHS- NYC to do outreach and establish trusting relationships
with community residents and provide counseling and other
assistance in order to qualify them for eventual participation
in the conventional market . in 1992 over 200 individuals
received these services .
Over two thirds of NHS - NYC clients are minority, nearly half
are female headed households and nearly one third are elderly .
All are low- moderate income individuals who have tried and
failed to obtain loans from conventional sources .
Our clients require more attention than conventional sources
allow for and so help from NHS-NYC is comprehensive . We
provide extensive financial counseling to each of our clients .
We monitor construction quality throughout the job . We offer
intensive , hands - on workshops in topics such as carpentry ,
electrical wiring or plumbing that meet on a weekly basis . We
also offer educational workshops which cover a subject in one
presentation discussing issues such as home maintenance ,
foreclosure prevention , financial management and meeting
insurance needs . In 1992 NHS- NYC educational programs reached
1,303 individuals .
This type of " full - cycle " lending --- counseling , lending,
rehabilitation monitoring and post - purchase education
is
time consuming and costly . It is also necessary when dealing
with individuals and property that have credit issues , title
problems , rehabilitation needs , legal entanglement and overall
lack of success with conventional credit borrowing . Full -cycle
lending is a critical component to a successful community
revitalization financing system; NHS -NYC serves this vital
niche .
NEIGHBORWORKS NETWORK · A NATIONAL COMMUNITY DEVELOPMENT
LENDING SYSTEM :
part of a national system of community development
NHS - NYC is
lenders - the NeighborWorks Network - which is monitored by
the congressionally - chartered Neighborhood Reinvestment

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Corporation . This network , comprised of 180 community - based
development organizations , is active in over 150 cities serving
350 neighborhoods containing 4.5 million residents . In 1992
this network directly lent $ 26 million and retained or secured
6,500 affordable residential units . In addition , $ 17.5 million
in loans were sold to our national secondary market
Neighborhood Housing Services of America ( NHSA ) .
Neighborhood Reinvestment provides 2 essential elements to our
network . It establishes national standards for the network in
the areas of lending, service delivery and financial
management . Each NeighborWorks organization is held
accountable to these standards . To ensure that the local
NeighborWorks organizations are best equipped to meet the needs
of their distressed communities , Neighborhood Reinvestment also
provides ongoing technical assistance, training and seed
capital . These elements provide quality control enabling safe
and sound lending practices .
The national asset base of the network's local revolving loan
funds , seeded by Neighborhood Reinvestment and further
capitalized by the private and public sectors , is nearly $ 200
million . The NHSA national secondary market leverages these
investments . This secondary market purchases at face value
rehab loans and first mortgages for home ownership issued by
local NeighborWorks organizations revolving loan funds . NHSA
pools the loans and sells securities backed by these loans to
private
institutional investors at interest rates slightly
below market
. The cash proceeds from the sale are returned to
the local NeighborWorks organization's loan fund , thereby
allowing more loans to be made . To date, a cumulative total of
$75 million has been purchased .
THE IMPORTANCE OF THE COMMUNITY REINVESTMENT ACT ( CRA )
Low and moderate income and minority communities are hurting
after years of disinvestment and neglect . People in these
communities , working through NHS - NYC , the NeighborWorks Network
and other community - based organizations and networks are
working hard to improve conditions , but they need the support
and cooperation of government and business . In particular ,
banks and thrifts play a vital role in a community
revitalization financing system .
Thanks to the Community Reinvestment Act and Congress ' recent
improvements to that law , conventional lenders are beginning to
play a bigger role in community development efforts . One way
that these lenders are becoming more involved is through
partnerships with non- conventional community development

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lenders such as NHS- NYC and the NeighborWorks Network .
During NHS -NYC's early history we only had the capacity to make
small loans exclusively with government
originated funds .
These funds came with target-area and other restrictions and
so our ability to make a truly significant impact in Urban
Redevelopment was limited . But with a strenghthened CRA,
NHS- NYC has been able to leverage private conventional funds
for both capital and operating support and has become a truly
significant force in the financing and community revitalization
of NYC's distressed neighborhoods . Private lenders , encouraged
by CRA, realize that through partnership with NHS -NYC loans can
be made in markets - both geographic and economic- that they
otherwise would not have penetrated , at a cost they can afford .
For example , due to CRA, the private dollars invested in
NHS-NYC loan pools grew each year between 1989 to 1992 and so
did the number of loans made , $ volume lent and units rehabbed .
in 1989 , NHS - NYC directly invested $ 648,000 in the
rehabilitation of 1-4 family units . These were all
government -originated loan funds and they were targeted to 67
projects . In 1990 the direct investment increased to
$ 1,256,593 which was targeted to 121 projects . There were some
private funds involved in these projects . In 1991 we directly
lent $ 1,366,138 targeted to 132 projects ( 208 units ) . This
included about 20% private funds . In 1992 , directly as a
result of CRA , NHS -NYC invested $4,114,183 targeted to 226
projects (477 units ) ; 48 % of these funds were private dollars
reinvested in housing in NYC to individuals with buildings that
were turned away by banks . Yet , we have not had $ 1 of private
funds default to date !
In addition , NHS - NYC has been able to raise $ 5 million in a
line of credit at prime from 13 different conventional lending
institutions for a mixed-use and multi - family lending program
and another $ 2 million in funds available for loans from 9
wholesale banks which never would have been procured without
CRA .
The Community Reinvestment Act is making a difference . Even
when banks lend NHS - NYC only $ 50,000 we can relend these
dollars to 5 to 10 families who may have small repair or
emergency needs and not be able to get financing anywhere else .
Without the encouragement provided by CRA , our distressed
communities would remain credit - starved .

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TESTIMONY TO THE SENATE COMMITTEE
ON BANKING , HOUSING AND URBAN AFFAIRS
BY FRANCINE C. JUSTA, Ph . D.
PAGE 5
DO WE NEED NEW COMMUNITY DEVELOPMENT BANKS?:
There has been considerable talk about the possible creation of
up to 100 new community development banks across the nation .
Yet, we have across the nation many existing institutions and
networks that perform community development lending . There is
a significant need to recognize the existence of these entities
and properly support them so that they can better fulfill their
lending mission . NHS - NYC and the NeighborWorks Network stand
as a prime example of non - conventional community development
lenders poised to make even greater impacts in the communities
we serve if provided proper resources .
Other existing institutions that do community development
lending include : state - chartered thrifts , S + L's , commercial
banks , many with CDC's , ( and among these 106 minority banks ) ,
church lending organizations , community development credit
unions , community development loan funds , micro- enterprise loan
funds , city and state lending programs , national
intermediaries , program related investments ( PRI's ) by
foundations , SBA related lending organizations , social services
organizations such as Settlement Housing Funds .
What we all need is appropriately priced capital and subsidy
funds to support loan originations , financial counseling ,
rehabilitation assistance , loan servicing and organizational
infrastructure ( administration , overhead , space , equipment ,
training, marketing ) . We do not need another type of
institution .
The regular banking system already has the means and the
obligation to serve all of the community , including minority
and low income neighborhoods . While there are some parts of
the population where the transaction costs ( outreach,
counseling, and other support services ) are so high that loans
become unprofitable , as well as continuing systemic racism,
there also exists NHS - NYC and the Neighborworks Network , and
the institutions noted above with considerable experience and
commitment to serving these people .
A strenghthened and enforceable CRA encouraging banks to
fulfill their community responsibilities through direct lending
as well as lending through existing non - conventional lenders
( NHS - NYC et al ) combined with more Federal funds for capital
and administrative costs is the most cost - efficient and
effective way to develop a community revitalization financing
system .

175
TESTIMONY TO THE SENATE COMMITTEE
ON BANKING, HOUSING AND URBAN AFFAIRS
BY FRANCINE C. JUSTA , Ph . D.
PAGE 6
To the degree that new community development institutions are
created, they should only be promoted where it is not possible
· to
access any existing lending entity . Furthermore , there must
be a strong commitment to networking- the goal of moving the
urban and rural poor into the economic mainstream requires
relationships with mainstream institutions . I have a strong
fear that community development banks can become marginal banks
for marginalized people and rather than bringing people into
the mainstream they will create a separate ( and unequal )
stream.
The concept of community development banks, and the role of
non-conventional lenders , must go beyond the provision of
credit . As we provide financing to distressed areas we need to
be considered as stepping stones to the larger conventional
banking system which has the responsibility of serving the
whole community .
SUMMARY:
+ There are existing systems and channels , such as NHS- NYC
and the NeighborWorks Network, as well as other
non-conventional lenders that are delivering
residential community development loans to bankable and
unbankable clients aimed at renewing distressed
communities .
+ There are real costs to originating smaller loans that need
to be recovered but can not be absorbed by the loan client .
+ Existing systems require additional equity , operating
support and appropriately priced and flexible capital to
meet the needs of marginally bankable clients and the
larger unmet market of responsible , yet unbankable clients .
+ The resources of the non- conventional lenders need to be
leveraged by secondary outlets such as NHSA , and the
non- conventional lender needs to adhere to high quality
standards , both financial and programmatic .
+ The Community Reinvestment Act and anti -discrimination laws
must be strengthened and more effectively and aggressively
enforced to encourage broader community lending and
possible linkages with non-conventional lenders .
+ Community development banks should be promoted only in
areas where there is no other source of credit available .

176
TESTIMONY TO THE SENATE COMMITTEE
ON BANKING , HOUSING AND URBAN AFFAIRS
BY FRANCINE C. JUSTA, Ph . D.
PAGE 7
SUMMARY CONTINUED Community development banks must be stepping stones to the
economic mainstream and not marginalized institutions
serving marginalized people .
Thank you for the opportunity to submit this testimony. I am
available for any follow- up or additional hearings that may be
held on the topic of " Urban Redevelopment Initiatives " .

Respectfully submitted ,

Francine C. Juste, Ph . D.
Executive Director

177

CFA

ConsumerFederation of America

STATEMENT OF CONSUMER FEDERATION OF AMERICA

before
COMMITTER ON BANKING , HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
on
COMMUNITY DEVELOPMENT

BANKING

February 16 , 1993

The Consumer Federation of America is pleased to submit this
statement for the record on community development banking . CFA
would like to commend Chairman Riegle for scheduling hearings on
community development banking in the first weeks of the 103rd
Congress . The Committee's early focus on the financial needs of
distressed communities
confirms that community development
initiatives will be a top priority of this Congress .
Since the founding of the Consumer Federation of America in
1967 , our national , state and local members have been deeply
concerned about the availability of financial services for low- and
moderate-income consumers . While these consumers , many of whom live
in inner-city and depressed rural communities , may not have the
vast financial assets that the banking industry is wont to chase ,
their needs for basic banking services have never been lacking .
Tragically, today , millions of households are non-participants
in our nation's subsidized , regulated and insured banking system.
These consumers strive to make ends meet without benefit of simple
checking accounts -- payment mechanisms most Americans take for
granted
and suffer the debilitating consequences of growing
credit famines within their communities . Such exclusion is
intolerable and unconscionable under a deposit insurance system
that is subsidized and supported by all taxpayers .
CFA is concerned that the people least able to pay are
required to pay the most in a financial system that sends millions
of citizens into the arms of high- priced check cashing operations ,
loan sharks , pawn shops and money order firms just to meet day-to-

1424 16th Street. N.W.. Suite 604

Washington. D.C. 20036
•

(202 ) 387-6121

178

day financial needs . This is a situation that should not be
tolerated in a proud nation like ours .
However , we are pleased that from the campaign trail there has
come a Presidential finding that commercial banks , despite the
Community Reinvestment Act , the Fair Housing Act and the Equal
Credit Opportunity Act , have left an enormous gap in financial
services for millions of Americans in many of our nation's inner
cities and rural towns . The President in his campaign , and his
advisors since , have talked about the great gulf of credit and
banking services that have left deep financial scars on the nation .
The President and his advisors have also repeatedly spoken of the
dire need for immediate national action to heal these wounds .
CFA knows that rehabilitating the Nation's financial wounds
will require a concerted and comprehensive effort to ensure that
the existing banking system strives to better meet the needs of
underserved communities , that Federal credit facilities be upgraded
and rallied behind revitalization efforts and that the Nation
experiment , as the President has proposed , with non- traditional
community development banks to stimulate economic activity and job
creation in communities that the banking industry has abandoned at
great cost to the Nation .
CFA strongly believes that the community development banks
that the President has proposed must be a supplement to existing
banking facilities for low- and moderate - income and particularly
minority consumers and neighborhoods , and not a replacement for the
major source of mortgage , consumer and commercial credit -- the
nation's commercial banks and savings and loan associations . It is
our belief that the President's pledge to create community
development banks is rooted in the goal of full - service banking for
all Americans .
The President's community development bank initiative is an
effort to expand financial resources in distressed communities -not an effort to collapse or to replace existing resources . The
resources within the banking and thrift industries , credit unions ,
and Government Sponsored Enterprises like Fannie Mae , Freddie Mac ,
the Federal Home Loan Bank System and the National Cooperative Bank
must continue to be utilized , strengthened and targeted if the
problems of these consumers and communities are to be responsibly
addressed . This is not a simple task and there are no simple
solutions .
COMPREHENSIVE APPROACH REQUIRED
In order to stimulate the economic revitalization of these
distressed communities , CFA believes that a comprehensive approach
must be developed . In broad outline , a comprehensive approach will
require maximum local flexibility in the utilization of Federal

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179

resources , the commitment of substantial support for outreach and
technical assistance to build capacity among all participants ,
strict targeting of subsidy monies and the requirement that the
full array of existing financial institutions --both public and
private -- be called upon to be partners in the effort .
The development of a full-service financial infrastructure in
these distressed communities will require the that the following
minimal actions be taken :

1 ) Mandate Basic Banking and Government Check Cashing .
The community development bank initiative must be integrally
linked to efforts to provide access to basic banking services for
all consumers in the mainstream banking system. This is not too
much to ask of an industry subsidized and backed by the taxpayers .
Since the deregulation of interest rate controls on deposit
accounts beginning in 1980 , US banking institutions have embarked
on deliberate strategies of improving their profitability at the
expense of consumers and the well -being of local communities by
vastly increasing income from fees and charges for banking
services . Bank services that used to be free are now honeycombed
with fees and those for which there used to be nominal charges have
been subjected to substantial and often prohibitive increases .
The net result of these changes has been to send millions of
lower income and elderly consumers out of the lobby and into a
growing market- place of alternative and unregulated high- cost
fringe banking .
Basic banking is the first step of including the poor , working
poor and elderly in the nation's publicly subsidized banking
system. A deposit account has important intangible values necessary
to conduct day-to-day personal business and to organize a
consumers ' financial affairs . It is difficult , if not impossible ,
to build a credit record -- the key to economic opportunity in our
society 88- without a banking account . For consumers , a banking
account is more than just getting your check cashed . It is the very
means of financial empowerment .
2) Preserve Bank Representation in Low- Income Communities .
A bank branch is an integral part of the economic well -being
and development of a local community . When a bank branch closes , it
is more than an inconvenience -- more than an expense ; a feeling
that a community devoid of banking services is a community at risk
sets in . When the teller , the loan officer and the branch manger
disappear , consumers and small businesses alike assume new costs
and new burdens to meet their day-to -day financial needs . Hardly a
week goes by today without a major metropolitan newspaper

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180

chronicling the growing epidemic of bank branch closures in lower
income communities .
To ensure that there is no further erosion of banking services
for consumers and communities that are on the ragged edge , CFA
calls for an immediate moratorium on branch closures in low- income
communities . A prohibition on branch closures should remain in
place until firm policy is in place at regulatory agencies for
evaluating claims that there is an economic need to close any
existing branch and a system is developed to guarantee the
availability of alternative and affordable banking facilities for
impacted communities .
A solution may involve getting the National Credit Union
Administration to determine if a credit union could be established
in the community . It may mean working with local governments and
agencies to secure municipal deposits and coordinated economic
development strategies . But , clearly , we are not being a very
imaginative government if we are allowing the loan window to be
shut and the branch door to be padlocked without trying to ensure
that communities are not cut off from access to basic banking
services .
3. Upgrade Existing Federal Credit Programs .
Upgrading Federal credit programs and credit institutions that
support private sector lending by both for-profit and not- forprofit firms -- like those on the books at the Federal Housing
Commission ,
the
Small
Business Association ,
the
Economic
Development Administration , the Federal Home Loan Bank System, the
and the National
National
Cooperative
Bank
Credit Union
Administration
should be integral components of a comprehensive
community development banking initiative .
For example , as other witnesses have testified , the National
Credit Union Administration could enhance its program for the
promotion of Community Development Credit Unions to provide needed
depository and credit services in many areas . Similarly , the
National Cooperative Bank could use its " development window" to
provide loans and technical assistance for consumer-owned
enterprises ranging from business to housing and health care
cooperatives . And , the 12 regional Federal Home Loan Banks have , in
addition to being a ready source of below-market funds ,
considerable technical assistance capabilities that could be
utilized to spur economic development through the system's over
3,600 member institutions .
4. Enhance Enforcement of Community Reinvestment and Fair
Lending Law

No community development initiative can overlook the
importance of requiring the regulatory agencies to put special

181

emphasis on examinations , regulations and guidelines that will
ensure full enforcement of statutes , such as the Community
Reinvestment Act , the Fair Housing Act and the Equal Credit
Opportunity Act , which have been placed on the books to promote
credit
job creation ,
economic development ,
fair
lending ,
availability and the provision of banking services to all sectors
of the economy .

in a
Each of these initiatives should be included
comprehensive strategy to realize the President's goal of placing
these financially distressed communities on sound economic
footings .
THE PEOPLE IN COMMUNITY DEVELOPMENT BANKS
CFA believes that the single most important consideration for
the Congress as it molds the President's community development
banking initiative is to be guided by the new Administration's
motto of " Putting People First " . We recommend that consumers be
actively consulted , represented and involved in the development and
day-to-day operations of community development banks . The only way
community development truly takes hold is when the residents of a
community believe they have a real stake in their communities '
growth .
There are three key elements to consumer empowerment that
should be at the core of a community banking initiative :
1 ) Place real people on the boards of new community
development banks .
In 1989 , CFA urged that the Congress revitalize the Federal
Home Loan Bank System by placing consumer representatives on the
board of each Home Loan Bank and that each bank create an advisory
council composed of low- income housing advocates and consumers . The
Home Loan Bank Affordable Housing Programs are today a model of
public-private partnership because these programs have been
developed and overseen by these consumer representatives . This
successful model of consumer representation should be imported into
this Committee's legislative product on community development
banks .
2) Provide support for consumer controlled financial
institutions .
Consumer controlled financial institutions like credit unions
and consumer cooperatives are institutions that for years have
stabilized the financial health of local communities . Credit unions
and cooperatives are the epitome of financial empowerment from the
5

182

ground up . They deserve a significant role in ultimate legislation
and should have substantial funds earmarked for their development .
3) Investment in outreach and technical assistance .
The importance of technical assistance , including consumer
education and counseling cannot be overemphasized . The communities
that the President identified as short on capital , credit and
banking services are in need of lots of hands on help -- from
consumer education on the value of a savings account to how to
start a family small business .

These elements are critical components
community development banking program .

of

a

successful

COMMUNITY DEVELOPMENT BANKS AND CRA FORBEARANCE
CFA is aware that many within the banking industry have seized
upon the President's community development bank initiative to
promote CRA forbearance . These are misguided and unproductive
suggestions which will only exacerbate the very problems that the
President's initiative is designed to solve . As a result , CFA will
be compelled to oppose any legislation that links community
development bank capitalization to CRA forbearance .
The idea that the establishment of a network of community
existing
development
banks
will
relieve
banks of their
responsibilities would defeat the basic purposes of the
Administration's proposal -- the expansion of credit and banking
services in low- and moderate- income communities . As this Committee
is well aware , for many years , banks -- particularly the larger
institutions - have suggested that they be allowed to make onetime contributions to CRA compliance and then be excused from
further concern or participation in the low- and moderate- income
areas of their communities . This has been unacceptable in the past
and remains so today .
Some of the proposals that have been circulated on community
development banks propose that commercial banks could help finance
or provide capital for the community development banks and let this
contribution serve as their complete CRA program . With this
contribution , as the suggestion has it , banks would expect to
receive a "gold star " and an outstanding rating for their check to
the local development bank . Such a proposal would not create more
credit or more service -- it would simply shift the responsibility
of CRA compliance to a community development bank at a net loss to
the President's goal of expanding financial resources .
Suggestions have been made that commercial banks be granted
CRA forbearance for equity investments in community development
banks up to 5% of their core capital , or an amount equal to less

6

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than 1 % of their assets . Under this proposal , far less would be
leveraged than that under today's CRA -- a CRA that many , including
CFA, believe is woefully under enforced by regulators and
disregarded by the industry .
For example , last month Sumitomo Bank of California announced
a CRA commitment equal to 10% of its assets . Similarly , last year
Nations Bank , one of the country's largest institutions , committed
to deliver $10 billion in new community development loans on top of
its existing CRA portfolio . Again , an amount approaching 10 % of its
assets . Even under the existing enforcement regime , CRA is capable
of leveraging ten times the most optimistic projections of these
forbearance proposals .
There is nothing to be gained by enacting proposals that would
result in less leverage than is currently achieved under the CRA.
Clearly, this is not what the President has in mind nor should it
be a serious consideration of this Committee .
In addition , the suggestions of the forbearance advocates fly
in the face of existing regulatory policy on the treatment of these
types of equity investments . Since 1971 , the Federal Reserve Board
has permitted bank holding companies to make equity investments in
community development projects . These investments have been
valuable components of many local economic development and job
creating projects . Yet , the Federal Reserve has carefully advised
holding companies that community development " investment activities
alone are no substitute for comprehensive , ongoing bank CRA
programs " (Community Development Investments , Board of Governors of
the Federal Reserve System) .
The Director of the Division of Consumer and Community Affairs
at the Federal Reserve , Griff Garwood , recently clarified , in
testimony before the House Banking Committee , the Board's policy on
community development investments :
"The Federal Reserve believes that the use of community
development corporations and investments has limitations
and that these mechanisms should not be oversold ....
[B ] ank related CDCs should not be viewed as a panacea for
the ills of out
urban neighborhoods and rural
communities ,
nor as the main vehicle for bank
activity .... [ T ] he community development equity investment
option is an important and useful tool , one that we
believe can effectively supplement ongoing bank lending
programs ....Under current provision of the CRA , CDCS and
project investments can provide positive contributions to
an institution's CRA performance , but they are not
considered to be a substitute for the institution's CRA
program. "
Finally , CFA is concerned that these proposals would not only
7

184

not produce more credit , but would institutionalize the very
economic divisions within local communities that generated the
President's call for community development banks in the first
place . These proposals would literally leave the nation with a
separate but unequal banking system. The commercial banks , with
their Federal insurance , would send their check across town to the
community development bank and that would be all -- the banks , with
their vast resources , would be invisible in those areas of their
community .
Such a separate system would have a corrosive impact on
development in the inner- city much as the separate educational
facilities did on the population of the South prior to Brown v .
Board of Education in 1954 .
It is absolutely essential that commercial banks remain part
of the entire community . The Community Reinvestment Act requires
that banks help meet the credit needs of the entire community
including low- and moderate - income neighborhoods . Allowing banks to
meet this requirement by simply sending a check across town would
defeat the letter and certainly , the spirit of CRA .
Banks , whether we like it or not , carry considerable clout in
every community in this nation -0 tremendous economic and political
clout . It is important that the banks , their officers and directors
have a stake in all areas of the community . As intended by the CRA ,
we want to see relationships develop between banks and all the
sectors of the community . Only with this ongoing dynamic will banks
at long last develop a " feel " for the community and an
understanding of the differing cultures and economic circumstances
that exist on both sides of the tracks within their communities .
Community development banks cannot fill this gap of understanding
alone and real economic development is impossible without it .
As has been true in increasing cases , banks have discovered
that citizens of inner -city neighborhoods can be good credit risks
and that they can be the source of profitable lines of business .
Great Western Savings and Loan of California has testified before
this very Committee that it makes money in the inner-city and it
finds the lowest default rate among mortgages in the low- and
moderate-income ranges . It is a learning process that would not
have been possible had Great Western simply been allowed to send a
check across town to a community development bank .

CONCLUSION
A final note . It is critical that a community development
banking initiative not result in the stigmatization of consumers
and communities who will become targeted populations of the effort .
This is why opening up the mainstream commercial banking

8

185

system through the provision of basic banking services and ensuring
adequate enforcement of the CRA are critical elements of a
successful comprehensive approach.
No one can build assets without a means to cash a paycheck ,
pay monthly bills and safely save what is left over -- however
meager . Ensuring access to basic banking services is the
prerequisite of financial empowerment and lasting community
economic development .

186

190 VISA

podifond

esas 61judies so sestien
16 bho Illi
t /zoan
Crepes :

-3 regolaveb Dison

The

Oweesta

Program

Your Investment in Reservation-Based
Economic Development

First Nations Development Institute
69 Kelley Road
Falmouth, VA 22405
703/371-5615

187

The

Oweesta

Program
American
merican Indians living on reservations face
manybarriers to economic development. Since
capital has always originated from large infusions of
federal funding, small-scale financing is virtually
non-existent. Most Indian land on reservations is
held in trust and tribal members have no access to
mortgages or home equity loans. Reservations lack
the vehicles and familiar forms offinancing available
tomost other American populations.

New, improved housing was just
one ofthe results ofthe First
Nations' work with the SaginawChippewa Tribe throughthe
Oweesta Program.

The Oweesta Program is one suchvehicle.
Named forthe Mohawkword for money,the
Oweesta Program was developed in 1987 byFirst
Nations Development Institute. The Oweesta
Program is the onlynational program that assists
tribes in reservation-based lending and capital
management. The Program does so for a variety of
purposes and always in culturally-appropriate ways.
The Oweesta Program helps tribes manage trust
settlements and other financial assets. More
importantly, it helps tribal members form equitable
and long-lasting relationships with border town
banks and other financial institutions.

3

70-832

- 93 - 7

188

The Blackfeet
NationalBank in
Browning,
Montana benefits
from Oweesta
Fund investments.
The bankis
Indian-owned and
managed.

BLACKFEET
MAYONAL BARK

The

Oweesta

Fund:

Your
Investment
in Reservation

PHOTO: TIM RICE

An investment inthe OweestaFund puts capital
directly on reservations throughout the United States. The
OweestaFundwas used to start the Lakota Fund on the
Pine Ridge Indian Reservation in South Dakota, the first
micro-enterprise loan fund inthis country. The Fund has
also made investments in the Cherokee Community Loan
Fund inTahlequah, Oklahoma, the Tlingit and Haida
Tina'a Fund in Southeastern Alaska, the Navajo
Community Fund in Shiprock, New Mexico, the SissetonWahpeton Credit Union in South Dakota, and the
Blackfeet National Bank in Browning, Montana.

Economic
Development

The Fund is also being expanded to help provide
affordable housing for 12 tribes inNorthern California, to
help the Fort Belknap Community Coop secure muchneeded land for their sheep farming and to aid the
UmatillaTribe in restoring the land base on their
reservation in Pendleton, Oregon.
The Oweesta Fund is funded by a pool ofinterested
and dedicated investors who lend moneyat low orno
interest to First Nations for re-lending. In return, First
Nations works with tribes to insure goals and objectives
are met. Investors include private individuals and
religious groups, along with the Ford Foundation,
MacArthur Foundation and other philanthropic
organizations.

189

The Oweesta Program, and its lending component,
the Oweesta Fund are administered by FirstNations
Development Institute, a not-for-profit reservation-based
economic developmentorganization. First Nations is a
Native American organization dedicated to advancing
culturally-appropriate development. First Nations'
President and Founder, Rebecca Adamson, a Cherokee
from NorthCarolina, is an internationally known expert in
economic development Ms. Adamson also sits onthe
Board ofDirectors of the Calvert Social Investment Fund,
the Ms. Foundation and the National Center for Indian
Enterprise Development
Though headquartered in Falmouth, Virginia, First
Nations does all ofits work on reservations throughout the
United States. The Oweesta Program is one of6 ongoing
program components. Other program areas indude Field
Sites, Policy, Education, Research and Marketing. First
Nations has a staff of twentyand an annual budget of
$3 million.

The Lakota Fund on thePine Ridge
reservation, was the first Oweesta site
and thefirstmicro-enterprise loan
fund in the United States. Here an
artist seils her artwork. Many artists
borrowfrom the Lakota Fund.

FirstNations is classified bythe Internal Revenue
Service under Section 501 (c)(3) of the IRS Code as a
charitable, tax-exempt organization. Contributions to First
Nations are deductible to the extent permitted bylaw.
Financialsupport for our work comes from private
foundations, corporations, religious organizations and our
ownearned revenue. First Nations is not supported by
anygovernmentnor does it receive any Federal funding.
First Nations is proud of its record as one of the
mostsuccessful and oldest Indian economic development
organizations in the country. Answers tothe most
commonly asked questions are included on the following
pages. For more information, contact Debra Levy or
SherrySalway Black, First Nations Development Institute,
69Kelley Road, Falmouth, VA 22405, 703/371-5615.

5

190

Questions

and

Answers
WhoAdministers theFund?

about your

The Fund is administered by First Nations Development
Institute as the capital pool for its Oweesta Program.

investment
How large is the OweestaFund?

in Indian
Country

It is currently capitalized at $1.3 million. The Fund
should reach $3 million by 1995.

What is the minimum investment?
First Nations prefers to work with amounts of
$25,000 or more, although some exceptions have
been made in the past for lesser amounts. The
minimum term is three years.

What is the interest rate paid?
Most investors provide interest-free loans. Interest
can be paid up to the Federal Reserve Bank's
Discount rate in effect at the time the loan is made.
Please check with our offices for further
explanation.

6

191

How is the money invested?
Funds are put to work in Indian Country immediately. Your investment will be used to start loan
funds, finance housing and land acquisition, and
leverage local financial power. Funds awaiting
disbursement are invested in a combination ofthe
following vehicles:
(1) Indian financial institutions, credit unions and
banks that work well with tribes, sociallyresponsible banks and other instruments;
(2) Obligations issued or guaranteed by the United
States of America or by an agency of it;
(3) Certificates of deposit, times deposits or
investments fully insured by the Federal
Deposit Insurance Corporation of the Federal
Savings and Loan Insurance Corporation in
any banking or savings institution;
(4) Certificates of deposit or accounts with banks or
corporations endowed with trust
powers having capital and surplus in excess
of $50,000; and
(5) Commercial paper at the time of investment
rated at least A-1 by Standard & Poors
Corporation or Prime-1 by Moody's Investors
Service, Inc.
When is interest vaid?

Interest is paid yearly or twice yearly.
Can the loan be assigned to another vartu?

PHOTO: VERN KORB

The Oweesta Program includes access
to capital through the Oweesta Fund
andaccess to information and education through the program. Top: The
Oweesta Fund is expanding to help
finance projects such as housingfor u
12 Tribe consortium in Northern
California. Below: The Oweesta
Conference isjust one ofthe many
educational programs offered.

Our standard investment agreement allows for the
assignation ofthe loan to another party after one
year of investment. Exceptions can be made.
7

192

How secure is my investment?
As with most types of socially-responsible investments, your investment is an unsecured loan to the
Oweesta Fund and should be thought of as a highrisk investment. In five years of existence, the Fund
has never defaulted or failed to repay a loan. In
fact, most investors " rollover" their investments
when theycome due. Your rights as a creditor are
neither superior nor subordinate to any other investor in the Fund.
What types ofsafeguards exist?

The Oweesta Fund is used to capitalize
culturally-appropriate economic development. The Oweesta Program helps
tribalmembers hone their business skills
anddistribute theirproducts to awider
audience.

First Nations invests only in programs that meet our
standards. Loan funds, for example, must have
large loan loss reserves; individual loans made by
the fund cannot exceed $10,000, etc. As was mentioned, the Oweesta Fund has never defaulted or
failed to repay an investment on time.
What types ofreporting mechanisms are there?

The Oweesta Fund is audited annually and copies
are available to any investor. The Fund is administered through the Trust Department of the Kellogg
Bank, Green Bay, Wisconsin. Groups that have
received loans provide quarterly financial and
semiannual program reports to First Nations. They
are required to re-pay interest quarterly.
What types of reports will I receive?
All investors receive copies of First Nations'
BUSINESS ALERT every other month and copies of
any annual or other reports produced .*

8

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RESPONSE OF MILTON O. DAVIS TO WRITTEN QUESTIONS
FROM SENATOR RIEGLE
Question 1 -Community Lending:
(A) Are these institutions addressing fully the credit needs of distressed communities?
(B) What credit needs are not being met and why?
Answer 1 :
A broad range of credit needs in distressed communities continues to be significantly underfinanced. These needs include , among
others , small- and middle- sized business start-up and expansion
loans, micro business transactions , conventionally financed mortgages for the purchase and/or rehabilitation of rental housing, and
credit for community organizations , home improvement and singlefamily mortgages.
The reasons for this lack of credit fall broadly into three categories. The first set of reasons includes many deals which should
be bankable by conventional standards but are not financed due to
racial and cultural obstacles. Other deals are avoided because most
banks seek what appear to he more attractive markets . Conventional banks, with the proper incentives, could meet these needs .
Second, many deals in distressed communities are only bankable
by specialized institutions with sufficiently targeted market knowledge and expertise to evaluate, structure and finance them appropriately. Distressed communities need access to credit from lenders
that are willing to find ways to make this lending a source of good
business. These credit needs in distressed communities often do not
fit the standards set by traditional lenders: the loans are too small,
the borrowers are less financially sophisticated; lenders are unfamiliar with the neighborhood; and lenders are unwilling to partner
with other sources of financing or enhancements to enable comprehensive redevelopment efforts . Specialized finance institutions
with a focus on and commitment to community development such
as community development banks or loan funds are designed to
meet these needs.
The third category is less about credit than about comprehensive
community development-the purpose of development banks . Access to credit by itself is insufficient to revitalize a distressed community. Disinvestment is a market phenomenon and , consequently,
will only be reversed by fundamentally reinvigorating local markets . Permanent, self- sustaining community renewal results from
creating an environment where private investors inside and outside
the community are confident their investments will be rewarded as
healthy community dynamics are restored. If the focus is community development, perhaps the largest category are nascent credit
needs: deals which are generated by supporting entrepreneurial energy through extended, mutually reinforcing, financial and non-financial community development interventions. Comprehensive
community development financial institutions can be designed to
meet these needs. Community development bank holding companies, which include a comprehensive set of nonbank affiliates , are
particularly suitable for this purpose.

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Question 2-CRA Enforcement:
(A) Can the credit and revitalization needs of distressed neighborhoods be satisfied completely through better enforcement of
CRA? If not, why?
(B) How can we strengthen enforcement of CRA to better meet the
credit needs of distressed communities?
Answer 2:
As suggested by the prior answer, credit needs in distressed communities cannot he completely met through CRA enforcement.
Disinvested communities frequently require far more intensive
intervention than can be provided through conventional banking
institutions. Indeed, even community development banks function
only in communities which retain or attract some working class
base.
However, a large portion of the credit needs (the first category
identified in the answer to question # 1) could be met by conventional banks subject to rigorous CRA enforcement. Incentives for
conventional banks to meet those needs are critical, and would
complement and reinforce specialized efforts to meet the other categories of unmet need .
There are 11,000 commercial banks in the country. Each of these
institutions employs seasoned loan underwriting talent, has proven
credit mechanisms and controls, and knows how to operate within
a prudent and regulated context. Regulatory enforcement of CRA,
an Act in force now since 1977 , has not yet succeeded in motivating
the vast majority of these institutions to apply this talent to adequately addressing the credit needs within disinvested communities. Alternative financial institutions do not operate on a national scale or magnitude that would enable them to fill the void
left when conventional banks do not adequately invest in their
communities. Clearly, a successful reinvestment strategy should
engage commercial banks, through CRA implementation and other
mechanisms , in initiatives that provide credit to distressed communities.
In order to ensure that there is access to conventional credit in
disinvested communities, clearer CRA guidelines and better enforcement are needed, particularly to reverse racial disparities
within some lending markets. CRA examiners need to analyze
lending patterns within individual institutions and pay particular
attention to the lending policies and practices of those institutions
that have fewer loans in minority areas and/or higher denial rates
for minorities. The evidence of disparities in some lending markets,
particularly in home mortgage lending markets, is mounting. It is
imperative that Congress and banking regulators work to ensure
that every borrower has equal access to credit, regardless of race
or gender.
CRA regulators need to better educate safety and soundness regulators to the variety of tools used to make loans in low- and moderate-income communities so that financial institutions do not feel
there is a conflict between the requirements of CRA examiners and
the requirements of safety and soundness regulators in terms of
the evaluation of loan portfolios . Small business lending, in par-

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ticular, has recently been negatively affected by these kinds of discrepancies.
The regulatory agencies, or the Congress , should consider two
procedural changes to CRA to improve its effectiveness . First, regulators could partially apply the practice of the educational and
medical professions, which rely on peer review, by adding a banker
and a qualified community-based representative as members of
every CRA examination_team. In addition , an annual working session should be convened to make specific recommendations on improving CRA enforcement. The working session should include approximately fifteen representatives of regulatory agencies, bankers
(and/or banking associations), and community-based organizations .
CRA should be more performance and output driven: less concerned about appearance and more about the amount of credit that
gets extended directly or indirectly-to low- and moderate- income
communities. This requires , among other things, more clarity from
banking regulators on what counts for CRA "credit." Examiners
and banks need to be reminded that compliance with the law requires assuring the actual making of loans (by the institution and,
in some circumstances, through intermediaries) in low- and moderate-income areas, i.e. , getting dollars into communities that have
been significantly underserved by financial institutions . Thus ,
while documentation of compliance is important, lending is more
important and, of course, the factor that ultimately counts in
achieving CRA's public policy objective.
Because some credit needs can most efficiently be met through
specialized institutions, regulators need clearly and specifically to
recognize that financial partnerships with intermediaries can help
extend the ability of some banks , especially those institutions without retail lending operations , to meet the credit needs of low- and
moderate-income people. These partnerships could include community development banks, community development loan funds , community development credit unions and micro credit programs as
well as nonprofit community development corporations .
Finally, positive financial incentives should be created to further
encourage community reinvestment lending by conventional banks .
New, much sought after, banking and non -banking privileges
should be awarded to institutions that meet specific, high thresholds of CRA performance .

Question 3- Distinction :
(A) Can you explain to the Committee what factors make CDBs distinct from other institutions?
(B) Why do you feel that the creation of a CDB was necessary to address the needs ofyour community?
Answer 3 (A and B):
Community development banks are generally distinguished from
conventional banks by their development specialization and targeted comprehensiveness of banking and non -banking activities .
They tend to be distinguished from other community finance institutions by scale (as regulated depositories) and , again , often by
comprehensiveness of activities .

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Shorebank defines a community development bank as a bank
holding company with a specialized structure which is organized to
transform the market dynamics of a geographical target area. This
structure, including a bank and community development subsidiaries, has a number of attributes which make it particularly wellsuited to promote the revitalization of distressed communities .
1. A community development bank is designed, to be, a comprehensive community development institution which, in addition
to a bank, includes other development subsidiaries and affiliates
that complement the investment activities of the bank . These subsidiaries and affiliates enable a development bank to aggressively
identify and better evaluate opportunities and initiate development
activities; and to address multiple dimensions of community renewal, ranging from developing retail shopping centers to upgrading labor force skills, Through its non-bank development affiliates ,
the institution can invest equity capital in businesses owned by
others , rehabilitate and construct residential and commercial real
estate, operate social development and business technical assistance programs, attract other private and public investors, and generally link residents, financial resources and Government programs
into a coherent renewal effort.
2. A community development bank is further distinguished from
conventional banks by its specialized commitment to the revitalization of a targeted area for the benefit of current residents. Through
its leadership , ownership and governance structure, the development bank makes its mission the long-term development of a community. It measures its success in terms of the development impacts it has on that community. It becomes a permanent institution
whose success is joined with the improvement of the community. In
order to accomplish its mission , the development bank's leadership
and staff must bring together highly localized knowledge of the
community, technical banking skills , and a broad understanding of
the strategies and process of economic development.
3. A development bank combined the structure and expertise of
a for-profit financial institution with the commitment to place one
normally sees in community-based non -profit organizations . By developing specialized expertise in carefully targeted areas, and
achieving synergies through comprehensive coordinated interventions , a development bank is able to manage the tensions between
the goals of profitability and community development impact, making development profitable. In contrast to many community-based
organizations, profitability is an essential feature of a development
bank. Profits enable the bank to be self-sustaining and to grow and
assure that continuing business discipline will be brought to the
task. However, while profitability is essential, the shareholders and
management of a development bank recognize that its goal is not
to maximize profits, but to help effect lasting community renewal .
4. A development bank also combines the qualities of a community-based, market-driven, private institution with unusual scale ,
expertise and ability to leverage resources. A development bank is
a uniquely capable delivery agent for external public and private
resources. Many private and Government programs are not fully
available in the communities for which they are intended because
of lack of sophisticated , market-based delivery systems. A develop-

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ment bank uses foundation investments and grants, Federal loan
guarantees , secondary markets , low- income housing tax credits,
JTPA and numerous other programs to accomplish common objectives. A development bank can be considered a "handyman " of
sorts, intimately familiar with particular local problems, equipped
with a "toolbox" of varied Government and private "tools" to address them, and possessing the expertise to select and productively
use the appropriate tool.
5. Finally, a development bank can be flexible and innovative.
Location dictates strategy and design : the organizational structure
and the strategies or tools it employs can be adapted to a wide
range of circumstances. Thus, whether a bank or other kind of
large scale, regulated depository institution is most appropriate,
and what affiliated activities are needed, will vary from community
to community. For example, Shorebank's structure reflects its goal
of revitalizing older urban neighborhoods . Southern Development
Bancorporation uses a different array of affiliates than Shorebank,
because it has been designed to specialize in business and rural development rather than urban community reinvestment.
Conventional banks and community development banks do not
compete; they are natural partners . Community development banks
operate in a market niche which is generally not "bankable" except
by such specialized, comprehensive institutions. In effect, they
"grow" the market for conventional banking much more than they
take a "slice" of the existing "pie."

Question 3:
(C) How do CDBs fit within the spectrum of all community lending
institutions?

Answer 3 (C):
CDBS tend to be the most comprehensive and well-capitalized
model. Through their ability to use the lending and deposit gathering properties of insured depository institutions and the proactive
community development properties of various types of subsidiaries,
development banks offer unusual potential to affect a broad economic development strategy and achieve scale of impact . Unlike
traditional banks, development banks are extraordinarily proactive
in the design and delivery of coordinated bank and non -bank products to meet the credit and community development needs of distressed communities.
However, it should be recognized that "disinvested" communities
are not all alike. The degrees and categories of credit need vary.
In response to different needs, a variety of types of community development financial institutions has emerged to fill the credit gaps
in low- and moderate-income communities. These institutions provide a critical, alternative and accessible source of financing for
meeting the capital and credit needs of distressed communities in
ways that increase employment, income or housing opportunities
over the long term and with broad-based impact.
Each of these types of community development financial institutions plays a separate and distinct role in meeting community capital and credit needs. Some are defined with a broad economic development focus, others are narrowly focused on the delivery of a

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small number of development credit products. Generalized descriptions (which cannot do justice to the individual institutions) reflecting some of their distinctions follow.
1. Community development credit unions are a particularly effective vehicle for connecting very low-income people to mainstream
money management techniques. The deposit and financial transaction services of CDCUS make mainstream banking services accessible and affordable to people that otherwise might have to use expensive and unregulated check cashers and "under the mattress"
savings accounts. The consumer lending done by CDCUs is often
the only source of loans for expenses like education, home improvements, or used cars that enable people to get and keep jobs . Lending to individuals can have a significant impact on a community
scale as opportunities for individual advancement make local community economic development a reality.
2. Community development loan funds specialize in making loans
for "unbankable" deals. Through their lending, they often make
projects bankable, train borrowers to use credit, and fill a credit
gap that cannot be filled by conventional banks . CDLFs serve as
a delivery mechanism for social investment capital that is willingly
invested at risk for a financial return that is generally below market rates, in order to further the goals of community development.
Through their willingness and ability to make loans to community
projects that are unable to attract conventional bank loans, CDLF's
fill a development credit gap that often stands in the way of community-based development. CDLFs foster new borrowers , make
new loans that enable borrowers to establish relationships with
traditional financial institutions, and provide technical assistance
to help borrowers establish the kind of experience and track record
necessary to secure future loans from banks.
3. Microcredit programs provide a very specialized type of development credit to individual entrepreneurs who seek to be self- supporting through income from their businesses . Although not a community-wide strategy for economic development, microcredit programs do provide access to capital to very small businesses owned
by low-income persons, often women or minorities, who are otherwise unable to borrow. Because microcredit programs are designed
to provide tailored, extensive technical assistance and are not limited by the regulatory constraints of depository institutions , they
have the potential to make a deeper impact on truly disadvantaged
populations.
Question 3- Follow Up :
One concern raised about the creation of a network of CDBs or
other community-based lenders, is that it will create a two-tiered
banking system-one that serves the needs of poor communities and
the other that serves everyone else. Is this a legitimate concern? Why
or why not?

Answer 3-Follow Up:
This concern is not legitimate if, as has been proposed , CDBs are
not established as a wholly distinct "system" with a special charter.
An essential feature to CDBs ' success is precisely that they are
fully regulated commercial banks operating by the same stand-

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ards-and with the same legitimacy, credibility and business discipline-as any bank. They are distinct from conventional banks
because they are specialized in community development (as, indeed, many other banks specialize in particular markets) , but recognition that this specialization serves public purposes, and so is
particularly deserving of support, need and should not constitute
them as a different and certainly not a lower tier- system.
[Question 4 was missing on our copies]
Question 5-Impediments:
(A) Why are there so few CDBs and what are the impediments to
the formation of new institutions?
Answer 5 (A) :
Shorebank was created in 1973 by a management team and investors interested in testing the theory that a bank holding company, as a self- sustaining, large scale, permanent institution , could
engage in multi -faceted community development, simultaneously
helping revitalize communities while operating profitably. For
nearly fifteen years, its owners and managers concentrated on refining, implementing and learning the lessons from application of
this model in the South Shore community. The last five years have
witnessed significant expansion and replication , and at least a
dozen communities are currently in varying stages of planning development banks. The perspective gained from almost 20 years of
experience inventing the techniques and methods needed to succeed leads us to believe that this model can be broadly replicated
in other communities. However, the challenges remain formidable.
Experienced personnel with the requisite skills and commitment,
capital, and funds for organizing costs are all equally great impediments. Community development banking is a difficult and specialized business that is not for everyone. It requires specialized skills,
flexibility and a long term commitment to the dual goals of profitability and community development. Formal bank training programs are not sufficient preparation for management of a community development bank. Establishment of and support for training
programs, and perhaps ultimately of a trade association type network of CDBs , deserves consideration.
Compared to most community development institutions , development banks are complex and large scale, requiring commensurate
amounts of organizational resources and capital. At the same time ,
community development banks have required patient and dedicated investors who are willing to take greater risks associated
with start-up and a new institutional model; who have been willing
to forgo dividends and liquidity in favor of reinvestment of profits
in development activities; and who support a development agenda.
Shareholders willing to fund start-up of and invest in community
development banks on this basis are a relatively narrow group ,
consisting largely of foundations and socially responsible religious
institutions, corporations and individuals. Start-up and risk factors
generally should decline as experience grows, but considerable obstacles remain. With new Federal programming and appropriate

200
incentives , it may become possible easier for CDBs to attract funding and capital from a broader investor base.

Question 5:
(B) Are their other community lending models that should be explored as part of a Federal community development banking
initiative?

Answer 5 (B):
Each disinvested community has unique capital, credit and community development needs, as well as strengths and resources . To
have an effective impact on these needs , each community development initiative must be tailored to these unique community characteristics . As stated above, the community development bank model
has unusual capacity for managing a comprehensive, community
development approach. However, other models may be more appropriate for particular communities with differing, or fewer, needs .
For example, a disinvested community with a strong community
development corporation and good access to an aggressive community-oriented bank and non-bank financing, may be better served
by a community development credit union that provides low-income
people with access to retail deposit and loan services .
While Federal community development initiatives should recognize and support the whole range of community development institutions, it is critical that a "least common denominator" approach
not result in folding all of the institutions into one program , which
necessarily could not then be appropriately tailored for the particular structures, purposes and needs of the diverse institutions. A
community development banking initiative should, for the reasons
detailed in my testimony, concentrate on comprehensive depository
institutions. Complementary initiatives should be designed for the
other institutions, and specific programmatic incentives and support should be created, which could be accessed by any of these institutions.
Question 6-Limits of CDBs:
(A) Are CDBs a panacea for these ills?
Answer 6 (A):
While community development banks can be a very effective
model with high development impact, they are far from a panacea
for urban and rural problems . CDBs are, in part, delivery mechanisms and mediating institutions, succeeding because they attract
and foster productive application of human and financial resources
from within and without the targeted community. They complement, and cannot supplant, the broad array of Government and
private activity which is necessary to restore distressed communities. Furthermore, as discussed below, they can play even this
limited function only in certain types of community environments.

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Question 6:
(B) What are the limits of CDBs? (C) What factors or conditions
must be present in a community for a CDB to be successful?
Answer 6 (B & C):
Considering the successes of the few currently operating CDBs ,
the limits of their capacity are as yet unknown . However, the
model is premised on facilitating entrepreneurial energy and potential development opportunities to restart healthy market forces
while supporting, among other things, profitable operation of a
bank. Some communities have been so devastated by years of neglect, disinvestment and destructive forces that the environment no
longer exists for a community development bank to operate or even
begin the renewal process. There are other neighborhoods whose
markets may simply be too small to support a community development bank.
Numerous factors affect how and whether a CDB can be designed
appropriately for a particular community. These include the volume and quality of the housing stock; business presence and development opportunities; the presence of a sufficient working class
and entrepreneurial population; community and public amenities
making it possible to attract residents and investors ; access to capable public and private sector partners; and others.

Question 6:
(D) What other initiatives should we be examining as part of a Federal community lending strategy?
Answer 6 (D):
As mentioned elsewhere, incentives and accountability under the
Community Reinvestment Act provide necessary, enormous and
complementary opportunities to contribute to revitalization of distressed communities. Distinct programs to support start-up of alternative community lending and development institutions should
also be created . Finally, a broad range of specific programmatic
support for development products ( such as the SBA loan guarantee
program) should be enhanced and coordinated , including support
which could be utilized by the nonbank affiliates of CDBs .

Question 7-Safety and Soundness:
Do institutions dedicated to community lending pose safety and
soundness problems or create significant risks to the bank insurance
funds? How do existing community development banks compare to
their peers in terms of loan losses, delinquencies, defaults, returns
on assets or earnings, or other indicators of the health of the institutions? What role should the Federal financial regulatory agencies
play with respect to regulating institutions that might receive Federal assistance?
Answer 7:
Shorebank's and Southern's experience suggest that CDBs do not
pose special safety and soundness risks . The same safety and
soundness regulations currently applied to all banks adequately ad-

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dress the risks, and should continue to be applied to CDBs . Careful
selection and monitoring processes by the investing (non- regulatory) "Entity," as described in my testimony, will also mitigate
any risks . Finally, to the extent other support, including capital
and training, is provided by the program to strengthen CDBs , it
will further decrease their risk of failure.
The well -documented problems in the thrift and banking industries did not stem from reinvestment in distressed communities . In
fact, the institutions that failed or got into serious trouble were
generally not active lenders in low- and moderate- income communities.
The charts of Shorebank and South Shore Bank performance
submitted with the written testimony demonstrate that their performance compares favorably to their peers , including:
-South Shore Bank has been profitable every year since 1975.
-1992 was the tenth consecutive year in which the Bank achieved
double-digit return on equity.
-The Bank's low 1992 net loan losses of just cover one third of one
percent (.38 percent) on a $ 161.2 million loan portfolio continue
a trend of outstanding performance at a level that has equaled
or surpassed the performance of peer group banks during five out
of the last seven years.
Additional Questions Concerning CRA:
To what extent should insured depository institutions receive credit toward fulfillment of their CRA requirements for contributions to
or investments in community development financial institutions?
Should contributions to or investment in community development financial institutions be sufficient to fulfill an insured depository institution's CRA obligations? Would it be appropriate to exempt institutions from CRA examinations and requirements if they contribute
a sum equal to approximately .05 percent of their assets of 5 percent
of their capital to a community development financial institutions?
Answer to Additional Questions Concerning CRA:
Since CRA should be clarified and enforced to emphasize performance objectives-outputs of financing to low- and moderate- income markets-examining the extent of CRA credit should not be
focused on whether the financing is extended directly, or indirectly
through intermediary community finance institutions which often
can more effectively extend it in particular markets. Rather, the
extent of CRA credit for such investments should reflect the extent
to which the investments result in provision of financing to underserved markets. Considering the limited opportunities for and
attractiveness of most indirect investments ; the enormous assets of
the conventional banking system ; and the extent to which many
credit needs can be better met by the conventional banking system ,
and would be with appropriate CRA enforcement and incentives ,
the proportion of total CRA activity which would ultimately be met
through indirect investments would remain miniscule .
It is extraordinarily unlikely that indirect investment could entirely fulfill appropriate CRA requirements. The extent to which it
could do so will depend on the nature of particular institutions and
indirect investment opportunities. For example, banks that do not

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have retail lending operations because they have defined themselves as wholesale banks, investment banks or specialty banks
like trust companies would more efficiently fill more of their CRA
lending requirements through capital investments in CDBs , if such
investments were available. The threshold should be high enough
to ensure that the investment is on a par with those banks that
have retail lending operations. With respect to banks that have a
retail lending operation, investment in a CDB would primarily supplement community lending activities.
CRA should be restructured to create, in addition to minimum
required thresholds , incentives for much higher levels of community financing. Such incentives might be structured in tiers , such
that financing at some multiple of the minimum would create a
"safe harbor," and financing at various established higher multiples
would entitle the institution to access additional special privileges ,
such as interstate banking, insurance sales , and securities underwriting. Among other reasons, because the amount of CRA credit
for indirect investments will depend on the nature of the institution, its markets and the investee institution , a blanket “buy-out"
would not be appropriate, particularly not at levels as low as the
percentages suggested in the question.
RESPONSE OF LYNDON COMSTOCK TO WRITTEN QUESTIONS
FROM SENATOR RIEGLE
Question 1-Community Lending:
Are these institutions addressing fully the credit needs of distressed communities? [referring to existing "commercial banks, savings and loan institutions, non-profit organizations, and public
agencies"] What credit needs are not being met and why?
Answer 1:
Capital starvation is a principal cause for the economic devastation faced by so many low- and moderate-income communities in
the U.S. There is not nearly enough capital investment taking
place to support an appropriate level of business development and
job creation, housing development, and consumer credit in lower income urban and rural areas.
As to the reasons for this situation , we have to begin with examining the performance of the institutions that have the capital base
and mission to supply investment for small businesses, housing development, and consumer credit.
The most important pool of savings in this country, and the most
important source of investment for small businesses, housing development, and consumer credit, is the nearly four trillion dollars in
the commercial banking system. What proportion of this pool of
savings is invested in ways which benefit the low- and moderateincome population of the United States? I refer now to the combination of all of the loans for housing in low- and moderate- income
communities, all of the loans for small businesses located in those
communities, and all of the consumer credit provided to low- and
moderate-income individuals by commercial banks .
My estimate is 1 percent.

204
I've come to that conclusion by looking at Community Reinvestment Act data for New York City, and would be happy to share
with you the basis for my estimate. If there have been any studies
of this question which could give us a further refinement of this
number, I would like to learn about them.
As to the reasons for the low proportion of total bank assets invested in low- and moderate-income communities , I suggest that it
is only partially related to loan risk. I have yet to see any evidence
that this type of lending is unacceptably risky when handled appropriately.
I also find it highly interesting that South Shore Bank has been
more profitable over the past ten or fifteen years , on a return on
assets or return on equity basis, than literally thousands of banks
in the U.S. The South Shore story is quite well known in the banking industry by now, yet there is a remarkable paucity of imitators .
One is forced to conclude that other banks either don't believe
they're capable of replicating the South Shore success, or simply
don't wish to focus on community development even if it is a profitable activity. Whatever the reasons may be, I have yet to hear anyone dispute that there is an extremely low level of capital investment taking place in low- and moderate-income communities.
Question 2-CRA Enforcement:
Can the credit and revitalization needs of distressed neighborhoods be satisfied completely through better enforcement of CRA
[Community Reinvestment Act]? If not, why?
How can we strengthen enforcement of CRA to better meet the
credit needs ofdistressed communities?
Answer 2:
We at Community Capital Bank support full enforcement of the
Community Reinvestment Act. I believe that all of my colleagues
in the community development financial institution (ČDFI ) sector
share that view. Whatever community benefits are generated by
the CRA need to continue and be enhanced.
A coalition of CDFI practitioners has put forward a position
paper on "Principles of Community Development Lending," which
was entered into the Committee hearing record on February 3. All
of the members of that coalition have agreed that community reinvestment ought not to be viewed as an either/or situation between
conventional banks and CDFIs . Our low- and moderate-income
communities need all of the help they can get.
The existing CDFIs are dedicated to community development,
and have proven to be good at it. Community development lending,
like any other form of lending, requires skill and dedication to
make it work. Purpose , focus, and skill are the attributes that
make CDFIs effective contributors .
The problem is that the entire CDFI sector is too small to be able
to address the scale of needs of low-income communities . That's
why CDFI practitioners have asked for help in our efforts to expand the capacity of the CDFI industry as fast as can be accomplished without sacrificing quality. Nonetheless , even a greatly expanded CDFI sector will be insufficient relative to the total capital
needs of low- and moderate-income communities . CDFI practition-

205
ers know that and most actively seek to use their institutions to
help leverage greater community reinvestment by conventional
banks.
There is an opposite problem with conventional banks . There are
enormous resources in the banking sector, but it has not been deployed in low- and moderate-income communities .
In the seventeen years since CRA was first passed at a Federal
level, I believe it has had only a minor effect on community lending
patterns. As far as I'm aware, the quantitative amount of total
community reinvestment lending has not significantly increased
over that period of time. If that performance analysis is correct, the
Community Reinvestment Act must be judged a failure so far.
Nonetheless , we shouldn't drop it, because whatever help it does
provide is desperately needed.
To strengthen enforcement of CRA, I highly recommend that the
new CRA proposal of the New York State Banking Department be
examined. The most important element of this proposal is quantitative measurement of CRA compliance. Quantitative standards
for CRA, which could be analogous to the capital adequacy standards of safety and soundness regulation, are long overdue, in my
opinion.
The New York proposal has not yet been implemented, and the
details, including the all-important CRA rating ratios, have not yet
been set. The principles of the proposal reflect, however, what
would probably be the most significant, and positive, change in
CRA since the law was first passed.
Capital ratios have been proposed as a basis for both restrictive
measures on banks, and for providing greater business latitude to
those with excellent capital ratios. A similar approach, combining
both "carrot" and "stick," could be taken with community reinvestment ratios.
Perhaps greatly improved CRA compliance could lead to a doubling or tripling of community reinvestment lending by conventional banks. This would be a significant change, and well worth
pursuing. To think that changes in CRA could cause a greater effect than this seems highly implausible to me, so long as there is
a continuing lack of fundamental interest in community reinvestment. There is only so much that can be accomplished with regulatory enforcement and incentives. The problem is that even a tripling of conventional bank community reinvestment would still be
grossly inadequate relative to community needs. Again, the central
point is that our communities need all of the help that they can
get.

Question 3-Distinction:
Can you explain to the Committee what factors make CDBs [community development banks] distinct from other institutions? Why do
you feel the creation of a CDB was necessary to address the needs
of your community? How do CDBs fit within the spectrum of all
community lending institutions?
Follow up: One concern raised about the creation of a network of
CDBS or other community- based lenders is that it will create a twotiered banking system -one that serves the needs of poor commu-

206
nities and the other that serves everyone else . Is this a legitimate
concern? Why or why not?
Answer 3:
As to community development banks specifically, they operate
under the same regulatory framework as other banks . Nor have I
heard any request from practitioners that a separate regulatory
structure be created . There are major differences between community development banks and other banks , however.
I would summarize these differences as: focus, which can help
lead to a skill at this work ; relationships with complementary community economic development services such as technical assistance
and equity investment; supportive shareholders and depositors ;
and commitment.
To elaborate, one of the most important differences is focus . At
Community Capital Bank, we have the entire resources of the organization aimed at providing community development loans in lowand moderate- income areas of New York City. Our board of directors, our senior management, and our loan officers all concentrate
on community development lending. This creates an environment
where we not only have the motivation to succeed at community
development lending, since our entire bank depends on it, but we
have used the concentration of effort to give ourselves the best possibilities of success.
Bank loans are only one part of the spectrum of community development finance needs. The existing community development
banks have explicitly recognized this by use of the bank as the anchor for related community development affiliates . In the case of
Community Capital Bank, while we have not yet formed a bank
holding company, we do have a nonprofit venture development organization, LEAP, operating from the Bank's office. I am the Chairman of LEAP as well as Chairman of the Bank. Shorebank , Southern Development, and Center for Community Self-Help have all
been able to been more fully articulate this strategy as they have
been in operation for a longer period of time.
The shareholders at Community Capital were recruited to the
Bank specifically on the basis of the Bank's community development mission, as Shorebank and Southern Development had done.
Shareholders and depositors who specifically support the community development mission will object to too few loans in low- and
moderate-income communities , not too many.
Community development is a long-term process that requires
sustained commitment. Institutions that have that commitment are
essential.
Community Capital Bank was created for the sole reason that
adequate bank support for community development has not been
present in New York City.
Community development banks are only one of a range of community development financial institutions. I also include community development credit unions , community development loan
funds, microenterprise funds , and venture development organizations as CDFIs. There are other, related, types of community development organizations that CDFIs interact with, or which could be

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included in a community development bank holding company. An
affordable housing development company is an example.
Not only are the needs for community development finance
broader than just bank loans, but a particular community's resources may be better suited to some CDFI vehicles than others.
For example, a community development bank tends to have the
best capital access of CDFIs , largely because of access to insured
deposits , but it also requires a large amount of capital to start one.
As to a two-tiered banking system, we should realize that would
be an improvement over what we have now. Right now we effectively have no banking system at all in most poor neighborhoods.
A "two-tier" system could imply that there will be a separate regulatory status for CDFIs . I don't recommend that course. However,
I do think that institutions who specifically adopt a program of
community economic development as their principal purpose should
be assisted as to their startup and expansion, and that it is in the
public's interest to do so.
The problem with the "two tier" approach is that it implies that
conventional banks will not or need not operate in low- and moderate-income areas. That is not acceptable. We should encourage
and require conventional_financial institutions to participate in
community development. To focus only on CDFIs and give up on
that effort would be a serious mistake, and would ignore the efforts
that CDFIs themselves make to involve conventional banks.
Question 5-Impediments:
Why are there so few CDBs and what are the impediments to the
formation of new institutions ? Are there other community lending
models that should be explored as part of a Federal community development banking initiative?
Answer 5:
The most important obstacle to the creation of more community
development banks has been the great difficulty in obtaining sufficient equity capital. The social investment capital market, which
has been the only plausible source for obtaining this equity , is in
a formative state and includes no underwriting capability. A further limitation is the relatively small number of experienced bankers, especially those at a senior management level, with experience
and an interest in community development. Yet a further problem
is the shortage of technical assistance available to groups who
would like to start a community development bank.
The coalition of community development financial institutions
that I referred to earlier includes a variety of types of organizations. I urge that any Federal support program be made available
to the full range of CDFIs. Eligibility ought to be defined by an organization's degree of commitment to community development, the
relative importance and likelihood of success for its programs in
supporting community economic development, and the need for
Federal support in achieving that success .

Question 6-Limits of CDBs:
Are CDBs [community development banks] a panacea for these
ills [in urban and rural distressed communities]? What are the lim-

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its of CDBs? What factors or conditions must be present in a community for a CDB to be successful? What other initiatives should we
be examining a part of a Federal community lending strategy?
Answer 6:
No one has ever suggested that community development banks ,
or community development financial institutions generally, are a
panacea for poverty. Banks are extremely useful tools for marshalling capital and investing it as senior debt. Reasonable access to
that form of credit is essential, but not sufficient. Other factors
that may be necessary to address community development range
from the financial (other forms of debt, various types of technical
assistance, and equity capital) , to the managerial (programs to help
create a sufficient pool of potential entrepreneurs and business
managers), to basic issues of physical security, transportation access, health care, child care, education , and cultural stability.
As I noted above , there is also the issue of the limited number
and scale of community development financial institutions relative
to the scale of need . CDFIs are accomplishing important work, and
could do more of that work. It's in the public's interest to help that
happen, but that should not be confused with a solution to poverty.
Community development banks , like other banks, require the income from a portfolio of quality loans to support the overhead of
the institution . The amount of loans needed will vary according to
the size of the institution, but even a very small bank will typically
need $ 10 million or more of performing loans to achieve breakeven.
Further, a bank ought to maintain at least some minimal diversification in that loan portfolio . Smaller scale organizations , such
as a loan fund or credit union , can succeed with a smaller loan
catchment area and deal flow.
It's important that any Federal support that may be forthcoming
for CDFIs be flexibly structured. New forms of CDFIs have continued to spring up in the past several years , such as CDFIs that specialize in raising equity for community development. These types of
organizations, which have the same degree of community development commitment and focus as a community development bank ,
should be eligible to apply for a Federal CDFI capacity expansion
program .
Question 7-Safety and Soundness:

Do institutions dedicated to community lending pose safety and
soundness problems or create significant risks to the bank insurance
funds? How do existing community development banks compare to
their peers in terms of loan losses, delinquencies, defaults, return on
assets or earnings, or other indicators of the health of the institutions? What role should the Federal financial regulatory agencies
play with respect to the regulating institutions that might receive
Federal assistance?
Answer 7:

The four institutions that are usually described as community
development banks (South Shore, Elk Horn/Southern Development,
Community Capital , and Self- Help Credit Union) have strong financial records according to their published financial information

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and also from anecdotal reports. No doubt the Committee could
confirm this information with the relevant regulators .
As to Community Capital Bank specifically, at two years old, we
are too young for me to make a statement as to our financial success. We do feel that we are on the right track so far. We have no
delinquent, nonperforming, or classified loans to date. Our operations area has run smoothly and quite efficiently. Our assets to
employee ratio, for example, is ahead of median for all banks , let
alone startup banks . Our deposit base, which now exceeds $ 16 million, has been highly stable and continues to expand.
We have not yet reached breakeven, a situation which is normal
for a two year old bank. We started out with the expenses of a full
bank, but with no loan income to cover those expenses. The growth
in our loan portfolio has reduced our monthly operating loss, such
that we anticipate profitable operations within a reasonable time
frame. In the meantime, we continue to be extremely well capitalized.
Accordingly, I don't believe the existing community development
banks pose any safety and soundness problems . Further, I don't believe that small business and affordable housing lending in lowand moderate-income communities has posed safety and soundness
problems for the banking industry generally. In general, I believe
these types of loans have been made according to appropriate banking practices, reviewing the debt capacity, collateral, and character
of the borrower. That can not be said, however, for many of the
abusive lending practices which have caused immense losses in the
banking and thrift industries.
No special intervention by banking regulators will be needed because of capacity building measures by the Federal Government for
the CDFI industry. Those CDFIs that are supervised by banking
regulators should continue in the same vein. Any Federal agency
distributing support to CDFIs will presumably use an annual compliance and audit procedure to determine whether the support was
used as agreed. That has no bearing on safety and soundness regulation.
Additional Questions Concerning CRA:
To what extent should insured depository institutions receive credit toward fulfillment of their CRA requirements for contributions to
or investments in community development financial institutions?
Should contribution to or investment in community development financial institutions be sufficient to fulfill an insured depository institution's CRA obligations? Would it be appropriate to exempt institutions from CRA examinations and requirements if they contribute
a sum equal to approximately .5 percent of their assets or 5 percent
of their capital to a community development financial institution ?
Answer to Additional Questions Concerning CRA:
I believe that depository institutions already generally receive
CRA credit for contributions or investments in community development financial institutions. On the basis that CDFIs are using
those funds to promote community economic development, this is
an appropriate regulatory practice. As to the appropriate amount
of credit for this activity, it ought to depend on the relative cost

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and/or risk to the investor bank. A market rate, FDIC insured deposit does not have the same cost or risk to the investor or benefit
to the investee as an equity investment, let alone a grant.
If the new CRA proposal put forward by the New York State
Banking Department were universally adopted, then a quantitative
measure of CRA compliance would be established, which I refer to
as the "reinvestment ratio. " This would be the bank's amount of
community reinvestment loans, adjusted for related community reinvestment activities, divided by the total insured deposits. In the
State Banking Department proposal, a " safe harbor" from CRA
would only be provided to those banks that had received an “outstanding" rating for three years running.
I recently submitted testimony to the New York State Banking
Department suggesting extra credit formulas for various CRA activities, including support for community development financial institutions . I further testified that the reinvestment ratio standards
ought to be consistent with the needs of the community. For example, I suggested that an "outstanding" CRA rating should require
a reinvestment ratio of no less than 10 percent at the very least,
and perhaps more. Accordingly, I believe that .5 percent of assets
ought to be a totally insufficient community reinvestment ratio to
provide a safe harbor from CRA.
Using a quantitative approach to CRA, it would be theoretically
possible for a bank to achieve all of its CRA compliance just by investing with CDFIs . In actual practice, however, there wouldn't be
nearly enough CDFI investments available for a bank of any size
to satisfy CRA through this method, assuming community reinvestment ratios on the order of magnitude I suggest were adopted .
I understand very well that banks feel that CRA has saddled
them with a social burden that is not imposed on other corporations. Banks , however, have chosen their regulated status to obtain
easy access to capital through the bank charter and Federal deposit
insurance. Because insured deposits , are our country's most important pool of savings , it's critically important that the manner in
which those savings are invested benefit our entire population.
One-half of one percent of our Nation's major pool of investment
funds going toward low- and moderate -income communities seems
impossibly low.
Thank you for inviting my participation in your deliberations on
these important issues .
RESPONSE OF STEVEN W. LOPEZ TO WRITTEN QUESTIONS
FROM SENATOR RIEGLE
Question 1 - Community Lending:
Q.1.a. Are these institutions addressing fully the credit needs of distressed communities?
A.1.a. No. The majority banks have found ways of loopholing CRA
regulations through mere public relations and self serving minority
organizations or leaders .
Q.1.b. What credit needs are not being met and why?
A.1.b. Minority business persons have a difficult time obtaining
business loans from the established banks. The reason they don't

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make loans to minority business people or residence of the inner
cities, is because the inner city is perceived as a high risk area and
the majority banks don't like making small loans. It takes as much
time to package a small loan, as it would a large loan to a well
known borrower in an acceptable area.

Question 2-CRA Enforcement:
Q.2. Can the credit revitalization needs of distressed neighborhoods
be satisfied completely through better enforcement of CRA? If not,
why?
A.2. No, because of the following reasons?
( 1) The lenders from the major banks do not understand how to
lend to minorities.
(2) If clear directives or commitments to lend to qualified minorities does not come from the Chairman or Presidents of the major
banks, the minority communities will continue to be kept outside
the economic beltway-no lending will be done.
(3) The major banks prefer to make larger loans to well known
companies or to well connected referrals.
Q.2. How can we strengthen enforcement of CRA to better meet the
credit needs ofdistressed communities?
A.2. (a) Before the regulators such as the OCC perform audits on
a particular bank they should contact the various credit_agencies
for recent loan applicants based on zip codes. They can then send
out confirmation letters to the applicants to verity loan decision, so
when they audit the bank in particular or branches, they would
know which log books to ask for. All loan applications should be entered in a log book. In most instances though, minorities get verbal
turndowns, without their application being logged, or a credit report drawn .
(b) The CPA as it stands today based on the above circumstances
is difficult to quantify. Some banks get satisfactory ratings, just by
merely underwriting NAACP, Urban League dinners and sponsoring little league teams. Maybe it'd help if quantifiable standards
can be delineated and legislated . For example, if Chase Manhattan
were to invest 10 percent of its' capital into a minority financial institutions , it could be then exempted from CPA.
(c) As much as possible, regulators who understand inner cities
should audit urban banks or branches for CPA purposes.

Question 3-Distinction:
Q.3. Can you explain to the Committee what factors make CDBs
distinct from other institutions?
A.3. The following factors distinguishes the CDB from regular
banks:
(1) Apart from the bank owned by the Holding Company, it can
become an equity partner in a viable venture bringing needed
managerial expertise to a project in most cases .
(2) The mission of the CDB is to make a distressed area bankable. It is a niche bank.
Q.3. Why do you feel that the creation of a CDB was necessary to
address the needs ofyour community?

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A.3. (a) Due to blatant redlining.
(b) The time minorities spend complaining about the mainstream
banks they could be practicing capitalism and creating jobs in
Grand Rapids, where inner city banks obtained $508 million in deposits from inner city residents, in 1989 they loaned barely 1 percent of it in the neighborhood for mortgages. No business loans
were made.
Q.3. How do CDBs fit within the spectrum of all community lending
institutions?
A.3. The mission of the CDB is to groom small businesses into bigger businesses. So there should be no apprehension as to the subsequent participation of major banks-Natural banking market progression should be allowed to take place. The CDB will also need
the major banks in the following manner:
(a) Loan syndication wherever possible .
(b) Farming out some backroom operations to the major banks.
(c) Correspondent banking-all of the above can derive profitable
fees and earnings for the major banks.
The perceived two-tier banking system should not be a concern .
The main concern should be to bring African Americans into the
capitalistic beltway. This would help to grow the economy and expand our taxable base. The greatest crime that can be perpetrated
is to believe that the major banks will change the error of their
ways .

Question 4-NONE.
Question 5-Impediments:
Q.5. Why are there so few CDBs and what are the impediments to
the formation of new institutions?
A.5. It takes approximately $600,000 to start a bank from scratch .
(a) Established law firms are typically beyond the financial reach
of the organizers .
(b) The offering is invariably too small for the brokerage
houses -so the organizers and the President of the Bank to be,
have to market the stock .
(c) The organizers have a limited budget that cannot sustain a
coordinated marketing attack to support the capitalization process.
(d) Educating the community as to the benefits of owning their
own banks .
(e) Opposition from Main Street-here in Grand Rapids , two
major banks and several corporations have quietly campaigned
against the rise of Southside Bank, on the grounds that it is unnecessary. In a predominant republican enclave, one would feel that
a self-help project with some assistance would be easily understood.
Q.5. Are there other community lending models that should be explored as part of a Federal community development banking initiative?
A.5. At this time, myself and the Board members are emulating the
Southshore Bank model.

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Question 6-Limits of CDBs:
Q.6. Are CDBs a panacea for these ills?
A.6. Although CDB may not be a cure all, their benefits could be
the following:
( 1) Recycling indigenous capital throughout the neighborhood to
qualified borrowers to help create jobs.
(2) Gradually changing the image of distressed areas from welfare to one of a generation of entrepreneurs.
(3) Witnessing the building of economic blocs in the community
by a younger generation- so they can also be imbued with a "can
39
do spirit .
Q.6. What are the limits of CDBs?
A.6. (a) They cannot afford to get involved in unprofitable ventures .
(b) They have got to be selective about the ventures they finance
based on the competency of the support staff.
Q.6. What factors or conditions must be present in a community for
a CDB to be successful?
A.6. A structure that can provide capital to help create economic
development.
Neighborhood groups psychologically seeing or experiencing the
need for economic development.
Evidence of a viable income and deposit base.
Existence of small businesses waiting to be brought out of incubators.
Existence of a core of skilled managerial expertise.
Potential for growth in various industries.
Q.6. What other initiatives should we be examining as part of a
Federal community lending strategy?
A.6. (a) SBA loans should be underwritten at bank discretion .
(b) If the project financed is viable a two year period of interest
payment only, should be an option.
(c) If the above suggestions were to be accepted, they should be
subjected to periodic audited statements, and strict compliance
with SBA audit guidelines .
Question 7-Safety and Soundness:
Q.7. Do institutions dedicated to community lending pose safety and
soundness problems or create significant risks to the bank insurance
funds?
A.7. They can if the following characteristics are not in place:
( 1) A strong President/CEO who has familiarity of the operational infrastructure of banking.
(2) A strong comptroller CPA type who has worked in a major
bank as a comptroller to help plan and budget for the bank, monitor cost, etc. and product profitability.
(3) A strong and experienced senior lender who is familiar with
a variety of loans: Construction, commercial finance, floor planning,
letters of credit, mortgage warehousing, etc.
(4) A strong and experienced branch manager who knows lending
and branch operations.

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(5) With an experienced competent management staff, support
staff training would be ongoing.
Q.7. How do existing community development banks compare to
their peers in terms of loan losses, delinquencies, defaults, returns
on assets or earnings, or other indicators of the health of the institutions?
A.7. The only model that I am familiar with is the Southshore
Bank, and they appear to be profitable based on financial reporting. Loan losses, delinquencies , defaults are within industry norms.
Q.7. What role should the Federal financial regulatory agencies play
with respect to regulating institutions that might receive Federal assistance?
A.7. They should be treated just like the major banks: Audits by
FDIC, OCC and State Banking Departments .
Additional Questions Concerning CRA:
Question A. To what extend should insured depository institutions
receive credit toward fulfillment of their CRA requirements for contributions to or investments in community development financial institutions?
A. To the extent that the "investment" is quantifiable , so it can be
given a rating-poor , satisfactory or excellent.
Question B. Should contribution to or investment in community development financial institutions be sufficient to fulfill an insured
depository institution's CRA obligations?
B. If there are quantifiable CRA regulations in place to measure
a satisfactory CRA rating or an excellent CRA rating, then there
shouldn't be any problems .
Question C. Would it be appropriate to exempt institutions from
CRA examinations and requirements if they contribute a sum equal
to approximately .05 percent of their assets or 5 percent of their capital to a community development financial institution?
A. I prefer to confine myself to investment instead of contributions .
I think the most important thing is to get the majority banks to
start cooperating with the minority banks by investing in them; to
tackle the major tasks of making distressed neighborhoods bankable. Any target number, that will help to capitalize a CDB and
make it viable, should be a good start. If 5 percent of capital will
do it, then let it be 5 percent.
RESPONSE OF EDWARD H. MCNAMARA TO WRITTEN
QUESTIONS FROM SEANTOR RIEGLE
Question 1-Community Lending:
Are commercial banks, savings & loans, non -profit organizations,
and other lending institutions addressing fully the credit needs of
distressed communities? What credit needs are not being met and
why?

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Answer 1:
Although these institutions meet the credit needs of several "layers" in the spectrum of credit needs , the credit needs in distressed
communities remain unmet. In housing, for example, these unmet
needs include financing for multifamily housing projects, single
family mortgages, home improvement loans, and purchase and rehabilitation loans. In enterprise development (or small business),
the needs include, among others, small business working capital
financing,
early
stage
and
term
expansion
credit,
and
microenterprise lending.
The reasons for this lack of credit are two-fold: First, the primary
purposes or missions of these organizations are broad and not focused on a neighborhood's development (with the exception of nonprofits). Second, distressed communities need more than just credit.
They need coordinated interventions that will create demand for
credit and make lending activity less risky. The effective delivery
of credit in these neighborhoods often requires a specialized knowledge and experience to identify and structure transactions that provide access to credit yet minimize risk to the lender.
The primary obligations of commercial banks , savings and loans,
and credit unions are to their shareholders . The consolidation in
the financial industry has put increased pressure on these institutions to meet the expectations of their shareholders, Wall Street,
and regulators and seek the most attractive markets possible.
These organizations are not the best-suited to meet the developing
credit needs in distressed communities for several reasons:
-Loans in these communities are less profitable due to their smaller size, the time needed to work with less financially experienced
borrowers, and the lender's unfamiliarity with the local market.
Finding good business opportunities in distressed communities
requires time, patience, and effort, all of which are additional
costs to be borne by the lender.
-The institutions are less familiar with distressed and minority
communities and therefore less able to assess risk. Many loans
that would be bankable by conventional standards are not being
made for a variety of reasons, a situation which should change
gradually over time. Second, finding good lending opportunities
in these markets requires local market knowledge to evaluate
and structure loans to maintain a reasonable degree of risk.
-Regulated institutions build a diverse portfolio of loans rather
than concentrating resources in a particular geographical area or
community. In contrast, distressed communities need concentrated and heavy investment to create change. An institution
that targets a particular area is forced to find, or make, good
business opportunities in that community rather than seeking
the best possible opportunities around a broad service area.
Many of the credit needs in distress communities are met by
non-profit organizations. Although several non-profit organizations
are very sophisticated lenders, many do not have the lending experience or capital to provide a comprehensive set of resources. They
are not regulated depositories and cannot leverage their capital
into a significantly larger amount of development credit.
As a public agency, Wayne County is very aware of Government's
capacities and limitations. Public sector agencies face pressure

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from various political agendas, a cycle of frequent change, and high
competition for public resources. Government does not face the
sink- or-swim discipline of the marketplace that forces a business to
adapt and succeed or fail . A non -governmental, permanent organization can make the revitalization of a particular community its
primary purpose. In addition , it can efficiently combine public and
private resources to achieve that long term goal .
The second point is perhaps even more important in Wayne
County. If a community is fortunate enough to have conventional ,
non-profit and public sector lenders and no visible credit gap, there
may remain a need for a proactive , initiating activity to create new
demand. Unlike most lenders, a community development bank
combines a regulated bank with non-bank tools designed to create
change in a particular community. As the non-bank affiliates undertake "top down" development projects, they encourage local residents to invest in the neighborhood as well . This confidence evolves
into new demand for credit which can be met by the bank.
Question 2-CRA Enforcement:
Can the credit and revitalization needs of distressed neighborhoods be satisfied completely through better enforcement of CRA?
How can we strengthen enforcement ofCRA to better meet the credit
needs ofdistressed communities?
Answer 2:
As described above, the revitalization of distressed neighborhoods
requires more than just credit . Therefore , increased enforcement of
CRA can only go so far in addressing the complex challenges posed
in these communities.
Although improved enforcement of CRA would meet more of the
credit needs in these communities, banks would continue to see it
as a burden to be minimized . Banks and S&Ls might be more motivated to ensure access to conventional credit in distressed communities if certain changes were made.
(1) CRA guidelines should be clarified and performance evaluations should focus on the amount of dollar invested, both directly
and indirectly. At present, CRA compliance is not driven by outputs. Guidelines should be clarified so banks know what activities
earn "CRA credit. " For example, lenders might coordinate with a
community-based organization with specialized market knowledge
as a way to deliver credit effectively . Regulations should be streamlined so banks can focus on funding ways to increase lending and
investment opportunities rather than on documenting community
needs and bank research efforts.
(2) There should be positive rewards for banks with outstanding
CRA performance. The motivation to meet community credit needs
might be heightened by using incentives rather than only punishment. Banks with an exceptional CRA performance might earn access to desired activities or broadened powers. Incentives should
not substitute for enforcement, as many smaller banks may not respond to the incentives .
(3) CRA regulators should be better educated about the range of
tools used to make loans in low- and moderate- income neighborhoods. The safety and soundness regulators tend to be unaware of

217
the various tools used to manage the risks of lending to these markets and often contradict the recommendations of the CRA regulators. Regulatory agencies should give their staff methods to
evaluate the effectiveness of character lending rather than a sole
reliance on collateral values and financial ratios .

Question 3-Distinction:
Q.3.A. What factors make Community Development Banks distinct
from other institutions?
A.3.A. A community development bank differs from conventional
lending institutions in several ways:
-Targeting of resources within a particular geographic area with
the goal of renewing the market forces and economy in that particular area .
-The combination of banking with specialized, non-banking activities designed to meet the particular needs and opportunities of
that particular community. A CDB might use a real estate developer, for example, to undertake top-down housing and commercial rehabilitation projects to make a visible impact on the community and to change perceptions and confidence. It might use
a non-profit affiliate to train and place residents in jobs , provide
non-bank credit and training to very small businesses, or design
support services for apartment building tenants or homeowners.
-A singular purpose of long-term revitalization of a particular
community and a commitment to permanence. A CDB has an
identity of interest with the health of the community in which it
operates. If the community improves , the business risk of lending
and investing will decline; if the community falters or continues
to slide, loans become more risky. In effect, a CDB combines the
expertise and commitment to profit of a bank with the neighborhood level commitment of a non-profit community organization.
Creative use of multiple forms of resources, ranging from philanthropic money to public subsidy to depositors funds. A CDB is an
efficient user of a wide range of tools and resources to best serve
community needs.
-A CDB attempts to create new demand for credit by changing
perceptions and confidence within a targeted community. The
non-bank affiliates enter the market first with large scale, top
down development projects. As the market begins to change, local
demand for specialized credit (such as purchase and rehab financing) increases . As the market becomes more stable , credit
risk declines. These coordinated interventions essentially "open"
the market and allow normal competition and market supply and
demand to resume .
A community development bank is distinguished from non-regulated community based lenders by its larger capitalization , its ability to leverage that capital by accepting deposits, and the regulatory oversight that ensures prudent and sound lending practices.
Profitability is a critical feature of a development bank. To be a
permanent institution within the community and to meet the future credit needs of its customers, a community development bank
must earn profits to grow its capital base.
By combining the community-based commitment and social/financial approach of a non-profit with the resources and technical

218
capabilities of a regulated bank, a CDB is a uniquely capable delivery agent for public, private, and philanthropic resources. A development bank can marshall resources that would not otherwise
come into the community, such as philanthropic investment and
grants, Federal loan guarantee programs, secondary market mechanisms, low-income housing tax credits, JTPA and numerous other
programs. Because it knows the target market intimately, a development bank can choose the most appropriate tools and use them
to reinforce each other and generate synergies.
Q.3.B. Why do you feel that the creation of a CDB was necessary
to address the needs ofyour community?
A.3.B. In the older communities of Wayne County, we have inactive
real estate markets that present few opportunities to conventional
lenders. Although banks compete for attractive mortgage lending
within the City of Detroit to meet their CRA obligations and participate in partnerships with non-profits to provide small business
credit, the real estate markets remain an obstacle. Although_significant amounts of public resources have been poured into these
communities , the markets are failing to work.
We believe that a private sector-managed community development bank can be the mechanism to jumpstart the rebirth of our
urban neighborhoods. The development bank will include a regulated commercial bank, a for-profit real-estate developer, and a
non-profit providing small business support services and housing
assistance. Through a careful targeting of resources , it can stabilize
certain neighborhoods that are threatened by blight. The opportunities include attractive housing stock, affordable land values, and
a strong home ownership base with block clubs and community organizations . A community development bank should be able to halt
the spread of blight through the remaining pockets of strength in
distressed neighborhoods throughout Wayne County.
Although an effective delivery system for philanthropic, private,
and public resources , a CDB is not a panacea. It will rely on serving a cross- section of Wayne County's older communities to combine areas of extreme disinvestment and need with the working
class/moderate- income neighborhoods necessary to support a bank.
As a permanent, private institution with a long term development
objective, however, we believe a community development bank can
begin the process of rebuilding our neighborhoods one by one.
Q.3.C. How do CDBs fit within the spectrum of all community lending institutions?
A.3.C. If the spectrum of community lending institutions is described with conventional financial institutions at one end and nonprofit loan funds at the other, CDBs are somewhere in between.
CDBs are much more proactive than banks and S&Ls in the design
and delivery of coordinated bank and non -bank products and services . CDBs are also better capitalized and have more comprehensive interventions than most non-regulated community lenders. By
accepting deposits , a CDB can leverage the amount of capital invested by 8 to 12 times and convert deposits into development credit.

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There is a wide range of credit needs within disinvested communities. Different market niches are best filled by specialized institutions. A bank holding company can combine many of these specialized lenders within it (such as a bank and a non-profit, for example), however, a bank also requires higher capitalization and higher
revenues to cover its operating costs. There are many markets
where either the market is too small or the degree of blight and
disinvestment is too high for a CDB to operate profitably. These
markets are best served by specialized Community Development
Finance Institutions, such as community development credit
unions, community development loan funds, and microenterprise
lenders who target a particular segment of the market and meet
those credit needs.
Follow-up: Concerns About a Dual Banking System
As mentioned above, Wayne County is very aware of Government's limitations. A program creating CDB's as Government
banks would be destined for failure. The success of existing development banks demonstrates that the most effective economic development institutions are market driven and accountable to the businesses and customers they serve. Development banks should continue to have exactly the same status and set of requirements as
any other bank holding company and regulated financial institution. The standards of performance should remain high to ensure
a business- like approach to development and to ensure prudent and
sound lending and management practices . As Shorebank Corporation's financial results have demonstrated, it is possible to be a development institution and a profitable bank.
Question 4- missing.
Question 5- Impediments:
Why are there so few CDBs and what are the impediments to the
formation of new institutions? Are there other community lending
models that should be explored as part of a Federal community development banking initiative?
Answer 5:

As the oldest CDB, South Shore Bank has spent many years figuring out what works in distressed and underinvested communities . The Self-Help Credit Union and Southern Development
BanCorporation have also adapted these methods to rural environments. The strategy was largely discounted until the 1980s when
Shorebank began to achieve scale and momentum. As evidence
began to mount that the approach was creating change in these
neighborhoods, Shorebank received many inquiries from others
seeking advice on replication and adaption . We were one of those
parties.
The biggest impediments facing those who want to establish a
development bank include recruiting capable management, raising
patient capital that is willing to accept long term returns , and financing organizational and start-up costs. In addition , new development banks will need to finance technical assistance from exist-

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ing CDBs to avoid reinventing the wheel in the process of adapting
the model to their local needs and opportunities.
Like any business, the most important element in a CDB's success is capable management. Although there are few "ready-made”
development bankers available, we believe there are experienced
non-bank lenders with the ability to build and manage an organization. Similarly, there may be bankers who would like to shift to a
greater development focus. Regardless of the management team we
identify, we hope to receive guidance and management training
from existing CDBs.
Credit needs and market opportunities vary among communities .
In those communities where the credit needs are narrower, in particular, there may be a stronger need for a specialized non -lender
such as a community development credit union to provide local
banking services, or a loan fund to finance housing institutions,
each with a specialized role and market niche. Federal support for
these organizations is important to filling the credit gaps in
disinvested communities. However, Federal legislation should be focused on the particular support needs of each type of institution ,
rather than try to meet the needs of all community development
institutions simultaneously. Such an approach usually results in
finding the lowest common denominator, rather than developing effective and efficient legislation .

Question 6-Limits of CDBs:
Are CDBs a panacea for the ills facing disinvested communities?
What are the limits? What factors or conditions must be present in
a community for a CDB to be effective? What other initiatives
should we be examining as part of a Federal community lending
strategy?
Answer 6:
Community development banks can be a very effective model for
urban and rural economic development, but they are not a panacea.
CDBS are an effective means of delivering resources within a targeted, distressed community. While a CDB tries to build the capacity of local residents to access and use those resources, some communities require much greater investment of time. A CDB looks for
market conditions to support both the bank and the non-bank affiliates, such as a real estate developer. The bank needs a strong
working or moderate-income class population that can borrow from
the bank. In contrast, the developer needs an area with sufficient
blight that it can attract the subsidy required to undertake large,
top down rehab projects . A possible list of target area selection
might include:
-A sufficient level of distress;
-A mixed income population with some working class economic
strength;
-Population and market opportunity sufficient to support a bank;
-Close to areas with healthy economic activity;
-Salvageable housing stock (if a housing driven strategy);
-Defensible boundaries (which allow targeted investment) ;
-Presence of other development actors.

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Other initiatives that would affect the development impact of
CDBS include incentives and accountability under the Community
Reinvestment Act. In addition , new ways of delivering portfoliobased guarantees to small business lenders would complement the
SBA 7(a) lending program and reduce the usage costs for banks
(such as the Capital Access Program run by the Michigan Department of Commerce).
Question 7-Safety and Soundness:
Do institutions dedicated to community lending pose safety and
soundness problems or create significant risks to the bank insurance
funds? How do existing community development banks compare to
conventional lenders in financial performance? What role should the
Federal regulatory agencies pay with respect to regulating institutions that might receive Federal assistance?

Answer 7:
I will address the first and third questions only, as the second
is best addressed by the existing CDBs themselves.
First, if CDBs are regulated by the same regulatory authorities
as are other banks and bank holding companies, the standard of
safety and soundness should not differ from that of other institutions. Risk is mitigated through adequate capitalization , training
and development of management, and effective internal control systems and procedures. The strong financial performance of
Shorebank Corporation, the CDB with which I am most familiar,
suggest that CDBs do not pose any inherently higher risks to the
banking system.
The greatest risk in the establishment of CDBs lies in a too rapid
pace of establishing these institutions. It is more prudent to take
the time to design effective legislation and to identify the best candidates for any Federal support rather than aim to produce quantity at the expense of quality.
In response to the third question , I again emphasize that CDBs
should not come under any special rules or either more or less
stringent oversight than any other banks. There are many smaller
commercial banks and savings and loans across this country that
have engaged in community lending for many years and who have
operated under the same regulatory guidelines. A CDB is different
in how it combines that lending function with other, non-bank activities . These permitted non -bank activities are regulated by the
Federal Reserve.
Federal assistance must be carefully designed to not alter the incentives and decision-making behavior of management. The standard for safety and soundness and prudent lending must remain
high. Greater education of regulators about the strategy and its approach might make routine regulatory scrutinies less painful , but
the performance expectation should be no different than for other
financial institutions.
Additional Questions Concerning CRA:
A. To what extent should insured depository institutions receive
credit toward fulfillment of their CRA requirements for contribu-

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tions to or investments in community development financial institutions (CDFIs)?
B. Should contribution to or investment in community development financial institutions be sufficient to fulfill an insured deposiČ. Would it be appropriate to exempt institutions from CRA examinations and requirements if they contribute a sum equal to approximately .05 percent of their assets or 5 percent of their capital
base to a CDFI?

Answers:
A. Insured depository institutions should receive some credit for
investments or contributions to CDFIs , as these community-based
organizations can often serve a niche market much more effectively
than can a regulated bank. The extent of credit granted for such
investments , however, should not relieve the lending institution of
all of its CRA obligations . Banks are the primary vehicle for basic
banking services, consumer credit, mortgage lending and other
forms of credit. Non-profit and other CDFIs are designed to fill a
market gap, but not to permanently replace a function that rightly
belongs with the mainstream financial system.
B. No. If a depository is providing a wide range of support services to the CDFI and is providing a wide range of financial services
(such as those provided by a bank) through it, then perhaps a higher percentage of CRA is warranted. There should be compliance
with the spirit of CRA, not only the letter.
C. No. As mentioned above, CRA performance should be evaluated on outputs to the community. If a bank capitalizes or grants
funds to a CDFI without the capacity to translate those funds into
meaningful access to credit in the community, then there has not
been a significant increase in credit outputs to the community.
Banks have a specialized training and experience in lending and
servicing loan portfolios. That responsibility cannot be passed on to
CDFIs which lack the systems, infrastructure, and experienced
staff to make prudent loans .
RESPONSE OF RONALD L. PHILLIPS TO WRITTEN QUESTIONS
OF SENATOR RIEGLE
Question 1 - CPA Enforcement:
Can the credit and revitalization needs of distressed neighborhoods be satisfied through better enforcement of CPA alone, instead
of the creation of a network of CDBS or other community - based
lenders?
Answer 1: In part. The credit and revitalization needs of distressed neighborhoods (and rural communities) must be addressed
through continued and vigilant enforcement of CPA. CPA has
helped to stimulate bank involvement in credit markets that otherwise may not occur.
However , the creation of CDBs or other community-based financial, housing and economic development institutions are a necessary complement to CPA because these institutions identify,
package and present projects to mainline banks for financing that
otherwise cannot be developed.

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Therefore, a CDB or bank affiliation with a community-based organization would represent a more proactive application of CPA.
How can we strengthen enforcement of CPA to better meet the
needs of distressed communities?
Answer 2: Analysis of bank lending patterns continue to show
discrimination to minority communities. In many instances , the
bank lending officer is caught between two conflicting goals: loan
safety, and community reinvestment. Loans to small businesses
have been particularly affected by this contradiction . These disparities must be addressed by clearer CPA guidelines for both bank
personnel and examiners .
But banks do not tend to understand or know how to reach underserved markets. A community development bank is a model for
reaching underserved communities , and those who still suffer from
discriminatory lending patterns . The community development bank
concept must be broadened wherein CPA endorses (and rewards) a
bank affiliation with a nonprofit community-based organization (or
helps establish an organization if none exists) to develop the market for mortgages, commercial real estate, small business ,
consumer and other credit needs .
In Maine, banks and consortiums of banks have affiliated with
Coastal Enterprises to extend credit targeted to certain rural populations, communities and industry sectors (e.g. value-added natural
resource enterprises, small business manufacturing, microenterprises, child care centers, affordable housing subdivisions, women,
AFDC recipients).
How are community- based financial institutions distinct from
banks and how can we ensure that support for these institutions
does not undermine the obligation of other insured depository institutions to address community lending needs?
Answer 3: Capital is a necessary but insufficient ingredient in
community development. Community-based financial institutions.
are distinct from banks because they perform a variety of pre-credit
functions essential to developing credit-worthy opportunities . In a
nutshell, community-based organizations : are intimate with their
communities and market region; are professionally staffed with
people skilled in project development, and mobilizing federal, state
and private resources; provide technical assistance to prospective
individual and small business bank borrowers ; develop the plans
for and manage housing, health or dependent care facilities; and
mobilize and provide development capital essential to securing
bank participation .
If CRA encourages partnerships between community organizations and banks, the capacity of how to meet their obligations will
be facilitated rather than undermined; and the lending needs of
communities will be significantly enhanced .
Question 2-Community Development Needs:
What are the most significant development gaps inhibiting revitalization of distressed communities?
Answer 1: Among the more significant development gaps are the
presence of viable, community-based institutions that demonstrate
capacity, scale and permanence to develop their market region .

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Are there products or services that community-based institutions
provide that banks do not, but could provide?
Answer 2: Yes. But if a bank formed a community development
bank, then it would include the products or services that community-based institutions are concerned about, particularly the approach to community revitalization that is holistic and comprehensive, targeted and inclusive of a variety of nonprofit activities normally not associated with existing banks .
For example, the bank would have a relationship to: commercial
real estate development; soft lending and technical assistance for
businesses , including microloans; venture capital; use of special
federal, state or private foundation programs for housing, community and business development.
Short of forming a community development bank, by affiliating
with a community-based organization , or helping to establish one
if none exists, a bank could ensure the products or services needed
for the community are being developed.
Are there products or services that community-based institutions
provide that banks cannot?
Answer 3: Yes. Community-based institutions have developed a
culture of professionals dedicated to working in low-income neighborhoods, rural communities , and with populations normally cut off
from the economic mainstream. This network includes community
development corporations, which have developed 320,000 units of
low-income housing, 17 million square feet of commercial real estate, and made 3,500 small business loans creating at least 90,000
jobs; community development credit unions ; community loan funds ;
and microloan groups.
It is not clear that existing banks can , or should try, to completely integrate this kind of culture. As a first step, affiliation
with the special capacities of the community-based institution may
be desirable.
Question 3-Two -Tiered System:
Is this a legitimate concern? Why or why not?
Answer 1 : It is a legitimate concern if community development
banks are seen as a solution to the problems of distressed communities irrespective of the existing banking system or CRA.
If, however, community development banking is viewed in its
broader sense, that is, as a way to enhance CRA through existing
bank affiliations with community-based institutions, then you are
getting the best of both worlds : the participation of existing banks ,
and the partnership with community organizations intimate with
the market region.
In some communities, formation of a new community development bank as a special institution for certain market niches may
be necessary and ought to be valued as part of a community revitalization strategy.
If we adopt a policy of assisting community lending institutions,
how can we ensure that other institutions are not let off the hook
ofproviding credit in distressed communities?
Answer 2: Again, CRA must be upheld as the primary inducement to meeting the credit needs of communities . Community de-

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velopment banking, and affiliation with community organizations,
are extensions of CRA, not replacements .
Question 4-Community-Based Lenders:
How are your institutions different from CDBs? How are they
similar to CDBs?
Answer 1: How do non-CDB groups differ? Our institutions, that
is, community development corporations, community loan funds ,
and microloan organizations , are fulfilling community development
needs that go well beyond the capacity of a bank to perform.
We are different because we are performing the nonprofit development functions independent of serving as a regulated, depository
institution. Credit unions, however, are regulated, and are much
more similar to a CDB in that regard.
We are also different because in many instances we affiliate with
existing banks to gain their participation in our community development initiatives. For example, in CEI's case, we have leveraged
$60 million in bank financing for primarily business and housing
projects whose credit needs otherwise would not be met.
How are we similar? Commonalities include: targeting of resources of low- income communities; mobilizing other private and
public funds for our projects (e.g. SBA 7(a) guarantee program, lowincome housing tax credits, job training funds).
What is the justification for including these institutions in any
new community banking initiative?
Answer 2: There are several sound reasons for broadening eligibility for a community banking initiative. First, the most obvious
is the commonality of our goals, inclusion of mainline banks in the
process, and overall expanded political base for the community revitalization field.
Second, by inference, this question suggests an either/or situation. But a program that supports a menu and diversity of approaches would be more strategic, and have a wider audience.
Thus, in some cases , Federal funding to form or further develop a
CDB or credit union may be appropriate (to include consideration
of FDIC-troubled banks) ; in other cases, Federal funding to spur an
affiliation between existing banks and community organizations
(e.g. community development corporations , community loan funds ,
microloan funds) may be appropriate.
Third, the field of community development is much broader than
CDBs . There are virtually only a handful of CDBS in the 25 years
that South Shore Bank has been in existence . On the other hand,
there are several thousand community development corporations ,
community development credit unions, community loan funds, and
microloan funds. There are also EDA development districts , municipal and county development organizations, SBA 504 certified development companies , and SBA Small Business Investment Companies.
Anyone seriously interested in community revitalization would
not bypass the tremendous accomplishments , skills and network
that exist outside of community development banking experience .
Fourth, as a development model there are reasons for limited
replication of CDBs . In part, this is due to the complexity of forming a bank and capitalizing it with significant patient deposits from

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outside individual and institutional depositors (such as churches
and foundations), like South Shore has done.
Would this money flow in an accelerated federally-assisted program to form CDBs?
And fifth, another reason is that the community development
field has witnessed a continuum of need such that credit per se is
not the only issue in a distressed community . Rather, the capacity
to develop business, real estate or housing projects, to provide technical assistance, training and education , and to offer flexible, “gap
financing" sources of capital, are key ingredients in the community
development process .
Only community organizations have this extensive experience. To
eliminate them from a community banking initiative would be like
shooting oneself in the foot.
Question 5-Market Discipline:
If nonprofit organizations are included in a Federal community
banking initiative, how can we ensure that the projects developed
and financed by non-profits will be financially strong and the Federal Government's interests are protected?
Answer 1 : It is absolutely incorrect to assume that the CDB
strength as an insured, depository institution imposes a market
discipline on community development projects, and that projects
are therefore financially feasible, or that nonprofits do not have the
same pressure to balance bottom line profitability against community impact.
This argument is particularly specious when you realize that a
CDB needs subsidy to ensure it can extend credit to a project to
ensure its feasibility. For example , South Shore uses the SBA 7(a)
guarantee program. It also uses soft deposits who do not demand
a return (South Shore has never paid a dividend to a stockholder)
to generate "development credits" which in turn are used to "subsidize" loans, technical assistance , or other activities.
Further, nonprofit management is no different than a bank's
management and bottom-line requirements . In fact, banks , not
nonprofits, have tended to be the ones making speculative, unsound investments . CDBs do not exist in any particular number to
measure their performance, so there is no comparative reference.
At CEI, for example, we have highly qualified financial and technical staff, a board consisting of successful business , bank , financing and community representatives, and a portfolio of projects that
have been through rigorous screening and due diligence. We have
a strong asset base and net worth . It would be hard for any CDB
advocate to suggest that we are not disciplined because we are not
regulated . We are audited, and must comply with a variety of fiduciary, contractual and related requirements and standards.
Community development corporations have a 25-year legacy in
community development. There have been failures. But today,
many of these organizations can demonstrate track record; capacity; professionalism; diverse and qualified boards of directors ; audit
compliance; net worth and financial stability. CDBs alone have a
developed a combined value of some $3-5 billion in housing, business and commercial real estate financing. Community develop-

227
ment credit unions, loan funds and microloan funds also demonstrate growing degrees of capacity and skill.
The Federal Government can be assured that its interests are
protected with nonprofits, non-CDBs because it can a) rely on the
tremendous historic experience nonprofits have gained in project
development and management of resources from HHS, HUD, DOL ,
SBA, FmHA, EDA, and other Federal programs; b) establish qualifying criteria where applicants must demonstrate there capacity,
track record, and experience; and c) monitor and evaluate program
performance.
Question 6—Impediments:
What are the most significant impediments to the formation of
new or expansion of existing community- based lenders? What types
of incentives would encourage their formation or expansion?
There are several levels of impediments that, given a creative
Federal program, could be successfully addressed :
a) CAPACITY BUILDING. Community organizations need funds to
plan for and develop strategies for community development; to hire
qualified staff; to provide for core funding that does not unduly rely
on assets (or deposits ) for earnings.
b) TECHNICAL ASSISTANCE. Community groups require training
and technical assistance in starting up, operating and expanding
their organizations . At CEI, we receive 1-2 serious requests per
week, perhaps 50-100 per year, from communities and groups who
want to learn about CEI as a model, and replicate our approach either as a start-up or expansion.
c) GRANTS FOR EQUITY CAPITAL. Given a local plan and organizational capacity, the most serious obstacle to the start-up or expansion of community-based lenders is grants for their equity capital
base. This capital is important because it ( 1) contributes to the net
worth of the organization ; (2) provides an earnings base for operations ; and (3) serves as leverage to borrow other funds for project
financing. While no data currently exists on the financial worth of
community organizations , any group engaged in community financing ought to have a 1 : 1 debt equity ratio. Most community financing groups probably have a 10 : 1 ratio.
d) TAX INCENTIVES . Community groups could benefit by favorable
IRS treatment of private sector tax deductible contributions . Currently, the IRS has reduced the deduction to something like 30 percent or less . This should be increased to a 100 percent deduction .
The Low-Income Housing Tax Credit is being extended ; a similar
proposal has been offered for a Federal tax credit to stimulate capital investment in small businesses in affiliation with community
organizations .
Question 7-Implementation:
What entity do you believe is best suited for administering a community development banking initiative, and why?
A community development banking initiative that included the
menu of funding opportunities and support for the variety of community-based organizations described could be administered by any
one of a number of existing Federal agencies . A major concern

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would be how rural communities are treated and what kind of experience the agency has with rural development issues.
Existing Federal agencies have strength and limitations. For example, while HUD has some grasp of housing and urban projects,
it has very little understanding of the culture of commercial lending and financial institutions, let alone rural communities.
The Treasury has virtually no experience with community development. Federal financial regulatory agencies ought not to be considered because they need to preserve their regulatory status versus a program management and oversight status. The Federal
Home Loan Banks have experience in community development, but
this is mainly focused on housing.
A federally-chartered corporation may be the best route because
it provides a fresh start and streamlined context for funding of a
variety of initiatives. However, a memorandum of understanding
with all the other Federal agencies noted, including Department of
Commerce and SBA, and FmHA, should be developed in order to
ensure complementary resources.
Additional Questions Concerning CRA:
To what extent should insured depository institutions receive credit toward fulfillment of their CRA requirements for contributions to
or investment in community development financial institutions?
Answer 1: They should. I am not familiar with the options of incentives. But as a community development practitioner, the design
and implementation of a project could be enhanced with expanded
incentives.
For example, we are designing a targeted business and self-employment loan fund for economic and worker dislocation around defense department base closings. A consortium of banks is participating. We expect contributions to assist in development of the
project, and to match a pool of capital for loans.
Should contribution to or investment in community development
financial institutions be sufficient to fulfill an insured depository institution's CRA obligations?
Answer 1: No. But contribution or investment in a communitybased financial organization should be given special treatment if
the scale or impact of credit flowing to or in relation to the community organization's projects is significant.
Would it be appropriate to exempt institutions from CRA examinations and requirements if they contribute a sum equal to approximately .05 percent of their assets or 5 percent of their capital to a
community development financial institution ?
Answer 1: No, banks should not be exempt from CRA generally.
But it is a very good idea to structure a funding relationship as a
percentage of assets or capital . Another approach would be to have
a bank contribute 5 percent of its earnings on an annual basis ,
rather than a "one-shot" contribution.
Such contributions could be significant, and banks ought to get
some "special credit" from it as they would be going outside of their
normal banking channels to more proactively affiliate with and
endow a community organization through their financial structure.

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RESPONSE OF ROBERT JACKSON TO WRITTEN QUESTIONS OF
SENATOR RIEGLE
Question 1 -CRA Enforcement:
Can the credit and revitalization needs of distressed neighborhoods be satisfied through better enforcement of CRA alone, instead of the creation of a network of CRAS or other communitybased lenders? How can we strengthen enforcement of CRA to better meet the needs of distressed communities? How are communitybased financial institutions distinct from banks and how can we ensure that support for these institutions does not undermine the obligation of other insured depository institutions to address community lending needs?

Answer 1:
Enforcement of CRA and Federal support for community-based
lending institutions are not contradictory or mutually exclusive
goals; they should be considered two essential parts of a comprehensive effort to make capital available in low-income urban
and rural communities.
CRA alone will not get the job done. After more than 15 years
of CRA, it is dear that thousands of distressed communities remain
cut off from capital. It is also clear that "grade inflation" remains
a serious problem; many banks continue to be rate "outstanding"
under CRA although their actual lending in poor communities is
minimal. Also, in many areas, like the rural community where my
credit union is located, there are only a few banks , so that even
stringent CRA enforcement would not open floodgates of capital the
way it might in an urban center.
The proliferation of community development credit unions
throughout the United States in the last 15 years is, in and of itself, an indication of the limitations of CRA as a means of spurring
community reinvestment. While conventional banks were withdrawing from low-income neighborhoods, many communities-including mine decided to take matters into their own hands by
starting locally-owned community development financial institutions CRA may be able to push some banks into reluctantly reinvesting, but this activity is no match for a team of enthusiastic
local specialists who are in the banking business for the exclusive
purpose of rebuilding the economy of a low-income community.
Even with CRA, I don't know of a single conventional bank in the
Mississippi Delta that would make some of the housing loans to
sharecroppers that my credit union makes all the time. The regular
banks just wouldn't know how to do it-they wouldn't know the
people, they wouldn't be willing or able to properly assess the risk,
and they certainly wouldn't be willing to forego theirs usual level
ofprofitability.
As you know, I am a member of the Board of Directors of the National Federation of Community Development Credit Unions , which
supports efforts to strengthen CRA enforcement. In this regard, we
wholeheartedly support the work of CRA advocacy groups like
ACORN, the Center for Community Change, the National Neighborhood Coalition and the Center for Responsive Law. We have
been in dialogue with these organizations , and have reached a com-

230
mon position that support for community development financial institutions must not in any way lessen the obligation of other insured depository institutions to address community lending needs
in keeping with CRA and other Federal laws.
Obviously, a bank that supports a community development credit
union like mine should get some level of recognition under CRA,
and indeed that is currently the case. But it would be a mistake
to allow a community development banking initiative to allow
banks a "buy-out" from CRA. For all the good work that we do, the
Nation's 300 to 400 community development credit unions (CDCUs)
are only a small drop in the bucket: our combined assets of about
$500 million are loss than the assets of a medium-sized conventional bank. The Nation needs a two-pronged approach that supports the very specialized, grass-roots work that we do, while using
us as an example to the larger institutions of how far they need
to go to make capital available in poor communities .
Question 2-Community Development Needs
What are the most significant development gaps inhibiting revitalization of distressed communities? Are there products or services
that community-based institutions provide that banks do not, but
could provide? Are these products or services that community-based
institutions provide that banks cannot?
Answer 2:
While I do not have comprehensive knowledge of all the problems
that prevent the revitalization of distressed communities, I do
know that a lack of access to capital is a critical development gap
that often blocks economic development. To put it simply, we are
asking thousands of small businessmen and homeowner to make
capitalism work without supplying the capital. Even very poor people tend to save some small amount regularly; this combined pool
of funds is the deposit base that a CDCU draws upon to finance
local development. But if those funds sit in a conventional bank,
chances are that the money will be completely inaccessible to the
same low- and moderate-income people who deposited the funds in
the first place. So homes will go unrepaired, and small businesses
will fail, and people will be unable to purchase homes and begin
to build wealth. Credit unions close the capital gap left by banks.
Credit, of course, is the basic product offering that banks could
provide in distressed communities. But there are a host of transaction services provided by CDCUS that banks probably could provide if they wanted to . Check cashing, for instance, is often needed
in poor communities, but many banks either charge high fees or
refuse to offer the service because they don't want a lot of poor people coming through the door. Certainly, the basic service of courteous treatment is one where banks have often come up short when
it comes to poor people.
Mortgage lending is another area where banks have the means,
but not the will, to provide services to people of low- and moderateincome. Banks have the capital and the administrative capacity to
make mortgages, but they need to relax some of the iron-clad underwriting standards that tend to shut poor people out of the housing market.

231
By the same token, CDCUs offer a range of services that most
banks are simply unable to match. My credit union and others like
it spend a great deal of time explaining the basics of the financial
system to poor people who have traditionally been simply turned
away by banks . We also are able to provide unsecured loans based
on the character of individuals. This ability comes from constantly
being in direct contact with the residents of a community- something banks no longer seem to be able to do.
Our intimate knowledge of a particular community and the people who live in it constitutes a kind of "social capital" that can be
used as collateral in communities where financial capital is in short
supply.
Question 3-Two-Tiered System:
One concern raised about the creation of a national network of institutions dedicated to community lending is that it will create a
two-tiered banking system. Is this a legitimate concern? Why or why
not? If we adopt a policy of assisting community lending institutions, how can we ensure that other institutions are not let off ofthe
hook ofproviding credit in distressed communities?
Answer 3:
I do not recommend that the Federal Government create or define an entire new tier of financial institutions. By relying on simple criteria, it is possible to identify which institutions are already
acting as community development banks, credit unions or loan
funds. If the institution has formally committed itself to make service to poor people its primary focus, then it's probably a community
development financial institution.
However, we should not be afraid of making distinctions . The
fact of the matter is that decades of underinvestment add disinvestment by conventional banks have created a market made up
of hundreds if not thousands of large, capital- starved, underserved
communities. Hundreds of community development credit unions
have arisen to meet this need, along with dozens of community development loan funds, microenterprise funds and reservation-based
lenders. These community development institutions specialize in
dealing with neighborhoods that other financial institutions have
ignored or written off. If this looks like segmentation within the financial services industry, so be it. More than 15 years of history
has shown that, even with CRA, our current " one-tiered system"
ends up leaving vast numbers of Americans without an adequate
level of banking services.
As indicated in my response to Question 1 , Federal assistance for
community lending institutions should not in any way lessen the
existing reinvestment requirements of banks . If a bank wishes to
support a Federal community banking initiative, for example, it
should get some level of favorable CRA recognition by its examiner.
However, it could be stated publicly by bank regulators that all
banks are expected to develop their own , in-house capacity to engage in lending that is similar to the kind being done by local community development financial institutions. The presence of a local
community development credit union, for instance, should raise the

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standard of what acceptable lending is ; local banks could then be
asked to try to meet that higher standard.
Question 4-Community Based Lenders:
How are your institutions different from CDBs? How are they
similar to CDBs? What is the justification for including these institutions in any new community banking initiative?
Answer 4:

CDCUs differ from CDBS in a few key respects.
OWNERSHIP . Unlike a bank, a credit union is organized as a nonprofit cooperative, meaning that all control of the institutions rests
in the hands of the people who are served by it. A bank must answer to two key constituencies-the bank's stock owners and its
customers-whose interests occasionally diverge. Stockholders , for
instance, are interested in maximizing dividends, while customers
might prefer to use bank profits to lower the cost of various services.
A credit union, by contrast, is a cooperative that can concentrate
exclusively on serving its member/owners. As non-profits, credit
unions do not offer financial compensation to their elected boards
of directors ; they also rely heavily on community volunteers.
CAPITAL STRUCTURE . The capital structure of a CDCU is also different from that of a CDB. While a CDB accumulates net worth,
or equity, by selling shares of common stock, a CDCU can only
raise capital by setting aside a portion of the profits from its operations . A CDCU can also accept donations of equity to increase its
net worth.
EDUCATION/EMPOWERMENT MISSION. Unlike a CDB, a CDCU has
an explicit mission of teaching community residents how to manage
the institution themselves. By serving on a credit union board or
committee ordinary citizens learn about the workings of the financial system; that knowledge is then put to work on behalf of community development.
RANGE OF CONSUMER SERVICES . Unlike CDBs , which tend to
focus exclusively on making credit available, CDCUS have a central
mission of providing a place where citizens can be assured of fair
prices on everyday cash transactions. In many neighborhoods ,
CDCUS are the only alternative to countless schemes-legal and illegal-that regularly cheat poor people. These include pawn shops ,
currency exchanges, check cashing outlets, home repair scams and
loan sharks .
The similarities between CDCUs and CDBs easily overshadow
the differences, Both kinds of institutions are dedicated to revitalizing low-income neighborhoods through the use of savings and credit. CDCUS and CDBS both rely heavily on "character" as a factor
in making credit decisions. Both have acquired the business discipline that comes with being Government regulated.
Most importantly, CDCUs and CDBS both use a coordinated combination of financial institutions and non-profit assistance corporations in a comprehensive approach to development lending. South
Shore Bank, for instance, is part of a bank holding company that
includes a non-profit institution which helps turn housing developers and small-scale entrepreneurs into better bank customers.

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Without this assistance, many of the bank's successful development
loans would be impossible.
Many CDCUs (including mine) have a similar arrangement. The
Quitman County Development Organization acts as a non - profit
"holding company" that created and currently supports the management of the CDCU. The non-profit offers training programs and
other assistance to potential credit union borrowers.
Given the structural and functional similarities between this arrangement and the South Shore holding company model, I believe
that CDCUS-especially those affiliated with a non-profit partner
organization-should be included in any new community development banking initiative.
Question 5-Market Discipline:
How can we ensure that the projects developed and financed by
non-profits will be financially strong and the Federal Government's
interests are protected?
Answer 5:
Although CDCUs are non-profit organizations, virtually all are
insured and/or regulated by the National Credit Union Administration, a Federal agency. In my experience, NCUA has never been
lax about protecting the interests of the Federal Government ; in
fact, the more likely danger is that "safety and soundness" concerns
may be carried so far as to weaken the level of development lending that CDCUs are capable of undertaking.
Question 6-Impediments:
What are the most significant impediments to the formation of
new or expansion of existing community-based lenders? What types
of incentives would encourage their formation or expansion?

Answer 6:
Until recently, the chief impediment to the formation of new
CDCUS has been the NCUA's reluctance of NCUA to approve new
charters. Since the fall of 1992, however, a new regulatory attitude
has emerged; four new CDCUs have been chartered in the last five
months in Denver, Los Angeles , Omaha, and New York.
Expansion, unfortunately, is a different story. All too often, Government regulators actively discourage CDCUs from making loans
for micro-businesses and home purchases or repairs. These basic
development activities are central to the CDCU mission , but they
require levels of reserve capital that many CDCUS do not have.
Without reserves that serve as a cushion against loan losses , many
CDCUS end up looking financially fragile in the eyes of regulators .
As a result, the regulators restrict CDCU lending activity, which
in turn prevents them from growing.
Infusions of equity is the single most helpful way to encourage
the expansion of CDCUS . With an additional $ 100,000 in reserves,
for example, my credit union could underwrite at least $ 1 million
worth of new loans for home repair and other purposes, We would
also be able to reduce some of the regulators' fears about risk.

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Question 7-Implementation:
What entity is best suited to administer a program of assistance
to CDBS or other institutions?
Answer 7:
Speaking as a board member of the National Federation of Community Development Credit Unions, my first preference would be
the creation of a quasi-public National Neighborhood Finance Corporation, set up in a way similar to the Neighborhood Reinvestment Corporation . The National Federation has advanced this idea
for years .
Answer to Additional Questions on CRA:
At present, banks receive credit toward the fulfillment CRA for
making grants to, or deposits in, a CDCU. I view this as an appropriate recognition of the reinvestment work that CDCUS do. However, investing in a CDCU or other community financial institution
should never be enough to exempt institutions from its CRA obligation or the requirement to submit to CRA examinations . The size
of the contribution is irrelevant the point is that banks are obligated to serve their entirely service area equally. To allow banks
to purchase exemptions from this important law would send a dangerous signal about how serious the Federal Government is about
enforcing fair levels of reinvestment.
Our understanding of the law is that it was never intended to
allow banks to purchase an exemption ; rather, it is supposed to be
a process through which banks constantly reevaluate their core
business and try to make it more responsive and relevant to the
needs of all people in a given service area.
RESPONSE OF MICHAEL SWACK TO WRITTEN QUESTIONS
FROM SENATOR RIEGLE
Q.1.a. Can the credit and revitalization needs of distressed neighborhoods be satisfied through better enforcement of CRA alone, instead of the creation of a network of CDBs or other communitybased lenders?
A.1.a. Revitalization of distressed neighborhoods can be best
achieved by both better enforcement of CRA and the creation of a
network of CDBs . CRA will promote more lending in lower-income
communities , but traditional intermediaries will never replace the
specialized roles played by community development financial institutions (CDFI). Traditional intermediaries and CDFI usually are
able to develop a complementary relationship . Traditional
intermediaries are able to offer certain types of products and services-but they are quite different from CDFIs. Community development financial institutions must be able to offer a wider range of
financing tools than traditional banks. These tools need to include
the ability to provide equity, as well as a range of debt instruments. The present regulatory environment would make it difficult
for commercial banks to address these financing needs . This regulatory environment limits the types of risks that the bank can take,
and limits the range of financial tools available to a bank. Development banking is common in many developing countries. These in-

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stitutions provide financing in a manner that enhances the financial viability of the project or business seeking financing. The goal
is a successful business or project, not necessarily a large return
on investment.
Q.1.b. How can we strengthen enforcement of CPA to better meet the
needs ofdistressed communities?
A.1.b. This is a very difficult question to answer. If you try to promote greater compliance through the threat of penalties (e.g. fines),
you run the risk of encouraging regulators to enforce the provisions
in a lax manners. That is, regulators will hesitate to give bad ratings because they don't want to take the step of imposing penalties.
However, if you do not offer specific sanctions for poor performance
(the current sanctions only "kick-in" if a bank seeks to expand or
sell a branch) , banks have no real incentive to comply with the law.
One improvement that could be made within the current law would
be to put more emphasis on the current regulation and provide better training to examiners responsible for CPA compliance. My experience suggests that most CPA examiners don't know what to look
for, or what questions to ask. They simply don't understand the
field of community development. Consequently, it is not uncommon
to see banks that take compliance very seriously get only satisfactory ratings (or worse) while banks that do nothing, get the top rating. This is frustrating for banks as well as community development practitioners. Examiners need more and better training so
they know what to look for and what to ask.
Q.1.c. How are community-based financial institutions distinct from
banks and how can we ensure that support for these institutions
does not undermine the obligation of other insured depository institutions to address community lending needs?
A.1.c. Again, community development financial institutions must be
able to offer a wider range of financing tools than traditional banks
(see answer 1.a.). Development banking is fundamentally different
from commercial banking. The purpose of development banking is
to promote self-sufficient and profitable business and housing ventures in poor urban and rural communities. Development banks do
not attract profit motivated investors. The South Shore Bank is a
commercial bank with a development focus. But even their core investors are social investors- investors who have never been paid a
dividend, and whose stock is illiquid. CDFIs promote self- sufficiency, entrepreneurship, local ownership and control of economic
resources. The "subsidy" to CDFIs (i.e. in the form of Government
investment), is paid back many times. The South Shore Bank is
but one example of this "repayment." In South Shore's case, the
subsidy came from charitable foundations and religious organizations who were willing to sacrifice a return on their investment.
One of the primary purposes of a community development financial institution should be to leverage and develop partnerships with
the private sector. For example, a community development financial institution such as a community development loan fund should
be encouraged to enter agreements with traditional lenders so as
to leverage its own investment with money from the broader capital markets. The development of secondary market mechanisms is

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critical for CDFIs . Current secondary market mechanisms have
been unresponsive to CDFI loans even when the pool of loans being
offered by the CDFI is of extremely low risk. A Federal initiative
for CDFIs should target the development of secondary market
mechanisms as a priority of the initiative and/or stimulate existing
federally supported secondary markets to be more responsive to
CDFIs.
CDFIs should be permitted to offer a wide-range of community
economic development programs under one roof. They should be
permitted to operate micro-loan revolving funds , venture capital
funds, housing loan funds , and programs that encourage the acquisition by community based organizations of their community's resources, especially land. They should also be able, through direct
investment or loans, to participate in specific infrastructure
projects that allow a community to develop. For instance, on many
Native American reservations , access to electricity, water and sewers makes economic development difficult. A CDFI should be permitted to become a partner, either through equity investments, or
loans , with tribes seeking to develop these facilities.
Q.2.a. What are the most significant development gaps inhibiting
revitalization of distressed communities?
A.2.a. Distressed communities definitely suffer from lack of capital.
Many recent studies have documented this gap. Additionally lack
of quality education and training for community residents impedes
the development process. Capital alone is not the problem, but it
is a significant problem.
Q.2.b. Are there products or services that community-based institutions provide that banks do not, but could provide?
A.2.b. Many CDFIs offer technical assistance to potential borrowers
and specialized loan or equity products. Banks could provide some
of this , but regulations would prohibit certain types of investments
and the provision of technical assistance is expensive for banks to
provide.
Q.2.c. Are there products or services that community- based institutions provide that banks cannot?
A.2.c. See A.2.b. above.
Q.3.a. Is this (concern of a two- tiered banking system) a legitimate
concern? Why or why not?
A.3.a. No, this is not a legitimate concern. Development banking
and commercial banking are two fundamentally different types of
banking. I have addressed this in detail in A.1.c. above .
Q.3.b. If we adopt a policy of assisting community lending institutions, how can we ensure that other institutions are not let offofthe
hook ofproviding credit in distressed communities?
A.3.b. As mentioned above, better enforcement of CRA ought to be
part of this initiative . There will always be credit needs for traditional intermediaries to address -CDFIs will not obviate the need
for traditional intermediaries to provide a wide range of credit to
communities and individuals .

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Q.4.a. How are your institutions different from CDBs ? How are they
similar to CDBs?
A.4.a. Community Development Loan Funds (CDLFs), Community
Development Credit Unions (CDCUs) , and microenterprise funds
have some differences and many similarities to CDBs . CDLFs and
microenterprise funds differ from CDBS in that they are non-insured institutions that typically don't service a consumer base.
CDLFs and microenterprise funds typically provide credit directly
to business , economic development and housing projects, but they
do not provide consumer and depository services. CDLFs and
microenterprise funds are similar to CDBS in that they accept
loans from a variety of sources (and incur liabilities to those lenders), serve multiple borrowers, assess risk and underwrite loans
carefully and systematically, set aside reserves and adopt appropriate portfolio management policies.
Q.4.b. What is the justification for including these institutions in
any new community banking initiative?
A.4.b. Non-bank CDFIs have proven track records, skilled and experienced management and have built extensive relationships
among both lender and borrower markets in their communities.
These institutions should be supported to expand their activities
because they know their markets and because they have proven
that they can lend and invest successfully in low- and moderateincome communities. Successful CDFIs are rooted in the communities they serve. They draw significant amounts of capital from
their areas and the boards of directors reflect the composition of
their communities. This makes it possible for them to gain the requisite understanding of credit needs and borrower capacity to
gauge their lending and investment properly. Institutions created
without these strengths and operating with a mandate to lend
quickly and in a safe and sound manner, will carry a heavy burden
of unachievable expectations. In areas not presently served by
CDFIs the Federal Government can help to foster the development
of new institutions.
Q.5. If non-profit organizations are included in a Federal community banking initiative, how can we ensure that the projects developed and financed by non-profits will be financially strong and the
Federal Government's interests are protected ?
A.5. Non-profit CDFIs do have the same pressure to finance financially feasible projects as for-profit CDBs . As mentioned earlier,
non-profit CDFIs incur financial liabilities just as for-profit entities
do. Non-profit CDFIs who make bad decisions will go out of business-just as for-profit entities do . Non-profits are thus subject to
the discipline of markets. In New Hampshire, it is interesting to
note that in the past 18 months, 5 of the 7 largest banks went out
of business because they had made too many bad loans . The two
surviving banks survived only because they had substantial capital
resources from out-of- state owners. However, the non-profit New
Hampshire Community Loan Fund is still in business- with a
strong balance sheet and a portfolio of performing loans to low-income borrowers. Institutions that make bad loans go out of business regardless of their legal structure for- profit or non-profit.

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Q.6. What are the most significant impediments to the formation of
new or expansion of existing community-based lenders? What types
of incentives would encourage their formation or expansion?
A.6. Existing community-based lenders need equity investment or
grants to permanent capital. Equity is critical to the long-term viability of any financial institution . Equity allows intermediaries to
take greater risk, price loans in a more flexible manner, attract additional investment, and generate earnings that contribute to selfsufficiency. Again , the South Shore Bank, which is held up as a
model CDB, benefitted enormously from the large equity investment from religious and social investors . Without this investment,
there would not be a South Shore Bank. Additionally, lack of access
to long-term debt is a problem for many CDFIs .
Another impediment to the expansion of existing CDFIs is the
lack of skilled loan officers, managers and directors with experience
in community development lending and investment. CDFIs also
need to provide technical assistance and training to borrowers . This
assistance enhances the probability that loans will be repaid. A
CDFI initiative should include funds for CDFI staff training as well
as funds for technical assistance to borrowers. See answer 7 for additional ideas on incentives to encourage the expansion or formation of CDFIS.
Q.7. What entity do you believe is best suited for this task and why?
A.7. One of the key issues facing CDFIs is where they are placed
in the Federal Government. I believe that one of the major challenges for CDFIs (and in some ways a defining issue for CDFIs ) is
to make sure that they are perceived as financial institutions. If
CDFIs are perceived as financial institutions, it will be much easier
to be gain access to some of the benefits that financial institutions
enjoy and that CDFIs need , such as access to secondary markets .
After looking at the range of " placement" options suggested for
CDFIs, I believe that being placed within the Federal Home Loan
Banks gives CDFIs more opportunities than other placements .
Placement within the FHLB system would be desirable for a number of reasons :
1. The members of the FHLB system are banks-CDFIs would
be seen as financial institutions not community development programs. I propose that CDFIs would become a new classification of
member within the system. Membership within the system could
give CDFIs access to member advances . Member advances allow
banks to borrow from the FHLB at very favorable fixed-rates for
long or short-term . Although many technical details (e.g. capital
requirements ) would need to be addressed, the benefit of member
advances would be a tremendous benefit to CDFIs . Currently, the
FHLBS are owned by member banks who purchase stock in the system when they join . However, the FHLB of Boston recently created
a precedent by allowing two public agencies to access funds as nonmember borrowers (two state housing finance agencies). These institutions have full access to member advances. This would open
the door to CDFIs . If there is enabling legislation for CDFIs , it
could require the FHLB to establish a new category of membership
and specify access to membership privileges such as advances.

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2. Allocation of funds and decision-making could be delegated to
the 12 FHLB regions. Each region could have an advisory board
comprised of local and regional community development lendersand each region could develop lending and investment guidelines
suitable to the specific region. The FHLBs already manage an affordable housing program with regional advisory boards-so they
have some experience with this type of program. Regional decisionmaking would provide much greater flexibility than centralized
(Washington) decision-making.
3. Operating within the FHLB structure would probably involve
fewer bureaucratic problems than would operating within HUD.
Additionally, the program_could operate relatively inexpensively
within the FHLB system. The program would be administratively
inexpensive, non-bureaucratic and economically efficient. I estimate
that the program could be run with a small Washington staff and
as few as 2-3 people per region.
4. Operating within the FHLB structure could provide easier access to secondary market opportunities. FHLB members routinely
deal with secondary market institutions such as Fannie Mae and
Freddie Mac. Placement within the FHLB system could provide additional leverage for CDFIs as we try to push these institutions to
develop products more suitable to its portfolios . I would also suggest that the enabling legislation for CDFIs should require the
Government sponsored enterprises (GSE) to develop the products
necessary to service CDFIs. The legislation might even specify that
the GSEs must develop products for entities such as limited equity
cooperatives and community land trusts (i.e. name products in the
legislation), in consultation with CDFIs.
GOVERNANCE
Based on the regional model administered through the FHLB
system , the following governance would apply.
1. The President would appoint the director of the program. This
person would be based in Washington at the Federal Housing Finance Board. The director of the program would appoint regional
directors, in consultation with the regional branches of the FHLB .
2. The regional directors would appoint a board comprised of regional community development lenders. This board would help design the policies and procedures governing the regional program
(within the parameters of the enabling legislation). The board must
approve the policies and procedures before the program is initiated.
The board would be comprised of two representatives from each
state in the region.
FUNDING
Allocation of funds through a regional FHLB system could work
as follows:
1. Appropriations should be allocated to each of the twelve regions. Allocations should be based on a formula which considers
both population and population of low- and moderate-income people.
2. Each region should be allocated at least 5 percent of the annual appropriation .

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3. Funding and investment decisions should be made by region
with the instruction that attempts must be made to achieve geographic (funding) diversity both within the region and between
urban and rural settings.
4. Within each region , funding for operating support may not exceed 20 percent of the regional allocation . Training programs and
technical assistance may be funded at a level not to exceed 5 percent of annual allocation per region .
5. Regional programs may attract additional private investment
by offering a tax credit to both corporations and individuals who
invest in or contribute to approved CDFIs (need to define what this
means). This would be administered through each regional program. Investments in for -profit intermediaries would be in the form
of a tax credit of 25 percent of the amount invested in preferred
stock (see explanation below of how investments in for-profits and
non-profits will differ) . Contributions to the capital of non - profit
intermediaries would be eligible for a tax credit equal to 50 percent
of the contribution . The amount of tax credits offered by each region would be capped at an amount no greater than twice the annual regional allocation . Administration of a tax credit program
will be handled by region . (Note: The New Hampshire Community
Development Finance Authority currently administers a state- wide
program that grants state tax credits to corporations that contribute to the Authority . This has not been a difficult program to administer for either the Authority or the contributor.)
TYPE OF FUNDING
Primary funding of CDFIs should be in the form of equity capital
investments in for-profit intermediaries, and grants of permanent
capital for non- profit intermediaries as follows.
1. Investment in for-profit intermediaries should be in the form
of 25 year preferred stock investments with a non-cumulative dividend of about 2 percent. Regulators should be instructed that these
investments be counted as the equivalent of perpetual preferred
stock (Tier 1 ) core capital until the final five years of the term. For
the remaining term , the investments should be considered the
equivalent of intermediate-term preferred stock (Tier 2 ) supplementary capital.
2. Investment in non-profit institutions (including CDLFs and
CDCUS should be in the form of grants to permanent capital [capital grants ]). This money cannot be used for operating funds, although the earnings on these funds could cover operating costs.
There would be no obligation to repay these grants.
3. As mentioned earlier, funds should be specifically earmarked
for operating support, technical assistance and training.
ADDITIONAL QUESTIONS CONCERNING CRA
Q. To what extent should insured depository institutions receive
credit toward fulfillment of their CRA requirements for contributions to or investments in CDFIs ? Should contribution to or investment in CDFIs be sufficient to fulfill an insured depository institution's CRA obligations? Would it be appropriate to exempt institutions from CRA examinations and requirements if they contribute a

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sum equal to approximately .05 percent of their assets or 5 percent
oftheir capital to a CDFI?
A. Contributions or investments by insured depository institutions
should be considered as partial fulfillment of CRA obligations , but
it should not replace the requirement that these institutions assess
community credit needs and meet those needs. As mentioned earlier, CDFIs meet a particular need but they do not meet the full
credit needs of low-income communities. It is vitally important that
insured depository institutions continue to meet the statutory requirements of CRA. Thus, contribution or investment in CDFIs
should not be sufficient to meet CPA obligations and it would not
be appropriate to exempt institutions from CPA examinations for
contributing a portion of assets or capital.

I
.
I

REVERSE REDLINING: PROBLEMS IN HOME

EQUITY LENDING

WEDNESDAY, FEBRUARY 17, 1993

U.S. SENATE ,
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,
Washington, DC.
The committee met at 10:05 a.m. , in room SD-G50 of the Dirksen Senate Office Building, Senator Donald W. Riegle, Jr. (chairman of the committee) presiding.
OPENING STATEMENT OF CHAIRMAN DONALD W. RIEGLE, JR.
The CHAIRMAN. The committee will come to order. Let me welcome all those in attendance this morning. We certainly have a
large and very interested and enthusiastic gathering this morning.
Let me say, as we proceed this morning, we've got very serious
matters to discuss and everyone here shares that feeling. Many
have traveled a long distance because of the importance of these
issues and how strongly people feel about it.
We have an opportunity today to build an important public
record and I want to do that. There may be moments today when
things are said or people have strong feelings and want to respond
to something that someone has said. I want to ask everyone now,
at the beginning, to maintain the order of the committee's work
today. It is very important that we do that, because we've got a
chance today to examine these issues carefully and fully and to get
them out in the light of day.
So I am going to need everyone's cooperation to get that done.
So I ask for that now. I don't want to have to gavel down anyone
in the audience at any point. And there should be no need for that
because we want to hear what everyone has to say and we want
to be able to build this record fully and carefully.
Having said that at the outset, I again appreciate the fact that
we have so many people here today. I think it underscores the very
important requirement that we examine these issues and do so
carefully and fully.
The committee today is meeting to conduct its second hearing in
a series on the problem of people in our country getting access to
capital in low- income and distressed communities. Just 2 weeks
ago, we considered the issue of community development lending.
Next Wednesday we are going to address the serious problem of
mortgage discrimination , of which there is a very great problem in
this country .
(243)

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We are proceeding systematically through an inquiry to get at
these problems and get them out in the open so they can be dealt
with and corrected.
Today then our subject is the discriminatory practice of targeting
certain communities for credit on unfair terms . Typically the community involved is a low- income or minority neighborhood where
housing prices often have appreciated . The residents in many cases
are unsophisticated with respect to some of the financial transactions and the way they are presented, and in many cases are easily victimized by unscrupulous financial salespeople.
This committee has observed how unscrupulous check cashing
outlets spring up in communities where banks and thrifts have deserted low-income neighborhoods , and in turn are charging exorbitant fees.
Our subject today is the lending side of the check cashing problem, namely the rise of what I would call shady home equity lenders offering promises of home improvements or credit consolidation.
These lenders then often peddle high rate, high fee mortgages to
cash poor homeowners. The borrower, who may not fully understand or not even receive disclosures from the lender about the
terms of the loan in many cases ends up struggling to meet overwhelming mortgage payments . Too often, the borrower then ends
up losing the house to foreclosure.
Now the answer to this problem is complex and it gets into the
issue of how we regulate certain activities in this country. Some we
do at the Federal level, some we do at the State level , and that
issue comes into play here.
But clearly, better enforcement of laws that are already on the
books can help in some instances. Much of the lending activity
being complained of is presently legal and therefore is not on its
face illegal activity. I want to get to that just a little bit later because we do write the laws of this country. And if they're not the
way they should be , then they need to be rewritten.
Better disclosure to consumers may also be a solution here in
some instances . But there may be instances in which the only solution is, as I say, new legislation. So today, I want to hear from our
witnesses on these points. I want to establish a public record. I
then hope to work closely with the Clinton administration to better
identify the roots of the problem and then, in turn , to find better
solutions to it.
We have two panels this morning. Our first panel will discuss
the origins and extent of the problems in home equity lending and
how we might address them. We have four witnesses on that panel.
The first will be Scott Harshbarger, who is the Attorney General
of the Commonwealth of Massachusetts. Mr. Harshbarger has conducted lengthy investigation of this issue in Massachusetts.
Filling out the first panel will be Kathleen Keest, who is a
consumer credit specialist for the National Consumer Law Center,
Terry Drent, housing coordinator for the Ann Arbor Community
Development Department in my home State of Michigan , and John
Hamill, who is president of Fleet Bank of Massachusetts . Fleet has
had the misfortune to find itself closely associated with this issue
in the press , but this problem is broader in scope than any one institution .

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We welcome Mr. Hamill here today for his testimony and to draw
upon the experience and the insight that he can provide us.
The second panel will focus on the nature of the home equity
loan problem. The witnesses will be Annie Diggs of Augusta, GA,
and Eva Davis of San Francisco, CA, two home owners who say
they've been victimized by second mortgage lenders. We will also
hear from John Long, an Augusta, GA, attorney involved in related
litigation, and Bruce Marks, who is the executive director of the
Union Neighborhood Assistance Corp. Mr. Marks , I might say, has
been a driving force in bringing the second mortgage problem to
light and it is important that he testify today.
We have also received written testimony for this hearing from
the Legal Aid Foundation of Los Angeles, the New York City Office
of Consumer Affairs, including a study that they have given us
that we will make a part of the record. The Legal Aid Foundation's
Home Defense Center in Georgia, and the Legal Aid of Bilouxi,
Mississippi, and any others that may wish to submit testimony or
statements for the record. And we will keep the record open.
Let me note for the record that several of this morning's witnesses are involved in litigation related to the subject of our hearing today. It is of course not the function of this committee today
to try to settle or in any way try to resolve these lawsuits. That
just can't be done in this setting. Our purpose today is to try to determine what the laws should be.
I ask all of our witnesses if they would keep that in mind and
help us in turn find the answers they need and lay a foundation
in fact, so that we know where a new law may well serve us properly.
Finally, I want to stress again the relationship of this hearing to
the larger and pervasive problem of an inadequate flow of credit to
low-income communities on fair terms and without discrimination.
This is a major problem in this country and it has to be dealt with
directly.
As I say, this is one of several hearings in which we are doing
it. But I am determined that we will face and solve that problem.
Racial discrimination and the denial of credit to people who are
creditworthy in this country, because they are being excluded from
the system, either on racial grounds or geographic grounds, or because they are in certain neighborhoods, is absolutely un -American
and it has got to come to an end. And I am determined to see that
it comes to an end.
That is why four of our first six hearings in this Congress focused directly on this subject. I am very much committed to working with all the members of this committee and with the Clinton
administration that feels very strongly as well on these issues to
address these matters directly in a specific legislative package and
as a top priority that's got to be dealt with now before more damage is done to our people and to our country.
So again, I want to thank all of our witnesses for coming this
morning, many from long distances. And we look forward to your
testimony.
Senator D'Amato.

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OPENING STATEMENT OF SENATOR ALFONSE M. D’AMATO
Senator D'AMATO. Thank you very much, Mr. Chairman.
Mr. Chairman, today's hearing obviously focuses in on a situation that is evil, that is pernicious , that is unlawful, and that really
is a stain on the financial community, as well as one that we share
for having permitted this pernicious practice of discrimination and
consumer abuse to take place.
When an elderly person is conned into taking a second mortgage and I say "conned"-into taking a second mortgage to pay
for some repairs, and within a matter of months cannot make those
payments , than any decent credit analysis should demonstrate very
clearly that he or she did not have the income to make the payments on this mortgage. It is intolerable to then have that elderly
person's home foreclosed on, to put them out of the home that they
have spent a lifetime of savings and scrimping only to receive nothing for it.
And that's exactly the kind of thing that is taking place in a
number of our States, Mr. Chairman. State law in some cases is
so permissive, without mentioning the individual States, that it
often allows and encourages these kinds of practices.
For example, some States have no laws licensing mortgage brokers or setting limits on interest rates on second mortgages . We
will hear today of other States, like Georgia, that have laws that
actually authorize interest of up to 5 percent a month. That's 60
percent a year.
That's loan sharking clear and through and it should be made illegal.
[Applause. ]
Mr. Chairman, too many Americans are losing their homes as a
result of these fraudulent practices. Homeowners in credit starved
areas are often pressured into taking out second mortgages, usually
on usurious terms and conditions to pay for home repairs, to consolidate debts, or to obtain needed cash . Despite the illusion of big
money on easy terms, the reality for these borrowers is often foreclosure and the total loss of their accumulated home equity.
Mr. Chairman , so-called reverse redlining is among the most pernicious forms of racial and ethnic discrimination and consumer
fraud. The innocent and unsuspecting victims of these outrageous
practices have worked hard to realize the American dream of home
ownership and their dream of home ownership has been twisted
into a living nightmare by the so -called "tin men" and loan sharks.
Mr. Chairman, these abusive practices must come to a halt. Unfortunately, current laws-the Real Estate Settlement and Procedure Act, known as RESPA, and Truth-In -Lending-do not provide
adequate protection for consumers and borrowers in the second
mortgage market. And the con artists exploit these gaps to the financial and emotional detriment of our constituents and our communities.
I have prepared legislation, Mr. Chairman, which I was going to
introduce today, that will provide an important first step toward
filling in the gaps in consumer protection . It is called the " Home
Ownership and Equity Protection Act of 1993."
Now, I said that I was going to introduce it today. I am going
to withhold it and circulate it so that hopefully we can make it a

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bipartisan act, an act that will give real and true disclosure, and
provide consumers with an opportunity after the initial application
is made for a person to reflect upon its terms. It will call for real
disclosure and if, indeed, another 48 hours or so can bring forth
suggestions from this committee and from staff to enhance and
make it a better bill, as a first step toward a solution to the problems we will hear about this morning, this Senator would be
pleased.
In short, the bill would provide a 3-day cooling off period between
the time of the loan application and closing. We establish strict
penalties for noncompliance with these enhanced disclosure and delivery requirements. And we mandate a comprehensive Federal
study of the entire second mortgage market. I think that is important, so that we don't over-regulate. But by the same token, we get
a comprehensive review. But this enhanced disclosure is something
that I think is a first step that we should begin to move on quickly.
Under the bill, consumers will be warned in writing at least
twice about the dangers of taking out a second mortgage. The 3day waiting period, as well as the 3-day recision period already required by Truth-In-Lending, will give homeowners more time to
consider and understand the responsibilities and risks associated
with loans.
I believe that our financial institutions have a very real obligation themselves . They simply cannot hide behind the fact that
there is some company out there doing this. That there are independent contractors making these deals. That's not good enough.
You cannot do that; it's wrong.
[Applause.]
We have a credit-starved community. You have an obligation to
see to it that if you make funds available, that the people really
have the ability to pay back. No one wants to see unnecessary foreclosures. It's wrong. I have had it happen to someone in my family
who should have known better; he didn't. It's wrong.
It is wrong for institutions that have a very special charter with
America and the American people and the American Government
not to act responsibly. It should not be necessary for us to pass this
legislation. It obviously is.
So I hope, Mr. Chairman, that we can at least come forward with
a basic bill that will provide more disclosure and begin to move us
in the right direction . And I hope that the great financial institutions of our country begin to exercise a greater degree of care and
concern in this area.
Thank you, Mr. Chairman .
The CHAIRMAN. Thank you, Senator D'Amato. With you and I
both having stated our intentions today to introduce legislation of
a comprehensive sort, I think we will be able to do that on a bipartisan basis and offer it in a way that can move it ahead. I think
it would be very constructive. And I think today we will get a lot
of valuable information as well that will help us in guiding the construction of that package.
Senator Campbell, let me start down in the order in which members have arrived for any brief opening comments they want to
make.
Senator Campbell, we are pleased to call on you next.

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Senator CAMPBELL. Thank you , Mr. Chairman .
I have a complete written statement. With your permission , I
would like to introduce it into the record.
The CHAIRMAN. Without objection , so ordered .
OPENING STATEMENT OF SENATOR BEN NIGHTHORSE
CAMPBELL

Senator CAMPBELL . Just to tell you, I appreciate your doing this
hearing and certainly intend to co- sponsor your legislation to correct some of the problems we have had with some of the predators
who have given the lending institutions a bad name and taken advantage of people who are very often the people who have the most
difficulty in our communities trying to make a living.
Very often, homeowners have nowhere to go for credit because
mainstream institutions are reluctant to lend to low-income families; and these are the homeowners who are targeted by second
mortgage lenders and charged very high rates of interest.
I am not well versed in the banking industry as you know, just
coming on this committee recently. But I have always been interested and concerned about the disadvantaged and minority communities , particularly inner cities and Indian reservations, as you
might know.
So I am interested in learning a little more about this. I have
tried to collect all of the written material which I will go over in
my office, since I do have a conflict this morning. But clearly we
have an obligation , a moral and legal obligation , I think, to make
sure that those people who have been predators on the disadvantaged in this country, to make sure that that's stopped .
We might not be able to go back in time and fix all of the mistakes that have been made and all of the unfair practices that have
been made. Hopefully, courts will do that and find justice for those
people who have been taken advantage of. But we can surely move
forward and prevent it from happening again.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much.
Senator Bennett.
OPENING STATEMENT OF SENATOR ROBERT F. BENNETT
Senator BENNETT. Thank you , Mr. Chairman .
I apologize in advance that I have a conflict that will not permit
me to hear all of the testimony. But I want to make it clear that
this is a matter that requires very careful study and something
that members of the committee should pay very close attention to.
I am delighted, Mr. Chairman, in your comment, in your opening
remarks, about the issue of whether this is a Federal jurisdiction
or a State one. Because I think much of the problem may have
arisen from the fact that States assume that there are Federal
laws on the books that take care of this and therefore ignore it.
And the Federal Government very often is the least effective agency for enforcing things of this kind. And it does require local administrators and local regulators who are closer to the situation
and can say this is going on.
So I hope in the testimony that we address not only the question
of the outrages , but the basic question of where the most intelligent

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enforcement should take place and what the Federal Government
can do to facilitate activities on the part of State and local regulators . And I am delighted that we have some State regulators here
to address that question .
I assure them that even though I do have a conflict that will require my leaving, that I will read their testimony very closely and
pay close attention to the recommendations . Because this is an
area that we need to pay very close attention to and see what we
can do to alleviate the problem.
The CHAIRMAN. Thank you very much , Senator Bennett.
Senator Kerry, you may also want to make a comment about the
fact that our first witness this morning will be your attorney general from your State.
Senator KERRY . Indeed, I would like to do that, Mr. Chairman .
The CHAIRMAN. A position with which you have some familiarity.
OPENING STATEMENT OF SENATOR JOHN F. KERRY
Senator KERRY. And with the gentleman himself.
Mr. Chairman, I think first of all I would like to join colleagues
in reflecting my own appreciation for your leadership. And I am
glad to hear Senator D'Amato withhold in an effort to try to put
a bipartisan effort together. I am confident we can. I think it is
very important we do.
I also want to underscore how important I think this hearing is
and this effort is. It is larger than just the examination of the predatory practices that have caused considerable and appropriate outrage among a number of citizens .
But it really goes to the larger issue of a relationship between
institutions, important institutions, financial institutions with
great power, and people who do not share that power. It is an effort
by this committee and others to try to transfer some of that economic power back to people who have been victimized by redlining
and a series of other practices amounting to economic abuse of our
urban areas.
I am particularly pleased that the leadoff witness is our attorney
general from Massachusetts. He rightfully carries a well -earned
reputation as a law enforcement officer, as a crime fighter, but also
as a crime fighter who understands this other relationship I am
talking about with respect to the non -street crime that you see
every day.
It has been important for our State, and I think he is to be saluted for that. The work he did on this is groundbreaking and important. It is really the best of what attorneys general and district
attorneys ought to do in protecting citizens. And I salute him for
it.
I also want to welcome John Hamill here who has the difficult
role of trying to articulate within an audience that is obviously suspicious of any corporate person representing an institution that is
associated with the downside of some of these practices. In fairness, I think it is very important for people here to understand
that John Hamill is an outstanding business leader in our community, somebody we have enormous respect for.
I know from my personal dealings with him and efforts to get minority lending increased and in our efforts to try to augment bank

250
purchasing among minority businesses and other things, that his
own sensitivity to this issue is real and that he does not condone
these kinds of practices. And I think it is important to listen to
whatever explanations are offered with that in mind.
Let me also say it is very clear that this committee has got to
come up with some kind of response to what we understand to be
an unconscionable relationship between disadvantaged people and
institutions with the power that we have described . Not every person or institution who loaned money to poor people, incidentally, on
second mortgages, committed improprieties. We understand that .
But on the whole, there really were substantial abuses within
the industry which wound up causing people to lose their homes for
no legitimate reason.
Over the past 2 years, my staff has interviewed a number of people from different parts of Massachusetts who met with these lending practices. And we have heard from over 70 people who received
loans from Dime Bank in New York under circumstances that any
person of common sense and decent conscience has to say are unacceptable.
We had instances where we had what was called a "no doc" lending process. No documentation . No normal documentation for folks
who were supposedly a larger credit risk. The whole process of
home buying was sped up. The less sophisticated borrower was
lured. They were only required to put down 20 percent downpayment, but in many cases there was no documentation of their ability to do that, no income verification , no credit history.
These "no doc" loans made it easier for fraud to occur. Real esunchecked.. Incomes were inflated,
tate transactions went unchecked
downpayments were sometimes financed by the developers themselves as a second mortgage . Appraisals were falsely inflated . That
institution, and another one that has subsequently been put out of
business by the RTC were the only two who dealt this way in Massachusetts, I want to add. But they used techniques called negative
amortization where they had a teaser interest rate with interest accruing from the moment and suddenly it would balloon to such a
degree that people simply never had a prayer of being able to pay
this . No one can accept that.
So, Mr. Chairman , I think it is important to build a record today
to understand precisely how this occurred and what the implications are. I salute you for holding this hearing .
The CHAIRMAN. Very good, Senator Kerry.
Senator Domenici , did you have an opening comment?
Senator DOMENICI . Mr. Chairman, I have a few pages of remarks. Would you put those in the record?
The CHAIRMAN. Without objection , so ordered.
OPENING STATEMENT OF SENATOR PETE V. DOMENICI
Senator DOMENICI . Mr. Chairman, I think it is conclusive now
that something is amiss with reference to inner cities and minorities, their ability to borrow money either for real improvements or
for home building. For a long time , people said it wasn't so, but it
is so . Frankly, we are quickly coming to the conclusion that you
cannot fix inner cities with Government programs solely. Nothing
works that way .

251
That's why you have banks , that's why you have a secondary
market which bundles up home mortgages and then permits banks
to even lend more for homes. Frankly, what we are doing thus far
seems to all be counter productive on the Government end, and I
think we need some real answers. Why isn't FHA more active?
Before we go around criticizing others, we'd better find out
what's wrong with our Federal programs . Something has to be
amiss.
The CRA, which we take so much pride in and credit for, isn't
even working in this area. It's being finagled in ways that it comes
out that there's still no real help for the individuals that want to
improve where they live.
We allowed tax deductions for home equity loans. I say to my
friends here on the committee, which said you can borrow money
and deduct that interest. That's working counter to the poor people
in inner cities because what is happening is they're pooling their
non-equity indebtedness and end up with a huge indebtedness on
their house. And they are ending up losing their houses in the
name of permitting them to deduct the interest payments.
Mr. Chairman, I don't have the answers, but I think it's pretty
clear that we need many resources applied to the inner cities aside
and apart from Federal programs. We need what every other part
of America applies to the community, led by mortgages and loans
for real home improvements and for housing. That is not happening.
The Banking Association of America has to face up to it. For
years they said it didn't exist. Now if we've got to believe the Federal Reserve on this one, they looked at it carefully and they told
us it does exist.
So I just don't think we ought to convene these hearings with the
idea that we are looking for excuses . We are looking for answers .
Maybe we have to change some things to help this occur. But it is
happening, there is no doubt about it.
Mr. Chairman, and Ranking Member D'Amato, I laud you for the
hearings . But more importantly, I really hope we can get together
and find some ways to improve this situation . Without it, it's not
going to work.
Putting in more community development block grants, I say to
the members it's just going to be a little superficial thing. It's not
going to fix the resources that ought to be flowing to individual
family members who need that kind of help .
Thank you very much.
The CHAIRMAN. Thank you , Senator Domenici.
I want to note that Senator Murray was here and had to leave
to attend to something. We will make her statement a part of the
record.
The CHAIRMAN. Senator Shelby.
OPENING STATEMENT OF SENATOR RICHARD C. SHELBY
Senator SHELBY. Thank you, Mr. Chairman .
I, too, am disturbed by the notion of the elderly and the less sophisticated among us being preyed upon by the over-zealous financial institutions. I believe, Mr. Chairman that this type of conduct
is unconscionable at best. There's a lot of fraud in this type of lend-

70-832

- 93,

9

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ing in America. Fraud must be stopped. I don't believe there is any
place for fraud or predatory lending of this type in America.
[Applause . ]
The recent settlement in my State of Alabama indicates that this
has been and may continue to be a problem in Alabama. I am interested in learning more about the problem of reverse redlining.
And I am very interested in what we can do to ensure that unwitting borrowers are not taken advantage of by predatory lenders.
Particularly troubling to me, Mr. Chairman, is the idea that a lot
of borrowers are unaware that they are using their homes to secure
a home equity loan on a second mortgage. These borrowers may get
in over their heads and end up in a lot of cases losing their homes.
Mr. Chairman, I believe no borrower in America should be unaware of what collateral he or she has used to secure a loan of any
type.
However, Mr. Chairman , having said this, I think as these hearings go along, we have to be careful about interfering in the marketplace, interfere as little as we have to. We use the term "redlining" to describe a community that has been shut off from credit.
The term "reverse redlining" suggests that a community has access
to much too much credit, a notion that is not all bad if it were carried out right, if we had conscionable people making those loans.
Mr. Chairman , I have an additional statement I would ask to be
made part of the record. And I, too, want to commend you as
Chairman for bringing about the leadership in having these hearings and I want to commend Senator D'Amato for his foresight and
leadership in the same area.
The CHAIRMAN . Thank you , Senator Shelby.
Senator Boxer.
OPENING STATEMENT OF SENATOR BARBARA BOXER
Senator BOXER. Thank you very much, Mr. Chairman. I will be
brief.
I also want to echo the praise that has been heaped upon you
and Mr. D'Amato this morning. I also want to say to the people
who are here that I think it is absolutely terrific that you came out.
What you've heard already should give you great heart and great
hope.
I have been in this system for a long time and to hear the kind
of commitment that you have heard from the majority and the minority today is , I think, a very good sign that something good is
going to happen and that you the public-have played a role by
bringing these issues forward.
Mr. Chairman, many times, as you know, the people who are
most hurt in these pernicious schemes are often the people without
a voice. That is why it is so important for us to be their voice.
Twenty years ago I was a newspaper reporter, Mr. Chairman,
and I wrote a story about an elderly woman who had this little
dream house and this little dream picket fence and roses in the
front, and she succumbed to one of these people who came and
said, "gee, I can give you some more money and you can buy some
gifts for your grandkids. " But it was never explained to her that
in just a few months, maybe a year or two, she would be hit with

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a balloon payment that would be more money than she ever hoped
to get her hands on . So she lost the house.
We wrote the story and everyone was stunned and shocked and
everyone thought this certainly would never happen again . But it's
still happening, 20 years later. But I am sitting in this seat and
I feel privileged to be able to do something now rather than just
write about how to fix the problem.
I am going to work with you, Mr. Chairman . The bottom line is
our home is our castle. And we can't let someone pretending to be
a knight in shining armor take that castle away. That can no
longer continue .
So I will work with you and do everything I can to make sure
we fix this problem .
The CHAIRMAN . Thank you very much, Senator Boxer.
[Applause. ]
I think what we have here today is a pretty good example of democracy in action . We have a lot of citizens here and I am very encouraged by that.
Mr. Harshbarger, you have been previously identified . We are
going to start with you.
I am going to ask each of our witnesses on this first panel to try
to keep your summary comments to about 5 minutes if you will so
we've got time for questions. As you know, we have got a second
panel coming behind you that will illustrate some of the very problems that you are going to talk about, but on individual terms. I
want to make sure that we've got enough time this morning to get
through all of that . So if we can try to adhere to that, that would
be very helpful.
Mr. Harshbarger, we will start with you.
STATEMENT OF SCOTT HARSHBARGER, ATTORNEY GENERAL
OF THE COMMONWEALTH OF MASSACHUSETTS
Mr. HARSHBARGER. Senator, thank you very much. I commend
you as Chairman and the members for focusing on this issue and
obviously, my colleague, and a leader on this issue, from Massachusetts, Senator Kerry. It is nice to be here.
I am Scott Harshbarger, the attorney general of Massachusetts .
I thank you for this opportunity to outline the work of my task
force, which investigated the home improvement and mortgage
scams in Massachusetts . I would ask that my full testimony be entered in the record.
The CHAIRMAN . Without objection .
Mr. HARSHBARGER. I would also ask that the report of our task
force, which contains in detail a number of our recommendations
for you as well as for others in Massachusetts, also be entered into
the record.
The good news. For the past 2 years, we have undertaken a comprehensive program of enforcement, regulatory and legislative action to remedy the harm done to vulnerable consumers in Massachusetts by unscrupulous lenders and home improvement mortgage
contractors. The bad news . Our investigations documented and uncovered the worst kind of urban economic violence which blatantly
victimized thousands of vulnerable homeowners .

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These vulnerable homeowners, elderly, people of color, and people in our inner cities, were targeted by certain brokers, lenders,
and contractors to take out second mortgages with unconscionable
terms and conditions. If the consumer had sufficient equity in his
or her home to cover the loan in case of a default, irresponsible
lenders motivated, as best we can tell, primarily by greed gave
scant attention to whether consumers could repay their loans with
their monthly income.
As a result, the consumers were burdened with unmanageable
debt and, in numerous cases, lost their home through foreclosure.
The words of one victim best sum up the impact that these scams
have on people. She said to me, "They did to me what a man with
a gun in a dark alley couldn't do; they stole my house."
Following the complaints that we received and many of the
leaders of the community groups involved in this are here and will
speak to you this morning-I mobilized the Home Improvement
and Mortgage Task Force from the Office of the Attorney General
to address, on a variety of fronts, this insidious form of urban economic violence.
To date, the Task Force has initiated thirteen enforcement actions. These actions have already produced more than $40 million
in legally enforceable benefits to Massachusetts consumers, particularly consumers of low- and moderate-income. The targets and
the participants in these actions were banks, home improvement
contractors, and a variety of other mortgage company officials.
We also promulgated unprecedented and creative regulations to
curb future abuses, and new mortgage licensing and home improvement laws have been enacted to legislate positive change. We recommend them for your consideration.
But the obvious question is, how and why did this happen.
First, many inner-city communities across Massachusetts and
elsewhere in this country were entirely abandoned by mainstream
lending institutions during the 1970's and 1980's . As a result of the
vacuum that was created when the mainstream financial institutions left, the only credit available to inner-city consumers was
from the then unregulated and unlicensed second mortgage companies.
This economic exploitation was aided by unethical brokers who
extracted unconscionable fees from consumers, and who, in some
instances, had undisclosed financial and corporate ties to lenders
whose primary goal, apparently, was the acquisition of real estate
in a then rising market.
I believe a second reason why these scams flourished is that for
over a decade, there has been a wholesale abandonment of our
cities in this country by many States, and by the Federal Government.
If these scams had in fact occurred or were occurring in middle
class suburbs of this country, as we saw with the savings and loans
scandals, the Federal " cavalry" would already have arrived on the
heels of the scam artists.
But instead, the social fabric of many inner-city urban neighborhoods was allowed to be torn apart and communities destabilized .
And these destabilized communities , as you know, and as Senator
Kerry in particular knows from experience, are the breeding

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ground for further forms of economic violence and other types of violence.
Our Task Force uncovered and documented allegations of wrongdoing by home improvement contractors, lenders and brokers ,
against vulnerable consumers.
We have given examples in my prepared testimony and our report of what was documented.
I stress that only because this is a field where allegations are
often made. Our investigation documented misrepresentations of
the nature of the transaction to the consumer, illusory inducements, pressure and coercive tactics, failure to disclose key elements of the transactions , forgeries and falsification of documents ,
and unconscionable or unaffordable loan terms, many of which examples have been described by members of the committee here this
morning.
Our attack therefore was multipronged. In addition to 13 actions
that targeted banks, mortgage companies, home improvement companies, and individual home improvement salesmen and mortgage
company executives , we did promulgate new consumer protection
regulations to create a " level playing field" for all the lenders , particularly legitimate lenders who were playing by the rules and were
protecting the consumers from these abuses.
We played a major role in working with the State Legislature to
secure the passage of a new law, regulating home improvement
contractors, registration , licensing and a guarantee fund to protect
consumers.
And we initiated, and with the support of over 100 lenders in
Massachusetts, a voluntary moratorium which was then followed
by a legislatively-passed moratorium that precluded foreclosures
during the period of our investigation .
Please allow me to mention just a few things in terms of recommendations.
We must look at the Community Reinvestment Act, and ensure
that its requirements are absolutely enforced and that the Act
mandates address issues that have been focused on here today. Let
me give just some examples.
Given that the unscrupulous preyed upon the vulnerable and
filled the vacuums that the mainstream financial institutions left,
we must insist that more banks put branches in lower income communities. We must insist that they market credit products designed to meet the needs and resources of low-income consumers,
and market them aggressively.
The banks must reach out actively to low- and moderate-income
consumers , and become, if you will, more "user friendly," as they
did in the middle 1980's for the "yuppie community." I apologize to
those who may have been in that group.
[Applause .]
It is also clear that we need far more flexible and liberal lending
criteria for mortgages in a number of areas . And, in addition , we
must insist that long-term plans of banks include locating in urban
communities.
We must also ask the banks to look at their financial relationships to other lenders. The fact is, in these situations , consciously
or unconsciously, mainstream banks in Massachusetts did finance

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high rate equity lenders who made loans in areas where those
banks were not participants.
We also must think about the education of consumers in some
meaningful way, to ensure that they know how to protect themselves.
And I suggest we should adopt regulations similar to those that
we adopted in Massachusetts , in terms of home improvement and
mortgage abuses, as well as legislation relating to licensing.
This problem won't be eradicated overnight. There is no magic
panacea or simple solution , but if together, the banks, the mainstream lenders, responsible brokers, responsible home improvement contractors, local community, Federal and State agencies , for
once engage in a partnership, and not to compete with each other,
but work together to try to address these problems , we can have
a public private partnership that I believe will change the urban
economic landscape from one of deprivation and disintegration to
one of hope and opportunity.
And you, Mr. Chairman , are to be commended for your commitment to not simply hold hearings but to take action . And we stand
ready and willing to assist in any way we can. Thank you very
much.
The CHAIRMAN . Thank you very much. That's very valuable testimony. I appreciate also the submission of materials from your work
and studies. That will be very helpful to us.
Next, Kathleen Keest, who is a consumer credit specialist with
the National Consumer Law Center in Boston , and is also the author of the Center's study called "Second Mortgage Lending Abuses
and Regulation ."
We'd like to hear from you now, Ms. Keest.
STATEMENT OF KATHLEEN KEEST, NATIONAL CONSUMER
LAW CENTER, BOSTON, MA

Ms. KEEST. Thank you for your invitation . Again , with everyone
else , I'd like to thank you for focusing the attention on this .
As you noted, others today are going to be telling you in graphic
terms what the human costs of this phenomenon are. I'm here to
be your boring speaker today, and tell you why I think some of
these things have happened, and what I think can be done about
it.
One of the major contributors, we feel, has been deregulation.
Usury rate ceilings have been around for thousands of years . They
were around for a very good reason, that being that greed is unfortunately apparently an immutable human trait in human nature.
Similarly, because there is inherent unequal bargaining power in
consumer transactions, particularly consumer credit transactions,
the regulation of consumer lending has been around for at least the
better part of a century.
But in the early part of the 1980's, when there was an anomalous mismatch between statutory rate caps and market rates, we
threw the baby out with the bath water, and deregulated virtually
everything, while, as Senator-I believe it was- D'Amato said,
some States have nothing at all.
Congress contributed as well . Not all of what we call second
mortgages are really second mortgages . Some are first mortgages

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which are also home equity loans . And Congress, in 1980, preempted State interest rate caps on those loans. That has contributed.
Congress, in 1982, preempted any State regulations on some of
the other creative financing things. Tricks that have been mentioned here, like negative amortizing loans and balloon payments.
Along with the Federal trend toward deregulation, many States
gutted their laws as well. This deregulation then set the unscrupuTous free to do what they will.
The second thing that happened was the appreciation of real estate values.
What happened was that there was an entire new pool of wealth
created, and what we call the equity skimmers or equity thieves
felt that it was there for them to, as Woody Allen put it, rob with
a paper and pen.
This led to what is called asset-based lending, which is OK in
commercial loans, at least some of them, but when you're talking
about consumers who look to their regular daily income to pay
their loans back, it doesn't make any sense to look at the value of
the collateral unless the House is going to write the check every
month.
It only makes sense if the homeowner is going to liquidate and
if they have no intention of it , it doesn't make any sense to be making loans that these people cannot possibly afford with large balloons of large monthly payments . It just led to reckless underwriting because the lenders had nothing to lose while the borrowers
had everything to lose.
The third thing that happened was the rise of the secondary
mortgage market, which helped a lot in terms of increasing the
pool of mortgage money available, but it also made these people,
these second mortgage operators, it gave them a backend income
stream from which they could continue to operate. And it encouraged their reckless underwriting, because they didn't have to deal
with the consequences.
And the investors buying the paper felt that they didn't have to
deal with the consequences because they could successfully or not.
Ultimately, they felt that they could assert what is called the "holder in due course" doctrine to protect themselves, and separate
themselves from any responsibility.
We've talked a lot already about who this happens to . I just want
to point out that one of the things we found from our national perspective is that in the areas where there has been the most permissive legal environments, regulatory environments, is where it's
been worst, along with the areas where the real estate values rose
most, like Massachusetts, Florida, the southwest.
Then of course it happens most to the vulnerable populations , including the rural poor, as well as inner cities , rural Mississippi ,
rural Alabama, and of course, in addition, to the people who have
no choices .
I just want to make a point that a lot of times these loans got
justified by saying that these were high risk borrowers. In the
paper that Senator Riegle alluded to, we take issue with that. I
simply want to make reference to that, rather than go into it here,
that it's not really true that that's the real reason .

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In terms of recommendations, there are a lot of recommendations
that we've made in an appendix which is submitted with our written brief, which I'd ask to be made part of the record.
The CHAIRMAN. Without objection.
Ms. KEEST. Among the three most important are, one, reregulation. If you have a floating ceiling, that takes care of the problem
of a mismatch, and it also concerns the problem that usury ceilings
were around to serve for the last 3000 years. I would ask Congress
not to preempt any States that want to do something even more
protective.
Second is to eliminate the "holder in due course" doctrine for
consumer loans.
And the third is to make improvident lending and equity skimming an unfair and deceptive or unconscionable act, and include a
private means of enforcement. I see my time is up.
I haven't heard any suggestions that this is going to happen
today, but I do want to urge caution people. I know there's a lot
of talk about regulatory burden . And when I hear the bankers talk
about it, all I hear them mention is the consumer protection laws.
And to gut those in the name of relieving regulatory burden is not
going to help matters at all .
There are a lot of other explanations, there are a lot of other reasons why there's a lot of paper work burden, and Truth-In -Lending
is really not one of them. So I would urge you to not listen to that
siren call.
I want to thank you again for having the opportunity to testify.
Like Mr. Harshbarger, if there's anything we can do to help the
committee in its considerations, we'd be more than happy to do it.
The CHAIRMAN. Thank you.
Let me just say that those consumer protection laws are not
going to be gutted by this committee, not while I'm here as Chairman. I can assure you of that.
[Applause . ]
Let me just say, that Mr. Terry Drent has given very important
leadership in Ann Arbor, Michigan, for which I and others are appreciative. Further, he has actually assisted several homeowners
with severe financial problems that have arisen because of these
second mortgage abuses.
Mr. Drent, we're pleased to have you and we'd like to hear from
you now .
STATEMENT OF TERRY DRENT, ANN ARBOR COMMUNITY
DEVELOPMENT DEPARTMENT, ANN ARBOR, MI

Mr. DRENT. Good morning, Senator.
It's an honor to speak to this committee today, chaired by our
distinguished Senator from Michigan.
I'm Terry Drent of the Community Development of the City of
Ann Arbor.
Many people living on fixed incomes in Michigan and the rest of
the country are facing a crisis. For many, the costs of medical care,
housing, and basic sustenance is so high that people feel they have
to supplement their incomes with debt just to survive.
Many of these people are being preyed upon by unscrupulous
mortgage companies, with a practice that we know as reverse red-

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lining. These firms are targeting low-income families , claiming to
be able to assist them in paying their bills. Many who avail themselves of these solutions find that they're worse off, and some are
being actually forced out of their homes.
People living on fixed incomes are most susceptible to the abuse
by mortgage companies because they see their expenses increase
more than their incomes. You know that if someone's income is derived from Social Security or any other COLA based program , the
most it's going to increase is the rate of inflation , which has been
about 3.5 percent a year over each of the last 4 years. In that time,
we've seen medical costs increase by as much as 15 to 20 percent.
The cost of home repair is also very high.
Many people are also struggling to pay their property taxes on
their homes, which have increased dramatically in recent years, as
State and local governments continue to face budget imbalances ,
many due to Federal budget cuts .
So people are in situations where they have to choose between
buying food or perhaps paying property taxes or paying for health
care or paying property taxes, or fixing a furnace in winter time
or paying property taxes. Like most of us, they choose to pay for
the things that will keep them alive, and they don't pay the property taxes.
We've discovered that some mortgage companies study the delinquent tax rolls published by county treasurers, and these mortgage
companies entice homeowners with loans to pay their back taxes
and their medical costs .
Frequently, the interest rate is double market rate, and there are
many high administrative fees and points.
One of the reasons these mortgage companies are successful in
enticing people to accept these loans is that in Michigan and many
States, if you are unable to pay the property taxes, the State will
collect them by selling them at the delinquent tax sale .
So a tax purchaser, frequently a company, will step in, pay the
taxes, get a lien on the property, and start the process to take the
home.
Some of these companies also own mortgage companies. It's an
embarrassment to me that Michigan is probably the worst State for
this in the country. In Ann Arbor, we had an elderly widow with
Alzheimer's disease who was unable to pay her property taxes , and
subsequently they were purchased.
A mortgage company contacted her through the delinquent tax
roll and put a lot of pressure on her to sign mortgage papers, saying she'd lose her home if she didn't. They offered her a $35,000
loan at 18 percent interest.
The CHAIRMAN. At 18 percent?
Mr. DRENT. Yes , sir. When she actually needed 13 percent to pay
her taxes. Her income was $770 a month derived from Social Security. This mortgage payment would have cost her $ 680 a month .
She'd still have to pay her property tax bill . Now, that would leave
about $ 90 a month to live on .
So we worked with a local bank, Great Lakes Bancorp . And in
consideration of the Community Reinvestment Act, they were able
to extend her a loan for $ 15,000 at 9 percent interest. Her mortgage payment with her taxes is about $326 a month, and she's

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going to be able to stay in her home. But not everyone is that
lucky.
There's another case in Southeastern Michigan where, again , an
elderly widow with early onset of Alzheimer's disease couldn't afford her property taxes and medical bills . In 1989, she got a mortgage for $ 12,729 with a 3-year balloon payment. She defaulted. Her
income was $520 a month derived from Social Security. Her mortgage payment was $350 a month. So she defaulted after 3 years.
The bank refinanced . She defaulted again . They refinanced again.
A third financial deal. In 18 months, her debt load increased from
$ 12,729 to $39,500 . Of this increase, this woman only saw $4,066.
The rest of it went to points and administrative fees.
Right now, through a court agreementThe CHAIRMAN. They're basically just stealing her equity through
those inflated figures.
Mr. DRENT. Absolutely. It was clear that this woman could never
pay this loan off.
Right now, in the court agreement, she has 8 months to refinance or she's going to lose her home before the year is out, and
truly become a burden on the community. This is a house she paid
off once. She paid off her mortgage.
There's another person in Ypsilanti, Michigan, who is mentally
disabled . His mother left him her home so he'd always have a place
to live. His State disability income equals $220 a month. A mortgage or a tax company bought his property taxes and exchanged
the lien on his property for a mortgage at 25 percent interest. His
payment is $250 a month, again , on an income of $220 a month.
Right now, he's borrowing from friends and family to be able to live
and pay this mortgage. He lives on about $25 a month after his
payment. Soon, he will be one of our homeless mentally ill.
There are many abuses in the nonconforming mortgage market.
What once were considered usurious mortgages are now the norm.
Many lower income homeowners are being victimized .
The city of Ann Arbor isn't specifically against nonconforming
mortgages. In fact, Mayor Brader of the city of Ann Arbor, and the
City Council and the City Administrator are working with local
banks to form a loan pool to help low- income people.
However, we feel that there are consumer protections that can be
put in place to protect the low-income, the vulnerable and the disadvantaged from an under-checked and under-regulated segment of
the banking industry.
We have some recommendations that I'd like to read into the
record.
We'd like you to consider repealing the exemptions from State
usury laws in the Federal Banking Statutes.
We'd like you to establish a Federal Usury Law, regulating interest rates as a specific percentage above prime rate and controlling
the total financing charges imposed.
Strengthen and clarify the notice of foreclosure prevention services existing in current law.
Require personal notice of foreclosures to all significant interests
in the property.
Require judicial foreclosures of all mortgages.

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And finally, amend the Older American's Act to require that lowincome seniors facing a foreclosure be referred to social service
agencies that can help them, literally get in contact with programs
that can help them.
Now the problem is so severe in Ann Arbor and Southeastern
Michigan, the Mayor and City Administrator set aside funds for a
foreclosure prevention program. But we realized that we're putting
a bandaid on an open wound, and regulatory action is needed.
The practice of reverse redlining is threatening the sanctity of
part of the American dream; that's homeownership.
Right now, we feel that the rapacious dogs have been unchecked
and under regulated, and are preying on our disadvantaged people .
This activity is wrong, it's unfair, it's unAmerican, and it certainly
needs to be stopped. And we hope that you take action to do so.
The CHAIRMAN. Thank you very much.
Thank you for your leadership in Ann Arbor and for coming
today.
Mr. Hamill is President of Fleet Bank of Massachusetts and a
senior executive for the Fleet Northstar Group. He is the spokesperson for Fleet on the second mortgage issue . Mr. Hamill, we appreciate having you here. We'd like to hear from you now.
STATEMENT OF JOHN HAMILL, PRESIDENT, FLEET BANK OF
MASSACHUSETTS
Mr. HAMILL. Thank you , Mr. Chairman . I appreciate being here.
Senator D'Amato , I appreciate your comments and the legislation
you are proposing. Senator Kerry, I appreciate your opening remarks. And Mr. Harshbarger, who I've worked with on a number
of occasions . I'm pleased to be here.
Fleet is headquartered in Providence, Rhode Island. We're the
fourteenth largest bank holding company with $47 billion in assets .
We have 1,300 offices in 42 States, and we employ over 27,000 people in our company with 5 major non-bank companies and 7 banks.
Fleet Finance is in Atlanta, GA. That's the headquarters. It provides consumer finance services throughout Georgia and in 25
other States. It's one of the largest consumer finance companies in
Georgia, but it's a smaller player in the national consumer finance
industry.
I would like to turn your attention, if you will, to the consumer
finance industry as a whole , because it provides credit I believe to
millions of people who would not otherwise be able to get credit.
These are people who have low- and moderate- incomes, and who
cannot obtain credit from traditional sources , such as banks and
credit unions because of their existing credit problems.
Fleet competes in this market with major national companies ,
such as Associates , AVCO Financial, Chrysler First Financial,
Household International, Beneficial, Transamerica, G.E. Capital ,
the Money Store, Old Stone Credit, NationsBank, and many other
companies.
This industry provides credit to a segment of our country that
needs credit. I believe that the industry needs to be focused on for
what it does right, as well as what it does wrong.
I would ask that we make sure that while we're looking at the
question of access to credit, that we focus on the fact that people

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do deserve access to credit, notwithstanding the fact that they have
had a poor credit history in the past. That I think from a public
policy standpoint is very very important.
Senator DOMENICI. Would you state that again, please?
Mr. HAMILL. I think that people, as a public policy matter, have
a right to access to credit, notwithstanding the fact that in the
past, they have had credit problems.
I believe that that is what this industry has done and that certainly there have been abuses. But I want to make sure that we
focus on the whole and not on the fringe.
Home equity loans are typically used by consumers to reduce
their monthly expenses by consolidating debt and stretching payments out over a longer term, when used right. A longer term and
lower interest rate reduces the borrower's monthly payment, it
eases cash flow problems. In addition , home equity loans are used
to finance home improvements, to acquire personal property, to pay
educational, medical, or other expenses .
This is a new phenomenon , home equity loans. It is something
in this country that we are dealing with, where we are bringing
this to the consumer in a way that we've never done before. Congress allowed tax deductibility, as was pointed out.
The fact is that we did have a rise in the real estate values, and
the fact is that many people looked for a way to be able to access
that equity in order to be able to satisfy some of their needs.
I think that is a very important public policy decision that was
made by this Congress, and I don't think it's something that we
should retreat from because of the fact that we have problems at
the fringe. We can take care of those problems .
I would like to also say that, although the subject is not to be
a Fleet Finance hearing specifically, you do have another panel,
and I've read their testimony. And I think it's instructive to be able
to at least talk to the industry issues that have been raised by Ms.
Keest and others in the testimony that you will see, in order to be
able to look at those issues through at least the eyes of Fleet Finance, as one company that does business in this industry.
The first is that this industry makes loans at exorbitant interest
rates. You might hear that. Also that excessive finance charges are
part of this industry.
I'd remind you that the loans of Fleet Finance that are presently
on its books, and have been amassed over the last 7 years when
rates were higher, and now have come lower, so that you need to
look out or back over the last 7 years.
Fleet Finance's Georgia loans , for example, have an average note
rate of approximately 14.8 percent, and an APR of 15.9 percent.
And I'm going to give you these statistics , and I will be happy to
provide them to you with certifications and all of the documentation you need. Because I do not come before this committee lightly
as a member of the Fleet Group, and give you statistics that I could
not back up and prove to you . So I would mention that. Ninetyeight percent of Fleet Finance's loans in Georgia have interest
rates below 21 percent .
The CHAIRMAN . I'm sorry. Would you repeat that again?
Mr. HAMILL. Ninety-eight percent of Fleet Finance's loans in
Georgia have interest rates below 21 percent.

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The CHAIRMAN. Let's have order in the room .
Mr. HAMILL. We're talking about a portfolio of 20,000 loans , Senator, and I would like to make sure that we're looking at it through
the eyes of the entire portfolio , in order to make sure that again
you get the picture of this industry as a whole, not as a result of
a piece of it.
Last, on that point, 41 percent of Fleet Finance's Georgia loans
have zero lender points.
The CHAIRMAN . Say that again now.
Mr. HAMILL. Forty-one percent of Fleet Finance's Georgia loans
have zero lender points, and 98 percent of Fleet Finance's Georgia
loans had 10 or less lender points. I give you that because it is
often alleged that there are lender points in the 20 and 30 point
range in this category. I'll get back to that.
With respect to the allegation that this industry engages in home
equity stripping , I'm sure that there are in fact some instances of
that. We have heard those from Mr. Drent and others. But let me
at least talk to that issue as it relates to the Fleet Finance portfolio
in Georgia, because I think it's instructive.
Usually equity stripping means that you have a lot of equity in
the house and the loan is a very small dollar percentage of that equity, in order to be able to get at that equity.
Eighty percent of the loans that Fleet Finance has made in Georgia have a loan to value in excess of 60 percent. That indicates that
the loans that are being made are in fact substantial in relationship to the equity in that home , not low loans in relationship to the
equity.
Fleet Finance lost in Georgia $5 million in foreclosures in 1991 ,
$8 million in foreclosures in 1992, and nationwide, by the way,
Fleet lost $24 million in foreclosures in 1992. And when it is often
alleged that finance companies, such as Fleet, are in the business
of making loans in order to foreclose on the loans in order to make
money, I would be hard pressed to have that be a business that we
would want to be in. In fact, at a loss of $ 24 million, it is quite
to the contrary.
The CHAIRMAN. Let me just stop you there. I take it, and you correct me if I'm wrong, that the loss that you just cited is on those
mortgages on which you foreclosed and which you collected , versus
what you have loaned against them. That, I assume , does not take
into account the rest of the mortgages where high rates were
charged, and the loan terms were fulfilled and there was profit
from those. Is that included as an offset or not?
Mr. HAMILL. These are the loans upon which a foreclosure took
place, the loss on those foreclosures. And I'm addressing the equity
stripping that says that you make the loan in order to be able to
get the house and sell the house and make a profit.
The CHAIRMAN. I understand that. Wouldn't it be fairer to say,
to really evaluate the profitability of that class of loans at the higher interest rates, and you've given us those numbers , that you have
to take all of the loans, those that payout and upon which you earn
the profits, and those that default, upon which you've cited the
losses . Wouldn't you have to take both sets of loans to really give
a full picture of the profitability or loss of that sector of activity?

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Mr. HAMILL. I think you obviously show that in the bottom line
of the company, and what this addresses, and what your point, I
think, goes to is the bottom line of the company. And yes, you can
put those two together to see the bottom line of the company.
The CHAIRMAN. I'm not talking about the bottom line of the company. I'm talking about the bottom line of that classification of
loans. Because, in a sense, you're taking a part of the loans that
in fact default and where you take a writedown because you've
loaned money, and you wash those loans through, and you've posted a loss on the figures that you cite.
I think what needs to be included at the same time is the profit
on the other loans that are in that category of loan that are up at
a very high level. To be fair about it, you have to do both. You have
to talk about what the class of business yields in profitability or
loss overall. Then if you want to take the part that has to do with
the mortgage losses on those that don't pay out, I think that's appropriate to do . But you can't do one without the other, and give
a fair picture.
Mr. HAMILL. Your assumption, I think, Senator, is that all of the
foreclosures take place on loans that are taking place at the higher
rate.
The CHAIRMAN. I'm not assuming that. I'm talking about these
loans that go into these areas, where we think this problem exists .
Mr. HAMILL. I would suggest to you that the foreclosures take
place, as Mr. Harshbarger knows in New England , we have had,
because of the poor economic climate over the last 4 years, many
many thousands of foreclosures in fact. It had nothing to do with
where the loan is made, in fact, but rather has to do with the fact
that somebody lost their job, and we unfortunately in New England
have had a terrific downturn in our economy, and had many people
who have lost their jobs.
It doesn't have anything to do with where they live. I think that
is in fact part of the issue here, and not a question of the profitability of the piece of the business that is not foreclosed on.
The CHAIRMAN. Let me ask you one other thing while we're on
this topic. I'm interested in knowing, and you've got the data there
with you, as an example you were using Georgia data earlier, the
average outstanding interest rate on that class of loans you cited
was 15.9 percent.
Mr. HAMILL. That's the average of all loans in the portfolio.
The CHAIRMAN. And you also said, just to keep the numbers
clear, as to what I think I heard you saying, there's obviously some
dissenters in the room, but you indicated that 98 percent of the
loans were below 21 percent.
Mr. HAMILL. Yes.
The CHAIRMAN. I don't know exactly what the practices are in
Georgia. I'd have to tell you, I gag on the theory that there's even
one loan in 21 percent or 19 percent or 18 percent. I understand
you can take the averages across the board here.
[Applause . ]
But correct me , if I'm wrong. If you get outside of GeorgiaSenator SHELBY. Mr. Chairman, can we have order in the hearing room? I think it's gotten out of control . We never have this in
other hearings . We're all sympathetic to the people that are being

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preyed on who have been exploited, but we do need order in the
hearing room.
The CHAIRMAN . Senator Shelby makes a good point. And it is important that we maintain order in the room. So I would ask that
everyone respond to that.
What I'm wondering is this . Is Georgia a State, that because of
its State laws , that shows us a profile, even within your lending
radius, and other States in which you operate, that would be different than we would see in other States.
If, for example, we looked at your lending in Rhode Island, or we
looked at your lending in Massachusetts, would we find average interest rates on this class of loans as high as the numbers you've
cited in Georgia?
Mr. HAMILL. Interestingly enough, the interest rates in Georgia
are not dissimilar to loans that are made in other parts of this
country. And Fleet Finance does business in 26 States in the country.
So on the question of interest rates, you would see a difference ,
it was addressed by Ms. Keest and others , in the question of broker
points and lender points. There would be more regulation in other
States. Therefore you might see a difference there.
The CHAIRMAN . Let me just stop you.
So the 15.9 percent, if we were to take State by State in terms
of the outstanding mortgages that Fleet has through the mortgage
company that would be roughly comparable throughout all the
States in which you operate?
Mr. HAMILL. Roughly comparable. There would be some States
that would be a little higher; there would be some States that
would be a little lower. But roughly comparable.
I looked back at the rate charts and the rate quotes that were
used over the years by Fleet Finance in order to see what rates
were, in fact, being quoted.
Senator D'AMATO. Mr. Hamill-if I might, Mr. Chairman I am
not going to be able to stay throughout.
You have obviously reviewed this situation carefully as it relates ,
not specifically to one matter that's in litigation, but to the entire
area. With the so- called "tin men" and others and people out there ,
the so-called independent contractors .
What conclusion have you come to if any as it relates to how you,
Fleet, are going to conduct your business activities now and in the
future? I mean , I recognize that there are some very real horrors
and that your institution has been involved by at least being lax
and not seeing to it that some guy is getting ten points for originating a loan that the borrower has no chance of ever paying back.
You recognize that, right? Yes or no?
Mr. HAMILL. Senator, may I address the question?
Senator D'AMATO . You recognize that there have been these egregious examples?
Mr. HAMILL. We have recognized there have been problems, and
we have taken steps. And I would like to address those if I might.
Senator D'AMATO. Good . I want to hear what you have done and
what you are going to be doing and what you recommend to be
done.
Mr. HAMILL. Let me take those in some order.

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First off, we think that limiting broker points by State law
makes sense .
Senator D'AMATO . Shouldn't you be doing that?
Mr. HAMILL. We have.
Senator D'AMATO. Look, if you're paying some guy 10 points, he's
going to be out there hustling like crazy. He's going to be selling
these people-it's your responsibility. That's outrageous. How many
points have you paid for a mortgage?
Mr. HAMILL. As I indicated, we have-if I can give you the statistics again on broker points , it is I think instructive in regard to the
issue of broker points. We have 75 percent of Georgia loans had
zero broker points. Ninety percent had 5 or less . I would suggest
to you also that Florida law, for instance, allows a combination of
10 points, 5 broker and 5 lender points, by State law. So if we were
doing business, as we do in Florida, that's accepted .
This is a question of State law. Each State has a different approach . We have taken the approach that notwithstanding the fact
that 90 percent of our loans in Georgia-this is Georgia now- have
5 points or less, we will in fact adopt that as our policy. We will
allow no broker to come to us with a loan who has charged more
than 5 points.
And I would also suggestSenator D'AMATO. But that has not always been the policy?
Mr. HAMILL. No , it has not.
Senator D'AMATO. When did you change this policy?
Mr. HAMILL. We changed this at the beginning of 1992. But let
me suggest to you, Senator D'Amato, that in fact in Georgia today
there are plenty of lenders charging more than 5 points because in
other States , by State law, you can charge more than 5 points. But
we have taken the policy because, for the very reason that you suggest, even though we think that the problems that are here are the
very edge, as I have tried to suggest, the very edge of some portfolios , we don't want to be subjected to the criticisms with respect
to being at the edge of anything.
So we have instituted a change in the way we do business , even
though many of our competitors do not adopt that change . We also
have a rate structure that we think is competitive in today's environment as well.
The CHAIRMAN. Let me ask you this . Isn't it also an acknowledgement that you , in that category, you feel there has been an
abuse? It isn't just to protect your good name, it's to protect your
good name against a practice that I would assume you've decided
in that area is abusive. If the costs get up to that point, it's a bad
practice and it's one you don't want to continue; isn't that a fair
conclusion?
Mr. HAMILL. No , I don't think it is. But it is one I can see you
logically coming to because it sounds-but we are, again, a major
banking company. We have spent, and I think Senator Kerry has
alluded to this, Mr. Murphy who is our Government relations office, who spends much time in New York , has spent enormous time
in the field of community reinvestment. Ron Walker, who is here
with me from Fleet Bank of Massachusetts , and many of the people
in this room know him. We have spent billions of dollars in trying

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to do what was just talked about, and that is to revivify some of
these cities.
I happen to live in Boston, and we are doing an enormous
amount. Mr. Murphy lives in New York City. Others live in other
cities . We are spending too much to try to do what you're trying
to do, and that is help the inner-city, to be at any point criticized
for something like this.
So what we said is that our policy in effect will be 5 points , even
though those points don't come to us. These are broker points that
go to the broker. We are going to take the position that no broker
that comes to us will be able to earn more than 5 percent, no matter where we do business , even though the State law allows more
than that in other States.
Senator D'AMATO. Let me ask you this. Should the State law be
changed?
Mr. HAMILL. I think that the issue of State law is, in my
opinionSenator D'AMATO. Should there be a cap on brokers?
Mr. HAMILL. I would suggest at least on the basis of the policy
we have taken that we would support a policy of a 5 percent cap
on brokers .
Senator D'AMATO. Because isn't there something if you start
getting above that 5 , isn't there something that's rather out of the
ordinary?
Mr. HAMILL. It depends upon the size of the loan , Senator. It depends on the size of the loan. If it's a $ 100,000 loan, yes. If it is
a $ 10,000 loan, a broker will tell you that he's trying to help somebody get a loan who might otherwise not get credit. Five percent
is not an unreasonable amount, he thinks, for the time and effort
that he has.
The CHAIRMAN. If I might
Mr. HAMILL. You haven't allowed me all of my time.
The CHAIRMAN. I want you to conclude. Let us save the rest of
our questions .
Senator KERRY. Mr. Chairman, if I may, I have an 11:30 I have
to go to. Can the record remain open for submission of questions.
The CHAIRMAN. By all means. Let me just ask Mr. Hamill how
long he has. I want him to finish and we've interrupted him before
he's finished. You should be given the chance to finish and I want
to do that now.
Senator Moseley-Braun wants to make a comment and others
may as well. Mr. Hamill, why don't I give you-what do you need?
Mr. HAMILL. I am not sure how much time I took, Senator.
The Chairman. Why don't you take 2 or 3 minutes and then we'll
go to questions.
Mr. HAMILL. I would appreciate it.
The CHAIRMAN. Senator Domenici, I will acknowledge you but I
don't want to get into further discussion until he finishes.
Senator DOMENICI . Mr. Chairman , I have expressed my views on
the seriousness of the problem and I can't stay. But I want to suggest that the heart of this problem is redlining. Because if we
didn't have redlining, there would be more money available in ordinary ways and I would hope that we really get to the issue. While
this is a major problem, it is a residual problem to the extent of

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I don't know what percent, 50, 60, 70 percent. Conventional bank
loans don't have 20 points. If we can't get money into these areas,
these kinds of problems are going to proliferate.
The CHAIRMAN . Let me say, Senator Domenici , we are having a
hearing on precisely that subject next week, because all of these issues fit together.
Mr. Hamill, why don't you go ahead and conclude.
Mr. HAMILL. I finished on that last number, the 90 percent of the
brokered loans that we do business with on Fleet Finance had 5
points or less. Let me go on to the issue of foreclosures in general.
It is often said that the consumer finance companies forecloseand at least it has been said about Fleet Finance on thousands
and thousands of homes. The number is , in 1991 and 1992 , Fleet
Finance foreclosed in Georgia on approximately 530 loans in each
year out of 20,000 loans in the portfolio.
The CHAIRMAN. 530 out of 20,000 in what quarter?
Mr. HAMILL. About 2 percent per annum. And we have compared
the 2 percent to the national average, and it is right in line with
the national average.
We have also looked at the race of the borrower upon which foreclosure has taken place, where we can tell that race of the borrower, because we don't always know what the race of the borrower
is. But where we do know it, half of the foreclosures have been on
people who are black and half have been on white.
The CHAIRMAN. Do you have numbers prior to 1991 and 1992?
Mr. HAMILL. They're smaller because the portfolio had been
building up.
The CHAIRMAN. Did the percentage go down too?
Mr. HAMILL. It stays around 2 percent. But it is not enough to
make a big difference because the denominator and the numerator
both go up .
The next point I would make is that it is generally argued, and
I agree with Ms. Keest, that if there is a loan made where the debtto-income ratio of the borrower is out of line , we should never have
made that loan . We have done some of those. They've gotten
through. We buy some loans in bulk and we didn't do a good
enough job.
But let me give you at least a sense of what we have. Generally
the criteria is the debt- to-income ratio should not exceed 50 percent. But 62 percent of our borrowers had debt-to-income ratios of
less than 40 percent, 62 percent. Seventy-eight percent had debtto-income ratios of less than 45 percent, and 95 percent of the borrowers have debt-to-income ratios of less than 50 percent. If it is
over 50 percent, there is either an explanation or an error. We
have made errors ; we are not perfect. I can give you the percentages going up.
But because we think very strongly that you have to be able to
repay the loan, and as I mentioned the loan values here are not
equity stripping, because we have made higher loaned values than
has been alleged in the past.
I would say to you also that our debt-to -income ratios here are,
I think, a critical policy issue for you to think about. Representative Kennedy in the hearings in the House suggested that maybe
there should be a 40 percent debt- to-income ratio as it relates to

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the question of this issue. Mr. Harshbarger indicated that banks
should have flexible lending guidelines.
I have worked with the Massachusetts Affordable Housing Alliance and others to try to come up with those flexible guidelines.
There is a question on the table. That is, how flexible should one
be, and is it right to have a loan made on debt-to-income ratios in
the 40 to 50 percent range?
I say, yes, because as much of a tragedy as the foreclosure of
anyone's house, and we hate it because not only is it a personal
tragedy, but people lose money, I would say to you though that for
the 98 percent of the people who could borrow that would not otherwise be able to borrow because of poor credit histories, who could
not walk into a bank because of their prior credit history, it is most
terribly important for them to have access to credit.
With respect to the issue of targeting minority neighborhoods, I
have given you the foreclosure numbers. Half of our foreclosures
are against whites, half of our foreclosures are against blacks . If we
were targeting, that would not be the case.
We have stepped up to the plate, and I am going to finish by just
saying what we have done. We have stepped up to the plate. I have
said we do not want to be associated with any part of a fringe industry. We want to be in the mainstream. We have put on the
table for those people who have been harmed in any way because
of inadvertence, because we have missed some loans that are outside of our policy, that we have not done something that we should
have done. We stepped up to the plate not because we have a legal
admission of guilt but because we wanted to be good corporate citizens. And it has been thrown back in our face because we put a
$38 million program on the table to help people that have had
problems.
It is thrown back in our face by class action lawyers who say we
cannot institute that program because they want to bring a class
action . We have offered to give a release to anybody who comes forward under this program in order to be able to make sure that they
are not losing any legal right under a class action and we have
been told, no, we will not allow our clients to deal with you.
Now, before the class action lawyers got involved , we had been
able to help 700 people who had been having a hard time making
their payments and they have come to us and we have worked with
them , and are willing to continue to work with them.
Finally, I would say, that in terms of the recommendations , I like
Senator D'Amato's notion of being able to give even better disclosure. I like the licensing issue with respect to the brokers so that
you limit the points brokers can charge. I like stricter licensing of
home improvement contractors because I believe that many times
the problems start here, as Mr. Harshbarger indicated, with the
home improvement contractor. I don't think that the banks and the
finance companies can estimate values and that's what winds up
having to happen when the loan is made, if the value of the home
improvement isn't what it was supposed to be, it is impossible for
the bank to be involved.
Finally, I would say that as far as Ms. Keest indicated this, I
think consumer education here and better disclosure is in fact, and
I am not for doing away with Truth-In-Lending, in fact, the way

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in which we this company discloses its loans under the Truth-InLending Act, we are all for it, we would like to see it enhanced,
and we would hope with better education that will help. In fact,
people who do not understand what it is that they are getting into.
The CHAIRMAN. As we start the question period, I am mindful of
the fact that we are moving along in the morning and we've got another panel coming.
I am going to yield my question time initially to Senator
Moseley-Braun who has not had a chance yet to make an opening
comment. Let me just start with you and then we will go to Senator D'Amato , and we will go in the normal order.
OPENING COMMENTS OF SENATOR CAROL MOSELEY-BRAUN
Senator MOSELEY-BRAUN . Thank you very much, Mr. Chairman .
I am going to ask that my opening statement- instead of reading
it, I am going to ask that that be submitted for the record. Because,
quite frankly, all the general things I was going to say in an opening statement have been overcome and overwhelmed by the testimony that we have heard .
The CHAIRMAN. Without objection , so ordered .
Senator MOSELEY-BRAUN . I am particularly taken by Mr.
Hamill's testimony. That is most of what I have heard. And the apparent inability to understand how it is that what Fleet does and
these other companies that we are looking at really has the effect
of enforcing a tax on poor people. It is a tax that is all too often
enforced on people who are black and brown.
I listened to your remark when you said "half of our foreclosures
are black, another half are white." The fact is that the AfricanAmerican population and the Hispanic population are, by definition, minorities. So you are talking about 50 percent of your foreclosures on 10 percent of the population , which is very different
from 50 percent of 100 percent of the population. That has a disproportionate impact on people who are black and brown .
The second point to be made that should just be very evident,
and this gets in part to what Senator Domenici was saying, is that
your company steps in where the majority of companies will not
lend . We have already seen the HMDA study, the study that reported that black and Hispanic mortgage applicants in the Boston
area are roughly 60 percent more likely to be turned down for a
mortgage loan than whites. That's geographic redlining.
But I want to submit that what we are looking at here is economic redlining as well, that it goes beyond just geography and
that it really does go to people who literally have nowhere else to
turn and they are preyed upon by companies that will make 21
percent because they can. That's what we are looking at is the situation in which people are subjected to lending practices because
they have no options. There is something terribly wrong with that.
And I would daresay, quite frankly, our failure to look at specific
legislative solutions to this area which we have known about- I
mean, this is not new news.
It is just worse now because of the economic downturn that we've
just come through . These practices have been going on for quite a
while now. They have been exacerbated by the recession that we
have just come out of, but they are not new.

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Quite frankly, Mr. Chairman, I would very much like to hear
from the other witnesses specific proposals for change, what we can
do to fix this. Because 21 percent, you testified Mr. Hamill, that
98 percent of your loans were under 21 percent. It is terrifying to
me what the other 2 percent might have been.
But even more to the point, that is no benchmark when mortgage
rates have not been in the double digits for over a decade.
Second, I daresay without listening to your testimony you did not
testify specifically in terms of your finance charges, your late fees,
the time of turnover on these foreclosures, those kinds of things
that are particularly hard for a family to deal with when someone
loses their job, when there is a recession, or whatever.
All of this in my mind, Mr. Chairman, comes down to a poverty
tax. It comes down to an anchor, a weight, that we have failed to
lift if we haven't been responsible for putting it there in the first
place. We have failed to lift it on people who really have nowhere
else to go. Literally the boats that are stuck at the bottom are
stuck there in large part because of practices like this.
I think we have an absolute moral obligation to move quickly on
addressing specific recommendations for change and what we can
do to make certain that this kind of activity ceases immediately .
Thank you .
The CHAIRMAN. Thank you.
Senator D'Amato.
Mr. HAMILL. Senator, I appreciate your comments, but if I might,
just on a couple of points?
One is the rates that I was talking about, that 98 percent are
below 21 percent, are as a result of a portfolio in Georgia that has
been built up over the last 7 years. Yes, the interest rates today
are much lower than they were. But as you look back over the period of the last 7 years, you will find that in fact interest rates have
come down substantially. So it is part and parcel with that.
Today the interest rates are lower and, in fact, the rates that
this company makes range from 9.9 percent up to, at this point in
time, about 14 percent. It is a different rate environment.
I am giving you a picture of a portfolio, not at a point in time.
Senator MOSELEY-BRAUN. OK, Mr. Hamill. I was going to skip
over asking all the questions that I had. But let's talk about that.
You talked about an average interest rate of 14.8 percent. What is
your high?
Mr. HAMILL. As I indicated, there are 2 percent of the loans over
21 percent. The highest rate that I can see in that portfolio is I
think a loan of about 28 percent or 29 percent. Again, it never
should have been made . But when I look at those loans and I look
back and wonder why those were made, those were mistakes . And
I have said when you look at 98 percent or 99 percent of your
portfolio being in what are, I think reasonable rate ranges , I am
not here to say that we're perfect. But I am here to say, let's make
sure we keep it in perspective.
The CHAIRMAN. Senator, if you will just yield for one minute, if
I may say, because I don't want that to pass , I think an average—
I heard two numbers , 15.9 percent and 14.8 percent.
Mr. HAMILL. 14.8 percent is a note rate, and 15.9 percent is an
APR.

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The CHAIRMAN. The annual percentage rate average. I have to
tell you, and I appreciate the fact that you have changed your practices and you mentioned that today, so you are not doing things the
way they were done in the past and you have acknowledged that
mistakes were made along the way. I think that's direct and forthcoming.
I've got to tell you that 15.9 percent on average as an APR bothers me. It bothers me and it ought to bother you, quite frankly.
Mr. HAMILL. Can we speak about that, because I think it's a very
important issue.
The CHAIRMAN. We're talking averages right now. That means
half of them are above that average.
Mr. HAMILL. What I am trying to do is put it in perspective with
the 98 percent in order to not just give you an average. Because
I understand that averages can be misleading. Therefore , I am giving you the 98 percent below.
In 1986, the rates of this company, not different from rates that
were done by consumer finance companies-and this is not a fringe
industry. The Household Finances and the Beneficials. These are
companies that have been in business for 50 to 60 to 100 years .
But the rates in 1986 ran from about 15 percent to 18 percent, depending upon the credit of the borrower.
Now, I would say to you that if a person has a credit problem
and a credit history that makes him unable to go into a bank and
borrow, unable to qualify for a credit card and is able to bring
down their monthly payments to a level that is affordable to them,
and needs the money to be able to pay for something, whatever it
is that they want to pay for, that is the going rate.
I would say to you, I'd like to be able to lend to everybody at
prime rate. But that is not the way the economic system works.
The CHAIRMAN. I understand exactly what you're saying. But I
think there is a part of the story that has to be added to that that's
critical here. And if you don't add it, then it's a lopsided story.
The fact of the matter is that traditional lending institutions
have redlined certain areas of the community. We know this in the
urban areas . The Federal Reserve has given us a study about discriminating against people based on race. And it is a very pronounced pattern .
When somebody can't go and get a loan who is creditworthy in
the normal system and they are pushed out of the normal system
into this secondary kind of a system where the mortgage lenders
who have been around for a long time, as you say, 15 to 18 percent,
they're being price gouged because they are being denied credit
where they should be able to get it and I understand how that system works.
But I don't want to put a gloss of attractiveness on it or of acceptability on it, because it is very troubling to me and I think
frankly it has hurt this country.
Now, you've got to take both halves of the problem. The fact that
there were rates out there at this level, 15.9 percent, that's the average. So you got half the people on the APR that are above that
level . Or I should say half the average is above that level .
Mr. HAMILL. Let me, if I might-these are second mortgages ,
these are not first mortgages . Although, as Ms. Keest said, some

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of them technically are first mortgages. But they are not purchase
money mortgages. These are mortgages that are in the truest sense
of the word second mortgages.
Second mortgages in banks, just as in finance companies, carry
higher interest rates than they do with first mortgages. You cannot
compare first and second mortgages.
I am very familiar with the question of the redlining issue. But
here is an industry, in fact, that is not redlining and I don't think
it's reverse redlining.
As we look at the statistics of this particular portfolio that happens to be Fleet Finance in Georgia, which has in Fulton and
DeKalb counties a high percentage of people of color, I think it is
usually viewed as a city that has done a great job with race relations by the way, and a model for many parts of the rest of the
country .
The fact is that our portfolio reflects a split along the lines of the
population mix in Fulton and DeKalb counties. Therefore, I would
say to you that, one , there is no redlining going on in this company.
Second, I would say to you that the people who are borrowing, even
if the banks were doing business in some of the neighborhoods
where some of the people who are borrowing might live, the credit
history of the borrower who comes to a consumer finance company
does not make that person qualified for a loan. And I have dealt
with this on the bank side.
Let me put my bank hat on for a moment. We have struggled
with this and Mr. Harshbarger knows that, Senator Kerry knows
that. We have been pushed and I have tried to push to get Fannie
Mae and others to take loans, and you have had hearings on this ,
that are beyond the traditional debt-to-income ratios that Fannie
Mae would use or FHA uses and try to get them up if you will.
They won't do that usually unless there is some kind of a subsidy
that comes from the Federal Government.
My point here is simply that these are borrowers, whether they
be white or black, who are not able to go into a bank and borrow
because of their credit problems. And I think they still, from a public policy standpoint, they deserve credit. They should have access
to credit. And I think that the rates that are charged are reflective
of the cost of the credit, the borrowing, and the servicing costs.
The CHAIRMAN. If you will just withhold for a minute, Senator
Moseley-Braun , do you have one other comment? Then I want to
go to Senator D'Amato here because I've actually given you my
time and I've interrupted you. Do you want to finish? Then I am
going to go to Senator D'Amato.
Senator MOSELEY- BRAUN. Thank you, Mr. Chairman .
I am glad you asked the question about the high average. I wanted to specifically ask Mr. Hamill just on a small and very specific
note, will you revisit that 28 percent mortgage and rewrite it for
those people?
Mr. HAMILL. In fact, we have a program—I don't know if you
were here when I mentioned it. We have in fact on the table a $38
million program, $25 million of which is intended to do just that.
We have said to people who have rates that got through our screen,
come in and we want to do just that.

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Senator MOSELEY-BRAUN. I don't mean them come in. If you
know who those people are because that's in your portfolio, will you
reach out to them and rewrite those mortgages?
Mr. HAMILL. In fact, we have tried to do that. We have been
thwarted by the class action lawyers from continuing to do that.
I am more than pleased . We don't like the fact that that got
through our screen. We're not perfect. We've said that we got 98
percent of our loans that we think at least have gotten through ,
but that's not acceptable, that 2 percent or 1 percent or whatever
the number is that have gotten through the screen . We want to rectify that. So, yes we will. I would hope that I will be able to get
through the legal entanglements in order to be able to do just that.
Senator MOSELEY-BRAUN . Your points and finance charges , do
you aggregate those? What are they? Are they aggregated and become part of this foreclosure package?
Mr. HAMILL. As you know, the lender fees are part of the APR,
so they are included in the APR.
Senator MOSELEY- BRAUN. That's the 15.9 percent?
Mr. HAMILL. That's the average , 15.8 percent. When I look at the
portfolioSenator MOSELEY-BRAUN . I think you've got me where you got
the Chairman a moment ago. It's 14.8 percent interest, 15.8 percent APR.
Mr. HAMILL. And that goes to the question of the calculations
under the Truth -In - Lending, which is the way in which we disclosed to the borrower what is the cost of the loan. As I mentioned
to you, 98 percent of the loans that we make have 10 points or less .
Senator MOSELEY-BRAUN. But what about your finance charges.
and your late fees?
Mr. HAMILL. Those are the finance charges the lender
Senator MOSELEY-BRAUN . Do you have a separate category of
late fees?
Mr. HAMILL. On late fees we do. If I could ask one of my colleagues , I don't have a specific on what the late fee is .
[Pause. ]
It's usually 5 percent after 10 days , I'm told. I do not know that.
Senator MOSELEY- BRAUN. Five percent of what?
Mr. HAMILL. Of the payment due. If you owed that month $ 100
and you went 10 days, it would be 5 percent of the $ 100 ; it would
be $ 5.
The CHAIRMAN. If I may, I think I've got to now yield to Senator
D'Amato so we stay within the time constraints here.
Senator D'Amato.
Senator D'AMATO. First of all , I have to say, Mr. Hamill, I hope
you can continue to reach out, as you've indicated before , and Senator Braun has indicated , to those people who have been victimized
and who have gotten through the process and through the system.
And their counsel would do well to permit that, and they can continue their suit . But they should not be so driven by their own interests that they disadvantage people that can and should be
helped.
Second, it would seem to me that where you have built up tremendous costs at these kinds of interest rates, which are truly excessive, that there would be a forgiveness of those interest rates

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that have accumulated, a certain forgiveness, a recognition that 28
percent or 25 percent or 21 percent is absolutely out of line. And
certainly, in the cases where it can be clearly demonstrated that
people would never have the ability to make the payments given
their income, that that recognition should be taken into consideration so that it is not just a matter of taking a situation and saying, well, you owe us $50,000 with the accumulated interest, et
cetera. Now we will just stretch it out and give you a new and
lower interest rate.
So I hope there is some kind of reasonable attempt to do that.
Because I think that then demonstrates that you are on the cutting
edge of doing the right kind of thing for the right reasons. And
certainly don't question your motivations as it relates to that.
I would like though, very much, because he has been a leader,
to ask the attorney general, Mr. Chairman , Mr. Harshbarger-it's
good to see him here I didn't think that earlier I would be able
to come back and see you again, Scott, in this capacity. So I am
delighted that I am able to be here to ask you that question . Someone else wanted to do that.
What legislative remedies do you believe should be initiated on
the Federal side? In our bill , we call for a Federal study, for example, of certain things such as should there be a cap on brokerage
fees and commissions?
I don't know whether there should or shouldn't be or what the
cap should be. I think we should get the regulators to give us that
information.
But you have been a pioneer in this area along with Senator
Kerry, your predecessor. So consequently, what would you suggest
coming from the State side that you think the proper role of the
Federal legislation should be in this area?
Mr. HARSHBARGER. We made a number of suggestions. Many of
them are geared to State regulation. But the biggest thing that we
heard from all of the industry at various times was the lack of uniformity and consistency, that things would vary from place to
place, and therefore those who chose to be unscrupulous could always fall back upon . It was vague, it was technical, it was overlapping, it was duplicative, there's too much regulation . And those
who tried to comply were having difficulties.
So one of the most interesting things for us about the regulations
that we have the power in Massachusetts to issue under our
consumer protection rates was we had long hearings with mortgage
companies, with banks, with brokers, and the vast majority of the
industry proposed most of the provisions that are contained in our
regulations that have everything from fair and simple disclosure
langauge, multilingual translation requirements, documents in
other languages, interpreter services made available , assistance
provided to people for mortgage transactions to issues such as how
you do define APR, what points you can charge , what you cannot
charge, what it should be.
We suggested a cap on the rates that would be some percentage
in excess of the prime rate. The details of those regulations addressed many of the kinds of problems that people addressed . And
I felt consistently , Senator, that it would have been very helpful to

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have had a Federal umbrella framework like Truth-In -Lending. We
kept coming back to people saying, make it like Truth-In-Lending.
The only point I want to make is not in defense of Mr. Hamill,
but was that we found that if we could have had the protections
applicable to banks available to the victims, we would have had
remedies. That was the biggest difference .
In this other world of consumer finance, the protections available
under banking to banks were not available if you took your mortgages and loans from others . That was a very frustrating situation .
A lot of our regulations and rulings were related to that. The second is your CRA looks that you're doing in terms of what is reasonable to expect of banks .
But I would urge you to include in mainstream financial institutions legitimate first and second mortgage companies as well.
There is no particular reason I could see that they should be excluded from these areas of regulation and control .
Senator D'AMATO. Mr. Chairman, I want to thank you , and I certainly thank the attorney general for his comments and his work.
Mr. Hamill, we thank you for coming forward today and making
yourself available. Obviously I think you go a long way when you
do indicate that there are certain abuses that have taken place.
Now the question is how do we address and provide a remedy for
those people who have been victimized, and what actions should we
take to minimize future victims .
I think Senator Domenici and the Chairman made a point. This
is going to take place as long as there is not sufficient capital that
can and should be made available to creditworthy people.
I'll make one other aside.
I don't believe, Mr. Hamill, I don't believe, and this is the genesis
and the core of my disagreement with the administration and others when I proposed caps on credit cards, that everybody should be
encouraged to borrow.
I think it's wrong. I think it's absolutely wrong. When you get
into this business and say, oh, well, look, people who are poor
should be given credit. Let me tell you, if they don't have a possible
chance of making the payments, you're going to enslave them, and
it is wrong. Financial institutions should not do that.
And then what you do is, you play-and I'm not saying you, but
I'm saying this is the argument-you mean you would deprive people of credit that otherwise-you're doggone right.
If a person is loaded up with bills , has got a family to support.
Loan sharks do that. The guy's a gambler and he's desperate, and
they say, OK, we'll loan you $ 1,000, and you've got to pay us x percent a day back . We're not helping people.
And I'm not coming down on you, but I just heard that doggone
argument from the last administration , from the banks that came
out and said, oh, no, credit card interest rates are wrong, because
you'll deprive the very people who need it most . That's nonsense.
At some point in time, you've got to take a look and see, does a
person, can they pay it back. And it's not wrong to say to them,
we're not going to make it available to you. We'll work with you .
So I just have to say, Mr. Chairman, we too have a responsibility
of being able to say that in certain areas , if you make credit avail-

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able to people that have no chance of ever paying it back, that is
wrong.
And I'll tell you, Fannie Mae shouldn't back you up, and Ginnie
Mae shouldn't back it up, and the Government shouldn't back it
up, because then what you're going to do is, you're going to have
the taxpayers paying for those defaults .
We've got to come to some kind of a reasonable balance in this.
I thank the Chair.
The CHAIRMAN. Thank you.
Senator Shelby?
Senator SHELBY. Thank you, Mr. Chairman .
I believe this helps make a case before the committee for something you've had hearings on, Mr. Chairman, on why we need community development banks around to help people that are the most
vulnerable , in ways in which they won't be exploited.
I'm one Senator that's very interested in lifting the regulatory
burden on banks in America in certain areas.
But a case like today doesn't help that much. Because none of
us are interested in lifting the burden on regulation if lack of regulation in an area is going to help exploit the most vulnerable of our
people.
A lot of these loans , a lot of these people that we've seen horror
stories here and know about, a lot of people would be much better
off if they had never taken a loan.
If I were a lender, Mr. Hamill , I would be very very careful of
buying loans from people in the market. You know, most lenders
do, especially where they're second mortgage loans on older people
and poor people.
But there are horror stories here that we've read about where an
elderly man 75, 76 years old has something done to his house . He
has some remodeling done, with the money he receives from a loan
and his payment exceeds his monthly income.
If I were buying the loan as a lender, I would look at the credit
report of the borrower. And if the loan called for 27 percent interest, or 22 percent interest, I would look at the ability of the borrower to pay back. I also wonder if there was fraud involved here.
I don't want us to regulate lenders any more than they have to
be regulated. But perhaps, if people are going to be exploited like
this, this is an area that we're going to have to look into , nationally, and State by State.
I'd be interested in the documentation . If lenders, finance companies, home remodeling companies, are unscrupulous in the way
they get borrowers to sign up, I would like to see how. Is it the documentation? Are the papers fraudulent? Do people know what they
are signing? How do we police this?
How do you police it, if you were to buy these loans later? You
assume that if you buy them on the market, that is what these borrowers assume, that everything is on the up and up. Many of these
borrowers are desperate-perhaps they are elderly and in need of
cash, perhaps they are simply uneducated and do not understand
sophisticated loan documents . Some of our consumer protections
are too sophisticated to actually protect consumers . We need to
simplify the paperwork burden, both for lenders and for borrowers.

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I hate to see Government micromanagement. But to protect our
most vulnerable, the Government may have to get involved.
Some lenders are obviously exploiting these people. I'm not saying whether you are or not. But why can't lenders police this problem in some way? If they can't, Government's going to step in.
Do these people need access to credit? Obviously, they need access to credit.
I would be interested to know, Mr. Hamill, since you are the
spokesman and an officer, what is your profit margin in the area
of second mortgage loans? How does it compare to credit cards?
You know, the Senate reacted to credit card interest rates . I
know there's a lot of credit card losses, but rates have been unreasonably high. It's also a very lucrative business ; we all use credit
cards. I understand that. It would be better if each person paid his
bill every month. Not everyone can pay his bill off each month. I
would be very interested in seeing the profit margins of these businesses. Do you want to comment on that?
Mr. HAMILL. I want to be careful. Generally the rates on credit
cards over the period we're talking about have generally been higher than the rates over this last 7 or 8 years. We're into a lower rate
period. Many times during the period , rates would have been higher on many of the loans that were being made in this portfolio.
Yes, there are losses, but the credit card business has been a
good business for banking over the years . It in fact has produced
profits for banking. So I would say that in general, I would say
that the credit card business has been more profitable for banks.
Senator SHELBY. Than second mortgage lending?
Mr. HAMILL. Than second mortgage lending.
Senator SHELBY. What is the loss ratio in your portfolio, just
being generic on second mortgage loans?
Mr. HAMILL. The foreclosure rate, as I mentioned , in Georgia is
around 2 percent.
Senator SHELBY. The foreclosure rate is not always indicative of
a loss though, because you've got collateral. A home, a piece of
property, and there's equity in that home and you're looking at that
as part of your collateral , are you not?
Mr. HAMILL. Yes , we are.
Senator SHELBY. And you recapture that?
Mr. HAMILL. I'm saying, even after you go through the process
of a foreclosure, nationally in this company, we lost $18 million ,
and in Georgia we lost $8 million.
Senator SHELBY. You lost $ 18 million out of the whole operation?
Mr. HAMILL. In the foreclosure process .
Senator SHELBY. As an offset of how much profit though?
Mr. HAMILL. Again , I think that the issue isn't profit. If you look
at the company as a whole, it is a company that has generally provided about 10 or 11 percent of the Fleet Financial Group's earnings .
As you well know, a higher percentage in 1990 or 1991 , as New
England banks went through a terrible time, almost no profit this
year in 1992.
Senator SHELBY . But a lot of your own testimony on Fleet Financial's offices are located in Atlanta, GA, and they do a lot of business in the South, where I am from too, don't they?

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Mr. HAMILL. In fact, we do business all over the country. We
have, as I mentioned, the principal assets of the company, if you
will, though, are the banks in New York and New England.
Just on an employee count basis, if you will, there are 27,000
people who work for Fleet Group throughout the United States.
There are a thousand people who work for Fleet Finance throughout the United States. So 27th of the employee count of the whole
Fleet Group of all companies is made up of the people in Fleet Finance.
Senator SHELBY. Let me ask you a question like this.
Assume you make a second mortgage loan to me, for example.
And I have a home in Tuscaloosa, Alabama, which is my home.
And whoever, if I'm dealing directly, you'd go out there and do at
least a windshield appraisal of the house and the property for a
second mortgage loan. You'd check to see if I have a first mortgage
lien on the property, and how much it is. That's part of doing business in making a second mortgage loan, is it not?
Mr. HAMILL. Yes, it is.
Senator SHELBY. For example, if I had a piece of property that
might be worth $ 100,000 on the market, then I owned say, $ 10,000
or $15,000 on an old mortgage that I was paying off on my home,
which is typical, and you came in and loaned me $40,000 to fix up
the house, so to speak, and give me some walking around money
or whatever, you're looking at the equity in that home that you're
protecting yourself by making that loan and putting up the mortgage on the equity. In other words, you'd be fairly well covered,
wouldn't you?
Mr. HAMILL. I think the most important point, thoughSenator SHELBY. Isn't this important? You make a second mortgage loan because you believe that it is relatively safe ; a loan on
a person's home, when they have equity there, is relatively safe .
Isn't that part of the criteria?
Mr. HAMILL . SenatorSenator SHELBY. Answer my question . Isn't it part of the criteria?
Mr. HAMILL. It's part of the criteria. The first criteria, though,
is whether or not you have a job and whether or not you have the
income to afford the loan that you want.
Senator SHELBY. What about some of these horror stories where
a man who is drawing Social Security and had equity in his home,
but the loan payment exceeded his monthly income. It looks like
a credit report would pick that out. And if you were a prudent
lender, you wouldn't loan.
Mr. HAMILL. It shouldn't have been done. As I indicated, we are
not-and, again, I go back to the statistics in this company with
respect to the debt-to- income ratios that have been used in making
the loans-62 percent of the borrowers in this company have debtto-income ratios below 40 percent.
The general criterion is to not go over 50 percent. We've gone
over that. Sometimes somebody has got some other assets . Sometimes it's a mistake. We buy loans in bulk.
Senator SHELBY. Let me ask you this. Let's assume that same
scenario a minute ago . Let's say I or anybody, these people in here
from Georgia, let's say they had a home that had $ 15,000 owed on

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it. The property you appraised was $ 100,000 . They wanted to borrow $25,000. Do you take in the amount of equity in that house,
the risk when you formulate the interest rate they are going to
pay? Or do you have a standard interest rate for a second mortgage
loan?
Mr. HAMILL. The better the credit of the borrower, you want to
make sure, first off, what the credit of the borrower is. That person's going to get the best rate.
Senator SHELBY. And is part of the credit the collateral?
Mr. HAMILL. You're going to look at both the income of the borrower and the collateral.
Senator SHELBY. How important is the collateral?
Mr. HAMILL. It is of secondary importance. It is not of primary
importance. It is clearly a piece of collateral that we don't want.
Senator SHELBY . Without the collateral, you wouldn't make the
loan, would you?
Mr. HAMILL. The second mortgage business has grown up in this
country, as I indicated, because of the fact that people wanted access to the equity in their homes to be able to borrow.
But the most important thing in our case is, every time we foreclose on a home, it is both a personal tragedy and it is a loss to
us. We lose money through the process of foreclosure.
Senator SHELBY. You don't always lose money, because if the collateral is there, you don't lose money.
Mr. HAMILL. In other words , my point is, though, as I look at the
entire number of foreclosures that have been done, there may be
some that there is in fact enough equity to cover, but when I look
at all of the foreclosures, we lose money.
The second thing is, the foreclosures that have taken place since
I've gone back and looked at the records, the reasons the foreclosures have taken place has generally been because people have
lost their jobs , because of the economic conditions.
Senator SHELBY. Why do people in the lending business-I know
you've got great folks, and I assume you're one of them, I just assume that- but why do they gouge and exploit the most vulnerable
people in America?
Mr. HAMILL. I would suggest, Senator , that they do not.
Senator SHELBY. But there is evidence that they do . I don't say
the overwhelming majority of evidence. There is evidence here, sir,
that there is overwhelming exploitation and gouging when you're
charging 28 or 29 percent or 24 percent to the most vulnerable.
There's a lot of fraud there.
I'm coming at you with an idea to deregulate, but you can't deregulate this kind of stuff.
Mr. HAMILL. I'm not suggesting that you deregulate Truth - InLending. I'm not here to say that.
Senator SHELBY. Truth- In -Lending sure didn't help these people ,
because a lot of them didn't understand that. Maybe it wasn't explained to them.
Mr. HAMILL. That goes to the question of education .
I'd make two points .
One is, I have not, and I'm sure you've seen a lot of different entities, whether it be businesses or other kinds of entities , I've found
no entity that is perfect, but as I look at the portfolio of this com-

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pany, I am saying to you that we have a very small number of people where we missed it. We bought a package of loans and we
didn't do the job, but it's a very small.
I would urge you, as we talk about this, that we have 98 , 99 percent of the customers that are being well-served, and I want to
make sure that 100 percent are. And we're taking all the steps we
can. We've taken further steps to change the way in which we buy
loans. We're dealing directly with the broker now, even though the
business is generally done through correspondence.
Senator SHELBY. I know my time's expired, but shouldn't you
bend over backward when you're dealing with the most vulnerable
of our population , those that are under educated people, those that
are desperate for money, not to exploit them?
Mr. HAMILL. Yes, I agree with that. Absolutely. We have, as a
company, and as I indicated earlier, we're spending billions of dollars trying to help rebuild the cities of America. That I would suggest to you indicates that the ethical nature of this company is
high.
Senator SHELBY. But you don't want to rebuild it on the big profit margins you make off of these people, do you?
Mr. HAMILL. Not at all. What we want to do is make sure that
if there is an error, that we correct it. And we're taking those steps.
Second, I think we want to make sure that in the context of this
business, that it is done without having to come to the Federal
Government for subsidies in order to make it work.
And if it means that we cannot provide credit to people who are
at the upper end of the debt-to-income ratio , then we will not.
Those people, going to Senator D'Amato, and perhaps your comment also, maybe there are people who should not be borrowing
here. We thought we were doing that by limiting the debt-to-income ratio in this company to 50 percent.
Maybe it should go down lower. We will do that if in fact that
seems to be the way in which we can best get to the issues that
you're talking about , because it is not worth our effort and time to
be in a business where , even though it might be doing some good
for an individual who would not otherwise be able to borrow, it's
not worth it for us to be accused of trying to rip off people.
So we will move that down the scale, and make sure that we are
in fact not going to be accused of that in the future.
The CHAIRMAN. Let me just say on that, Mr. Hamill , we're going
to help you do this.
[ Laughter . ]
That comes to the point, too, where you've got to put your banking hat back on. Because we think the banking side of a lot of
major entities in this country who enjoy Federal Deposit Insurance ,
and access to the Fed window and other certain Government granted assets and help, have to do a better job of coming in there
through the normal lending institutions.
You're here in a dual capacity and you've explained that, and we
understand that.
I think, if the normal banking system were doing a better job,
I mean, the education problem here isn't just educating people in
the inner cities, it's educating people that run a lot of these financial institutions, isn't it?

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Mr. HAMILL. I would say, Senator, that we've all, as we've spent
more and more time in the inner-city-and I am one who has done
a lot of that-understand that we have to try to go to great lengths
in order to bring the resources of the financial institutions to the
inner-city. And we have worked, as you have, with Fannie Mae and
others to try to make that happen.
The CHAIRMAN. We're going to do more in that area.
Mr. HAMILL. The President of the Fed testified before Representative Kennedy. He said the balance here is the balance between access to credit and appropriate guidelines. We're all searching for
that.
We do it in the banking business through ratios , debt-to-income.
They're not perfect. We're not saying they're perfect. But they are
proxies, the best proxies that we know.
We're trying to make sure that nobody tips over here, that nobody goes through. People do get through the safety net. We're here
to try to help them if we can, and that's why we've put this program in place. And we're here to work with you in order to get that
right balance .
The CHAIRMAN. You've acknowledged today that you've changed
the practices within the institution. You've made changes in your
practices.
Mr. HAMILL. We have, even though our competitors have not
changed, to be able to be sure that we are at the leading edge of
trying to make sure that people don't slip through, because they
have.
You will hear testimony from Mrs. Diggs. That loan should never
have been made . And we bought it in a package, and I'm sorry that
it ever got through the package. But it's not representative of this
portfolio.
The CHAIRMAN . We'll get to her very shortly.
Senator Boxer?
Senator BOXER. Thank you very much, Mr. Chairman.
Mr. Hamill, I really appreciate your trying to put the best light
on some of the things you've done but some of your comments disturb me .
You said that maybe there are some people who don't deserve
credit, you said this as a kind of veiled threat.
Mr. HAMILL. No.
Senator BOXER. Excuse me, sir.
You'll have a time to respond .
Not a direct threat at anyone, but sort of a veiled threat from
the industry that if we don't lay off then no one will have any credit. That was what I heard.
Maybe you didn't mean it. I'm telling you that's what I heard
when you said, I believe, "this isn't worth it ."
Well, you're darn right it was worth it. You're talking about a
portfolio that averages 15 percent and some loans as high as 28
percent. It was worth it for Fleet . You have a very small default
so sure it was worth it.
And, you know, we're not perfect. I say that a lot. I'm not, you're
not, no one is. But this is the business you're in so I don't accept
the explanation that these high percentage loans got through your
screening process .

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How could you let a 28 percent loan get through the screening
process? What did you pay for that money that you're charging 28
percent? What did you pay? Nine percent, 8 percent? Do you have
an answer? What did you pay for that?
Mr. HAMILL. If I might, the year in which that loan was made,
I would estimate that the cost of money would have been in the 8
or 9 percent range.
Senator BOXER. Eight or 9 to 28 percent, and it got through the
screening .
I'm not a person that likes to set caps on things, because I come
from a free market economy. I was a stockbroker. I don't like to
set limits. But I think what Mr. Shelby was getting at—and I know
he doesn't like to do it either-is that in the face of such outrageous behavior it's almost impossible not to consider having the
Government impose some limits.
Is there no shame here? Is there no conscience here? I have a lot
of problems with the way Fleet conducts business .
Now how many homes did you actually take over that defaulted
and then were sold?
Mr. HAMILL. Five hundred and thirty in Georgia in 1992 and
1991 , on a base of 20,000 loans.
Senator BOXER. You took over 530 homes and on most of that,
I assume, you made a profit?
Mr. HAMILL. No. As a matter of fact, the loss for 1992 was $ 8
million.
Senator BOXER. What about all the other homes that you took
over and sold?
Mr. HAMILL. That's it. I'm talking about the losses on the 530
loans.
Senator BOXER. How does that compare to the profits you made
on the other loans that did not default, which is something we're
trying to get at here , and we haven't been able to succeed so far.
Mr. HAMILL. The issue, I think , is the bottom line of the company. And the company, I don't want to use 1992 because it was
a bad year for the company , on average, it has made in the $30
million range bottom line on average.
I would be happy to provide you each of the years, and what that
represents as a percentage of the total of the Fleet Finance Group's
bottom line.
But let me address the veiled threat, because that was not my
intention. I was trying to respond to Senator D'Amato's notion that
there are some people who shouldn't be borrowing, and that the
lending institutions should in fact take the initiative to be sure
that they don't borrow because they get in over their heads , and
they lose their homes.
Senator BOXER . No one should borrow at usurious rates . That's
true.
Mr. HAMILL. If I might, though, these are not usurious rates.
Senator BOXER. That's debatable.
Mr. HAMILL. I would suggest to you that in this country today
there are 15,000 companies that are in the second mortgage business. This is a highly competitive business. The rates are in fact
set through competition , just like stockbroker rates are set , just
like any other business' rates are set. We don't control this market.

70-832 0 - 93 - 10

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I would only urge you then to not think about them as usurious
rates, but rather the rates of the industry.
Senator BOXER. Sir, I'm sorry. We're allowed to filibuster in the
Senate. You know, you filibustered because that little light's going
to turn red .
And I just want to make one more comment.
Mr. HAMILL. I apologize.
Senator BOXER. Unfortunately, I've waited 2 hours and I can't
wait any longer, because I have to meet some young people who are
meeting here. I'm sure you're very sad to know I'm leaving.
[Laughter. ]
But on the next panel one of my constituents from California is
going to tell a story that will make everyone just sick at heart. This
is somebody who was preyed upon.
So I would urge you to tell your colleagues in this very competitive marketplace where it's all dog eat dog, not to send people out
knocking on doors saying, gee, the step on your front porch is broken, and I can help you with that, and I can consolidate all your
loans . All for the purpose, in effect, of destroying that person's life.
There's got to be something that stops that from happening now.
What I'm suggesting is that there should be a new ethic. Maybe
it's a new time that we need to be more responsible for everyone
who's a part of our organization. Fleet needs to step up and accept
responsibility. And you alluded to that. I would hope that you
would take immediate steps voluntarily to change that. I know
you're trying to do that. But, as Americans, we can't allow these
practices to continue.
Mr. Chairman , you've been very patient. I thank you and I will
work with you on this issue.
The CHAIRMAN. Thank you very much.
Senator Sarbanes.
OPENING STATEMENT OF SENATOR PAUL S. SARBANES
Senator SARBANES. Thank you very much, Mr. Chairman .
I apologize to the panel that I wasn't able to be here earlier to
hear the testimony, but I had another hearing at which I had to
be present.
First of all, Mr. Chairman, I want to commend you for holding
this hearing. This is one in a series that the Banking Committee
is holding this month on credit availability for borrowers in the
low- and moderate- income areas in the country.
We held a hearing on February 3, 1993 , on community-based
lending institutions, such as community development banks, community development credit unions.
Next Wednesday, we have a hearing, as I understand it, on racial discrimination in mortgage lending.
I feel very strongly that this is a very important public service
which the committee is rendering.
And I particularly want to go on the record in thanking you for
your leadership in this regard.
I think there are a number of problems here.
My colleague, Senator Shelby, indicated that this underscored
the need for the community development banks .

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I think it also underscores the fact that a lot of commercial
banks are simply redlining out areas, and not making loans available, loans which, in many instances, ought to be made. And their
refusal to do so, and the unavailability of credit gives an opportunity for others, often time less reputable lenders , to enter the
market and take advantage of unsophisticated borrowers.
In some instances , you have mainline financial institutions who
won't do it directly. But then they set up subsidiaries in order to
do it, in order to be able to exploit that market.
This apparently is particularly true in the area of home equity
lending, which for many low- and moderate-income people is their
only source of personal wealth, is the equity they build up in their
homes.
Then, to finance needed improvements or other needs, they borrow based on the value of their home equity. They encounter difficulty getting credit from conventional commercial banks. They
turn to second mortgage lenders or finance companies .
Then they get loans at extraordinarily high rates of interest, and
in many instances, it appears from the face of it on the record that
the borrower is really going to be unable to service the debt. It's
obvious on its face, when the loan is made.
I want to just put a couple of questions.
First of all, Mr. Hamill, you make money on the second mortgage
lending, don't you?
Mr. HAMILL. Yes, sir.
Senator SARBANES. So the failure to make money was in reference to those instances in which you actually had to go to foreclosure. Is that correct?
Mr. HAMILL. Yes, Senator. It was in response to the question
that was raised earlier about whether we were, as an industry or
a company, strip mining the equity out of homes, trying to in effect
make the loan knowing that the people could not pay back the
loan, hoping to get the house and then make a lot of money on the
sale of the house.
Senator SARBANES. But what you're doing to the others on whom
you have not foreclosed is, you're absolutely pressing them to the
wall.
Here's what happens. In some ways , this is a tremendous testimony to the responsibility to meet their obligations of low- and
moderate-income people. That's one of the readings I take out of
your testimony, because here's what happens.
They take these really high rate loans, exorbitant in the eyes of
many, including my own , I assume. Then they're pressed, and they
go to every possible effort to meet the loan payment.
Let me ask you this question . If I take that into account, let me
accept your testimony now, the factual statement you've made, that
on the actual houses on which you went to foreclosure, you lost
money. And you said that was 2 percent of the houses.
Mr. HAMILL . The number of foreclosures that were effected in
1992 and 1991 represented about 2 percent of the total portfolio.
Senator SARBANES . So you have the other 98 percent of the portfolio made at these high interest rates . People doing everything
they possibly can to meet those payments, which are really putting
it to them. Now you made money out of that 98 percent, didn't you?

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Mr. HAMILL . Yes.
Senator SARBANES. You made so much money that it more than
offset the losses , did it not?
Mr. HAMILL. Yes. The foreclosures are a part of the operations
of the company and they're not synonymous with the profits of the
98 percent.
Senator SARBANES. Why are we looking only at the profit and
loss on the foreclosed properties, and not looking at the profit and
loss on the total picture?
Mr. HAMILL. I agree with you, Senator. I'm only trying to respond to the issue that keeps coming up, that there is, in effect,
an underlying business inside of the entire business, and that the
underlying business is one of trying to make money on foreclosures.
Senator SARBANES. Maybe you're making money on the threat of
foreclosure. Maybe when you actually go to foreclosure, in that instance, you then don't make money. But the threat of foreclosure
is absolutely pushing these people against the wall. And therefore
not to lose their home, in order to hold onto their home, it's the
only thing they have, the only thing they've worked all their lives
to build up, and not to actually lose it , they're going to an extraordinary extent to produce the money to make these payments . Isn't
that a reasonable hypothesis?
Mr. HAMILL. Senator, as I've indicated before you came in, in
New England where I live, we've gone through an extraordinary
economic downturn over the last 4 years.
We've had literally thousands of people who have lost their
homes because of the fact that when the loan was originally made,
the income of the individual in relationship to the debt they took
on was reasonable, but they lost their job.
I would suggest to you that we have, as a matter of policy, had
debt-to-income ratios, again 62 percent of the borrowers had debtto-income of less than 40 percent. It's perfectly reasonable in terms
of their ability to repay.
And if a change in circumstances takes place, it is going to put
people into a position as it did with many of our friends and colleagues in New England.
Senator SARBANES. What's your return on the subsidiary?
Mr. HAMILL. In 1992, it was very poor because of a variety of
one-time events , but in general, the return on equity is in the 17
percent range.
Senator SARBANES . And what's the return on your regular commercial bank?
Mr. HAMILL. Again , I don't want to use the last couple of years,
because of the fact that there have been, in New England, enormous dislocations, but the Fleet Banking Group, if you will, in normalized times has been in the 17 to 18 percent rate of return
range.
Senator SARBANES . You're including, now, the secondary mortgage excluding that, your regular commercial operation . What is
your return on that?
Mr. HAMILL. It's in the same category because this represents, on
a normalized basis, again , taking out the bad year that this company had in 1992 , and the bad year the banks had in 1990 and
1991 , it represents about 10 percent of the total of Fleet Financial

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Group, so that the returns of Fleet Financial Group, excluding this,
are about the same as the returns from this company.
Senator SARBANES. Let me ask the other members of the panel.
Maybe I'll come to you, Ms. Keest, what do you think about this
hypothesis of mine that it's the threat. It doesn't really get to the
point to simply look at the actual foreclosures without looking at
the threat of foreclosure.
And the company, in a sense, over lending on these houses ,
knowing that people are going to do everything they possibly can
not to lose their house, they're going to be paying these very high
rates of interest, they're going to go to extraordinary lengths not
to do so.
So they've got something working here, I mean , they've got this
threat of foreclosure and it serves as an incredible pressure.
In fact, if some people are not actually lost with these tragic stories, I don't know that the issue would have ever gotten the profile
that it's now getting. And this practice then would have continued,
but it never would have come so clearly to public attention . So
what about those people?
I don't know where they're finding it. I guess they're taking it out
of food and clothing and heat and everything else, in order to meet
these payments .
Ms. KEEST. Or refinancing with other ones of these high-rate
lenders . Absolutely.
I think originally when we started talking about this problem_we
did talk about equity skimming as trying to get the property. But
as we began to see more of it, we began to think of it more broadly,
which is that the ones who pay, that's a transfer of wealth from
the equity to the lender and the ones who don't pay, it's a transfer
of the property. Either way, the increased equity gets to the lender.
Even one of the worst of the examples in New England which I
understand had about a 40 percent foreclosure rate, that was 60
percent of those people who paid.
I also want to make a point that to further complicate matters,
when they talk about what the losses are, and I cannot speak to
Fleet Finance's practices in this regard, but I know that in some
of them in New England, if they talk about a loss on a foreclosure,
they may be talking about saying we didn't get to recoup the principal that we expended. But a lot of these lenders, on top of charging 20-plus percent interest, were what we call loan padding, which
is the note principal may say $ 20,000 and $ 15,000 was only their
actual expenditure; $ 5,000 of it was smoke and mirrors.
So if they say they lost that $20,000 loan on foreclosure, they
didn't really lose $20,000 because $ 5,000 of it was just another way
of doing some equity skimming.
Senator SARBANES. The other thing, of course, is that you pay a
high enough interest rate and the loan lasts for a while. The lender
can recover through the interest. He is doing pretty good even if
he loses on the principal when he finally goes to foreclosure. Isn't
that correct?
Ms. KEEST. Absolutely. One of my favorite schemes in some of
the New England ones was the ones where they would make loans
where they were bound to go into default very early. Then the note
called for a 42 percent default rate.

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The CHAIRMAN. Would you just yield to me?
I see another problem here we haven't really illuminated yet
today. I want to leave Mr. Hamill out of it, so this isn't aimed at
your company here. But it is aimed at companies that are holding
companies where they have banks, traditional banks, then they've
got these mortgage finance operations as separate entities under
one corporate structure.
Let's take as an illustration the portfolio you spoke about in
Georgia, where 98 percent of it was up to date, even though the
interest rates were high and so forth. Only 2 percent were in foreclosure. The other 98 percent are functioning in the normal fashion.
Let's leave Fleet and just go to a bank with a holding company
like that. If 98 percent of those loans are going to pay off and they
are going to pay off at a high interest rate, you've got an opportunity because you can wear different hats . You can either be a traditional bank, you can go into the inner-city and you can make the
loan to the inner-city borrower, let's say, at 7.5 percent. Or you can
decide, no, you're not going to make the loan to that person at 7.5
percent. You'll go over here to another party or company and you'll
make the same loan to that person at 15 percent.
And you obviously believe in anything like a 98 percent success
ratio would let you believe that that borrower could afford to pay
15 percent.
If they could afford to pay 15 percent, don't you have even a
more secure loan if they're only paying 7 percent, because you're
not squeezing them to the wall like Senator Sarbanes has just
talked about? I can see a very perverse incentive in a holding company here. I am not saying that's true in this instance. I don't
know if it's true; I don't know if it is or isn't. But I can see why
the economics if you've got a class of borrowers that are going to
pay up 98 percent of the time, you can run them through the mortgage mill at 15 percent rather than 7.5 percent, why would you
make a loan at 7.5 percent?
You just sort of take a look at it and say, well, that's a tough
area and, you know, I'm not sure I really want to bother with that
kind of lending, and so forth. We won't do it through this window;
we'll go over here and do it through a different window. We will
take off our banking hat and put on our mortgage banking hat and
we'll go out and we'll find that same borrower is now suddenly and
magically creditworthy at a 15 percent rate. And we are going to
have a 98 percent payback. But that person who would find it easier to pay back if they were only paying 7.5 percent is not creditworthy.
Part of the problem here is I think we've had the financial system functioning in a way where we've had large parts of our society
sort of ruled out of bounds for normal lending. The traditional
banks, in many cases, have bailed out of the inner cities . In fact,
in many cases you can't even cash a check. You've got to go into
one of these high priced check cashing operations even to cash a
Government check in a lot of inner-city locations . That's just not
right.
But the fact of the matter is it seems to me that you've got a situation here where if you've got a holding company, there is a built

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in financial incentive, if you've got a good base of customers out
there who are going to pay back 98 percent of the time and it is
a highly profitable business, why would you go ahead and finance
them at 7 percent if you can go ahead and finance them at 15 percent? Doesn't that logic hold together, Ms. Keest?
Ms. KEEST. Yes . I think it is called steering-the- sucker sales . You
alluded earlier to a paper that I wrote and there is an appendix
in there in which I had read a Law Review article that was conducted resulting from testing using paired testers of people shopping for new car loans. As I read that article, it really struck home
to me on this whole issue of high- rate lending.
—
And what they speculated was what they found was controlling
for everything else, white women paid 48 percent bigger markups
on new cars than white men. Black men made twice the markup,
black women paid three times the markup. What they speculated
the reason was is that not all the that the profits from the sales
were not spread evenly on all sales. So what they did, there were
stereotypes operating as to who the salespeople thought would be
the suckers that would pay full markup.
I would speculate that if I went into, for example, a finance company-this doesn't get to the holding company but it is the same
sort of issue-and asked or was applying for a loan, they would not
try to pad my loan. They do pad my clients' loans.
The CHAIRMAN. Wouldn't a holding company have exactly the incentive I talked about, Mr. Harshbarger?
Mr. HARSHBARGER. Yes. And I think in certain respects , a lot of
our investigation documented that this was occurring, although the
form in which it was occurring was through the second mortgage
companies, like Resources Financial, which were selling packages
to the banks. That was the original phenomenon that was being
utilized most of the time, according to our investigation .
An investigation clearly documents almost every point that both
you and Senator Sarbanes have made about this issue. One of our
arguments about the flexible criteria had to do with the fact that
most people were paying these rates. That was what was incredible
to find. They were willing and able to try to meet these rates.
Somehow, the criteria ought to meet that level of credit worthiness
as opposed to something else.
The CHAIRMAN . And they would actually be a better credit risk
if they were paying a lower rate of interest because they wouldn't
be squeezed to death.
Senator Moseley- Braun .
Senator MOSELEY-BRAUN. Thank you very much, Mr. Chairman .
I am going to be brief because we have a conference on the President's proposals coming up.
But I really want to reiterate and to thank you for calling this
hearing. I have been on this committee now for the month that I
have been in the Senate and we have had hearings now on credit
availability, this hearing on reverse redlining, and these kinds of
financial practices . You have really done a yeoman's job to bring
and make the Banking Committee relevant to the concerns that
the people have. I thank you for that.
I want also to say to Mr. Hamill I think part of the problem, and
I don't know the people in the audience really can't see Mr.

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Hamill's face . He looks so stricken. He looks like he really-his
feelings are hurt. Well , you do .
I think part of the problem is that not only is he having to talk
about Fleet's practices, but the practices of the rest of the industry.
It is the industry that is the problem. It is the fact that we, the
lawmakers, have not put the kind of regulation on this industry
that it absolutely needs to have. That, in my opinion, is the problem.
The fact that people are being preyed upon , these horror stories
someone sent me. I don't even know whose paperwork this is. But
someone sent me some paperwork, Mr. Chairman. I was sitting
here trying to calculate up the numbers and referring to your comment about loan padding, Ms. Keest.
I am looking at the numbers here. This individual received
$ 10,000, had a note for $ 12,500, and paid about 20 percent in fees
and charges, putting aside for a moment the 22 percent interest
rate. I mean, it is nothing short of outrageous.
Mr. Chairman, I just wanted to say, and I don't know whose documents these are, but I want you to get them back. I kind of scribbled on them.
I just wanted to say I look forward to working with you as we
approach some kind of a legislative response to try to take some
of the corruption out of this industry because I think that, personalities notwithstanding, the corruption is inherent in the system.
This system does prey on poor people and puts a tax on poor people
that is an illegitimate tax and one that I think we have a moral
obligation to repeal.
Thank you.
The CHAIRMAN. Let me thank this panel of witnesses. You have
been very patient and you have been very helpful to the committee.
We have got other witnesses that we must hear. Let me excuse
this panel.
Mr. HAMILL. Mr. Chairman, one final point.
The CHAIRMAN. If it's very important.
Mr. HAMILL. Just on the practices of steering you were suggesting, I would just for the record indicate to you that Fleet has banks
only in New England and New York and does not engage in the
practices of steering that were being talked about. And I know you
weren't directing it at us, but I want to make sure that's on the
record.
Thank you.
The CHAIRMAN . Thank you .
Let me thank this panel and excuse this panel.
Let me now call our next witnesses to the table. These witnesses
are, and I will call them in this order, Eva Davis, who is a resident
of San Francisco, CA. Her home is in foreclosure following her receiving a second mortgage loan.
Annie Diggs. Ms. Diggs is a resident of Augusta, GA. Like Ms.
Davis, she has experienced problems after receiving a high rate
second mortgage loan .
Mr. Jack Long is an attorney with Dye, Tucker, Everitt, Wheale
and Long of Augusta, GA. He is presently bringing a class action
suit against Fleet in Georgia on behalf of second mortgage borrow-

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ers, alleging reverse redlining and violations of the Georgia Fair
Housing Act.
Finally, Mr. Bruce Marks, who is the executive director of the
Union Neighborhood Assistance Corporation in Boston. As executive director of UNAC, he has been a leading community activist
involved in the second mortgage issue.
Let me also say, as has been pointed out by Senator MoseleyBraun, in light of the President's State of the Union message tonight, we have been asked to attend a formal briefing on that issue
here shortly. It will, in fact, start before long.
What I want to do with this panel is for each panelist to give us
their story and statement. After we have done that, we will take
the time we have for questions.
I am going to put the full statements in the record.
In some respects , this panel is more important than the first
panel . I am not going to hurry our way through this. We want to
take the time we need. Ms. Davis and Ms. Diggs, particularly we
appreciate your being here.
Ms. Davis, we are going to start with you. We would like to hear
your story now.
STATEMENT OF EVA DAVIS, RESIDENT OF SAN FRANCISCO, CA
Ms. DAVIS. My name is Eva Davis . I live in the Potrero district
of San Francisco where I have lived for over 20 years . I am a
widow and I live with my granddaughter and two grandchildren .
In October of 1989, the great earthquake hit Northern California.
It frightened me and the members of my family. It also caused
minor damage to my home . But what happened after the earthquake to me and to my family and to my home was more devastating than the big earthquake.
Nine months after the earthquake, two men came to my home.
One visitor said he was a contractor. The other man said he
worked for the Federal Emergency Agency, FEMA, where he said
he processed loans for people like me whose homes had been damaged by the earthquake. The contractor told me that it would take
about $6,000 to repair my front steps which had been damaged and
tagged by the city of San Francisco as unsafe. It was this yellow
tag stuck to the front of my home that had caught the eyes of the
contractor as he drove by in July 1990 .
I told the two men that I only had income of about $ 1,100 a
month, that I could not pay for any repair to my home, and that
I was not qualified for a loan because of my income level. At the
time, I only owed $ 58,000 on my home and my home loan payment
was only $619 a month. The only other debts that I had was about
$700 to Montgomery Ward . I was current on that obligation.
The two men told me that I could qualify for a Government loan
and see if they could arrange a short time loan until I got the
FEMA loan. They told me the Government loan would pay off the
shelter loan and I would not have to pay the FEMA loan until I
sold my home. They told me I could have other repairs done to my
home under this program. This sounded pretty good to me, since
I had not planned to sell my home in the immediate future.
The contractor then called a person from the finance company in
San Jose over 50 miles away. Within an hour, a loan officer ap-

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peared at my home in San Francisco. By the end of the day, I was
talked into a loan that they said would pay off my three existing
loans and would permit me to make major repairs to my home. I
wasn't told how much the loan would be for or any other details
of the loan. In fact, since I suffer from glaucoma, I had recently
broken my glasses. I wasn't able to read the loan papers or sign
any documents. The loan officer just told me to sign my name on
a blank sheet of paper and he would take care of everything.
Within 2 weeks of meeting at my home, the loan contractor came
to my home and told me that I had qualified for a loan of $ 150,000.
I called Congress Mortgage and they told me that they had not
paid off the first loan on my home as they had said they would.
I learned that my monthly payment would increase from $619 to
just under $2,000 a month. And I learned that Congress Mortgage
was charging me $23,000 in loan fees.
Within 5 months, my home was put into foreclosure by Congress
Mortgage because I was unable to make the loan payments of nearly $ 2,000 with my income of under $ 1,100 a month. There was
other problems as well.
Congress Mortgage paid almost $ 700,000 to a contractor who
quit work on my home and left my home in terrible condition. Over
2 years I have been fighting to save my home. I turned to Consumers Union for help and they found two attorneys who were willing
to help me. They have told me that I may eventually lose my home ,
however they were able to stop the foreclosure sale of my home,
which was supposed to take place at 10 o'clock this morning. I hope
that members of Congress can do something to protect people like
me whose only mistake was to trust people who sounded honest.
My home needed less than $6,000 in repairs but I was talked
into a $100,000 loan . Now I may lose my home. Please don't let
this happen to anyone else.
Thank you for letting me tell my story.
Senator SARBANES. Ms. Davis, that's a very powerful and moving
story and I want to go to Ms. Diggs. But I just want to be real clear
on one thing. Before all of this started, you were paying $ 619 a
month on the house payments?
Ms. DAVIS. Yes.
Senator SARBANES. You had an income of just under $1,100?
Ms. DAVIS. Yes.
Senator SARBANES. By the time they got through with you, you
still had the same income, but you were now going to be required
to pay just under $ 2,000 a month?
Ms. DAVIS. Yes.
Senator SARBANES. How could anyone expect you to pay $2,000
a month when you had an income of $ 1,100 a month?
Ms. DAVIS. It's unbelievable to me.
Senator SARBANES. Ms. Diggs.
STATEMENT OF ANNIE DIGGS, RESIDENT OF AUGUSTA, GA
Ms. DIGGS. My name is Annie Diggs. I have lived in the same
house at 1522 Blakley Street in Augusta, GA, since 1936. On January 17, I celebrated my 78th birthday. I was born in 1915 in
Macon, GA, and was raised in a community known as Shady Dale,
GA. My father was born in the West Indies, but he drowned 6

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months before I was born. My grandparents were born as slaves.
My mother was forced to work for the fair, so she left me to be
raised by a great aunt, who is my namesake, Annie Virginia Coleman.
The Colemans were originally farmers in Georgia, but had to
give up farming after the boll weevils invaded their farms. We
moved to Athens , GA, where my great uncle worked for a company
that made axe handles and hammer handles. When I was 14 years
old, I married Will Diggs, who worked as a fireman for the Georgia
railroad. The railroad moved us to Augusta in 1932. We moved into
my present home in 1936.
My husband and I was blessed to have 10 children, four of whom
are still living. I became a widow in 1946. After my husband's
death, I had numerous jobs , primarily of a domestic or clerical nature, such as a maid at University Hospital , a clerk at a grocery
store, and I worked in a food processing plant known as
Castleberry.
For the last 27 years of my working life, I was employed as a
domestic at Elliott's Funeral Home in Augusta. I stopped working
at Elliott's in 1979. Since that time, my only source of income is
my late husband's railroad retirement, which is now $515 a month.
Additionally, I receive food stamps worth $60 per month . Frequently, I have to go without food.
In 1987, my home needed major repairs, primarily due to a leaking roof. I went to a local bank. I had $343 balance on my existing
mortgage. The local bank turned me down.
Later, I was contacted by a woman working for a local loan company. She looked at my house and contacted a remodeling company
that agreed to do the repairs for $3,300. She said she could arrange
a loan. Also the manager of the loan company told me I should pay
off several other little bills so I wouldn't have nothing to pay but
my loan and so I could get some extra money to buy a washer and
dryer too. They never told me the rate or how long the loan would
last.
When I went to sign the papers for my loan, I was asked to sign
a stack of papers which I did not understand . Instead of the $3,300
which I originally needed , I ended up with a note to Tower Financial for $ 15,000 at an interest rate of 18.9 percent. My house is
pledged as security. My monthly payments are $251.34 a month ,
almost half of my total monthly income.
I was charged $ 2,595 or 212 percent of the loan in fees . My loan
documents show that I received $4,328.48 at closing, but I didn't
receive that. I don't know why they got me charged. I never had
this money. I have never been told why I didn't receive the $ 1,900.
Additionally, if I were somehow able to pay this loan off by refinancing, I would have to pay a repayment of $ 900, 6 percent of the
original note. The home repair work was very poor, the paint
peeled off, and my roof continued to leak. After one payment, I
learned that my loan had been sold to Fleet Finance . I complained
to Fleet about the sorry repair work. They said that was my problem. All they was interested in was getting the monthly payment
on time.
My ceiling finally fell in . For more than 5 years, I have lived in
my house with the roof still leaking. All the while, I have paid

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Fleet. I have paid more than $ 13,000 on my loan since 1987, but
Fleet Finance tells me I still owe more than $16,000 on my loan.
How can that be? I cannot understand how I could owe $ 16,000 on
a loan that was originally only $ 15,000, especially after I have paid
over $ 13,000 in monthly payments.
I am scared of losing my home; I really am. I go to bed and get
up in the morning looking for the mailman thinking I'm going to
get a letter telling me to move.
I finally got the repair work done right, but only after I got a
grant from the City of Augusta Community Development Housing
Rehabilitation Program .
And I am thankful that you all give me this opportunity to come
here today to tell my story. I am 78 years old. I ain't able to work.
And every time I turn around, they badger me and badger me. I
don't know. I just hope you all do something about this. They won't
give you a chance. I didn't know Fleet. I never heard tell of Fleet
until I got a letter. Then they're going to tell me I paid the first
note to Tower. Fleet's going to tell me you've got to pay this note.
We'll put it into your payment when you go to pay your last payment. You're going to pay this note because you were supposed to
pay it to us.
Senator SARBANES. We thank you very much for coming to tell
that story. It is a very powerful story. Actually, Mr. Chairman, it
underscores the point I was trying to make earlier. You have been
foreclosed on your home?
Ms. DIGGS. I am the lucky one.
Senator SARBANES. But you have been paying and you have been
paying dearly all these years. So we're told that, well, they lose
money on the foreclosures but they're making money on your loan.
Ms. DIGGS. If they take my home and sell it today, they can sell
it for over what I got in here, $ 16,000 , $ 17,000. Because it looks
like a new house. The stuff they tore out of my house was piled
up high, all rotten lumber, the top of the house. Everything was
rotten in there. I just wish I could have taken a picture and
brought it to show you the beginning and how they fixed it. I am
just happy. When I think the work it needed, my heart bled so bad
that they're going to come and take it.
Senator SARBANES. Mr. Long, we will be happy to hear from you.
STATEMENT OF JOHN LONG, ESQ., OF DYE, TUCKER, EVERITT,
WHEALE AND LONG
Mr. LONG. Thank you very much , Senator.
My name is Jack Long. I am an attorney from Augusta, GA. I
am not here to criticize any one financial institution, but I am here
to try to encourage change to correct abuses in home lending,
which I , along with other lawyers in my area, see every day.
We are not the traditional class action lawyers, because we represent a lot of traditional industries, insurance companies, and
banks. However, we are morally outraged at what we have seen.
Thirty years ago in the South, we had a system of dual waiting
rooms , dual water fountains , and the like. Congress reacted . Today,
our Nation is better. However, we still have a dual system of lending in this Nation in which whites, in connection with home mortgage loans, more often than not receive the benefit of market rate

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home loans from traditional sources of financing. A substantial
number of African-Americans only have one other source of lending
on homes available; that is, loans at very high rates, very high prepayment penalties, very high points. The loans come from these
non-bank banks that are completely unregulated by Congress .
The sad thing about what I am telling you and members of the
Congress is that these people are not on some Government program. They are not trying to get grants. These are Americans who
work hard their entire lives to earn the American dream, their
homes. Now we are faced with a situation in which they are losing
these homes at astonishing rates.
I noticed that previously we got a foreclosure statistic of 2.67 percent by Fleet. I don't want to criticize Fleet. I think that's probably
for the finance company industry. That's way above the national
foreclosure rate, which is one percent and less . You go back to 1980
with about half a percent or less. In 1991 according to the latest
statistics , it was one percent.
If you apply that statistic over a 15-year loan that we're talking
about, 40 percent of these 20,000 loans are going to be lost in foreclosure .
The examples of what I am about to describe to you are interest
rates that make Master Card or Visa interest rates look reasonable. We all know that unsecured credit is the most risky credit.
These loans I am about ready to describe to you are loans that
have no relationship whatever to market rates .
The first example I am going to give you is a loan entered into
by Ms. Lucille Williams. This is not a Fleet loan. In fact, Resolution
Trust Corporation owns it.
This lady was charged 35 points ; $ 6,300 of an $ 18,000 loan, that
was charged on the day the loan was made. The loan documents
say that was a "bonus" or points. That is unconscionable, is unreasonable, and is mind boggling. Out of $ 18,000, she only received 65
percent at an 18 percent interest rate-a rate higher than a Master
Card.
The next example is the loan of Mr. and Mrs. Dukes. They were
lucky! They were only charged points of 22.5 percent on a $ 16,200
loan at an interest rate of 18.5 percent. Both of these loans are secured by homes.
Let's take Ms. Diggs's loan . And I submit to you, Senator, it is
not the exception; it's the rule. Fortunately, we were given the
privilege to ride to Washington in a bus with a substantial number
of Fleet victims. We saw these same types of loans. People were
handing them to us and saying, "look at my loan. "
This is not the exception; it is the rule. In this loan, 20 percent
of the loan with the points, plus an interest rate of 18.9 percent.
They can talk about this lady's credit, but look at who she's paying
off. She's paying off Macy's, she paid off her Visa card, she had
good credit. Credit had nothing to do with it. They took advantage
of an elderly black lady. She was denied credit from traditional
sources because the Community Reinvestment Act is a joke. It
doesn't work. Traditional banks do not lend in minority neighborhoods, thus they create a void .
We talked about foreclosures . Mr. Willie Harris' loan is on a
chart. We are handling a substantial number of Fleet loans . In

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every one of their loans, we found they did a workup on foreclosure. We may not have all the records , but of the records we've
seen, we see they make a profit. They have these people going both
ways, Senator.
Some of these prepayment penalties are up to 19 percent. So, you
are charging points of, let's say, 20 to 25 points out in front. Then,
on the date the loan is made, they're charging 18, 19 percent.
They're charging a prepayment penalty of 19 percent. Customers
are slaves to their loans. These companies make a profit if the customers pay, or if they default.
They are lending at loan-to-value. Forget about income-to-value.
They are lending at loan-to-value of 40 percent or so. That's such
a big equity. The companies are going to make a profit even if they
foreclose.
I submit to you that what we see is wrong. As far as how to solve
this problem, first of all, the Community Reinvestment Act needs
to be strengthened. Banks are not lending in the minority neighborhoods. Congress needs to get tough just like you got tough with
the South in the 1960's. We are better off as a people because of
it.
What you need to do is to stop all the mergers , stop the acquisitions, stop them from buying failed banks and making profits off
of it, ifthey are not lending in the minority communities.
Second of all , I think we need to have a nationwide cap. Now,
in my part of the country, we talk of Government that is only supposed to defend the country and deliver the mail . We have to make
exceptions to that philosophy when we see abuses . We need a cap ,
just like we have a minimum wage for income, you have to pay a
certain minimum rate. We've got to stop these abuses .
We are destroying entire neighborhoods in our section of the
country. In fact, we all know that minority individuals in Georgia,
even though they comprise about 27 percent of the population , only
own 17 percent of the housing units.
We found in our statistics and in our redlining cases and reverse
redlining cases, that these loans are congregated. These high interest rates are congregated in the minority neighborhoods.
The result is that owner-occupied houses become rentals. Neighborhoods are destroyed. The crime rate goes up. These social problems are created and the taxpayers have to pay.
I'd like to end by saying this, Senator. The taxpayers had to
spend billions of dollars bailing out the S&L's . I don't know of one
savings bank or S&L that has gone broke from lending in the minority neighborhoods. They have gone broke because they lent
money on some shopping center project, some condominium , vacation home, or something else . If they had complied with the Community Reinvestment Act in good faith, they probably wouldn't be
in the position they're in today.
I ask Congress to adopt legislation in two areas . One, we need
to strengthen the Community Reinvestment Act ; and, two, put an
interest rate cap nationwide on what these home equity lenders
can charge.
Thank you.
The CHAIRMAN. Mr. Marks, we would be pleased to hear from
you now .

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STATEMENT OF BRUCE MARKS, EXECUTIVE, UNION
NEIGHBORHOOD ASSISTANCE CORPORATION OF BOSTON, MA
Mr. MARKS. Thank you very much.
What we are here really for today, with all the people here, it
is a wakeup call to Congress . It is a wakeup call . It is the real state
of the union . The real state of the union is that there is a sub-tier
financial system. It is not fringe. It is where working class people
cannot get access to credit and therefore these creditors come in
and steal their homes, milk them of their money and steal their
homes.
These are not people who are homeless. They are homeowners
who are the foundations within our communities that no one has
been paying attention to . And the state of the union is, we talk
about drugs, we talk about violence, we talk about gangs, but these
are the homeowners who are always the foundations, the stalwarts
within their neighborhoods , who said to the craziness, the violence ,
and the gangs , stay out of my neighborhood.
So what has happened is that's the problem. That foundation has
been wiped out because they are subject to a sub-tier, not a fringe,
a sub-tier financial system. But it is worse than that. It is because
that's where the money's at.
Fleet and some of the other corporations, ITT and Chrysler, but
let's talk about Fleet because they have set the standard. They saw
there was money to be made. They said this is a niche that we
want to exploit. So what do you do? You want to reduce your risk
and you want to maximize your profits. You reduce your risk by
lending on people that have tremendous equity in their house, people that have been denied credit and have owned their homes for
many, many years, often two or three generations.
So what do they do? That's the community they want to target.
People are desperate for credit because that's their major asset.
They want to improve their major asset.
So when someone comes knocking on the door and they say
you're cash poor but you're property rich and we can put $20,000,
$30,000, or $50,000 into your pocket, you tell me, Senator who
would turn that down? When for generations you've been dying to
have that opportunity. And when you have entities such as Fleet
who has a national exposure saying, trust us , you can refinance.
People are going to do that. It's not ignorance . It's what people do
because that's what anybody would do.
Let's talk about just how profitable this is.
In 1991 , 55 percent of the income of the Fleet Bank Holding
Company was made by Fleet Finance. Fleet could not have purchased the Bank of New England if it was not for Fleet Finance .
The fact of the matter is, that was blood money. That was money
made off the backs of working men and women whose homes
they've stolen .
Let's talk about just how that is.
When you look at that map , that's the Federal Reserve , that area
where you see the dots . Those are the areas where the Federal Reserve says, in Boston banks don't lend. Well, where those dots are
are every mortgage that the resource companies financed by Fleet
has made.

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They're all within the minority community and now 82 percent
of the people that purchased, that got a Fleet mortgage through the
resource companies, have lost their homes. It's only a matter of
time that when you have to pay up to 39 percent on a mortgage,
you will lose your home. It's a matter of time because these are balloon mortgages with very high interest rates.
The CHAIRMAN. Let me understand again what you just said.
If I heard you right, you just said that within this zone that
you've got on the map here, over some period of time, what percentage of the loans have now gone into default, and the people
have lost their homes?
Mr. MARKS. I'm saying, when you look at the default rate, and
the people who have lost their homes through fraud, it's now become 82 percent. The number there is 76 percent. That was done
about 7 months ago, and that's gone up.
The CHAIRMAN. Again, I want to make sure we've got this
straight for the record.
You're saying that this cluster of people who had these second
mortgages through mortgage companies of this kind, 70 to 80 percent of them actually ended up losing their residences. That's been
the experience in Massachusetts?
Mr. MARKS . Yes.
The CHAIRMAN. Over what time period is that? What does that
cover?
Mr. MARKS. That will cover from 1985 to the period now.
The CHAIRMAN. You're saying, in almost every case, it's a matter
of people actually losing their property in the end. It's not a matter
of just paying exorbitant rates and they paying it off. But in fact,
it's like running on a treadmill and they pay the money, and then
when the money runs out, they lose the property anyway.
Mr. MARKS . That's right. Because if you look at the second mortgage industry, if it was legitimate, the high rates should only be
for a period of time while people establish credit.
So if you get a balloon mortgage payment that is in 3 years, in
theory, you're supposed to be able to make those high payments for
a short period of time, reestablish credit, and then you can refinance at a lower rate, which you are able to afford in not an unconscionable way. The fact of the matter is, that doesn't work.
When you have a very high interest rate and you have a balloon
mortgage, and you do not have access to refinancing of that, it's
only a matter of time when you're going to lose your home.
The CHAIRMAN. How many mortgages would that have been in
the time period that you just said, from 1985 forward? Would that
be 500 or a thousand?
Mr. MARKS. We were talking, for this one company, which is
called the Resource Companies . They have six different names but
they are under one ownership. They were owned by a man named
Burt Lambert. He was a college roommate of Terry Murray of
Fleet. That one company made 330 mortgages within the Roxbury,
Dorchester, Mattapan area within Boston .
The CHAIRMAN. You're saying then the total over that period of
time was around 300. Of that number, 70 to 80 percent were foreclosed on and people lost their homes. Am I following you right?
Mr. MARKS . Yes . I just want to add one thing.

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Within Massachusetts, you have what's called a soldiers and sailors foreclosure process . And it's one of the oldest ones on the books
in the country.
It stretches out the foreclosure process for at least 6 months . If
someone is in the military, it's for 6 months that you cannot take
their home. So what happens is, there's a deed in lieu of foreclosure. A lender goes and says, you haven't made your payments
for 1 or 2 months. What we'll do is , if you sign over the deed , then
we'll forgive that debt.
Now, in Georgia what happens is that they have a non -judicial
foreclosure. What happens is the lender just has to put the notice
in the newspaper for 3 weeks, and on the first Tuesday of every
month on the courthouse steps, they do the foreclosure.
So you have two extremes. But Fleet gets around that one way
or another. One way, they do the deed in lieu of foreclosure . On the
other way, you will see foreclosures such as in Georgia.
The CHAIRMAN. Why don't you go ahead and finish.
Mr. MARKS. Sure.
Fleet said that they make only 2 percent of their mortgages that
are over 20 percent. But they're not really being straight, because
the fact of the matter is they're saying the ones that are in their
portfolio.
The fact of the matter is, Fleet sells the majority of its mortgages. They are mortgage-backed securities . When you look at the
SEC documents and you look at the prospectuses, you are talking
about a far far greater number of the mortgages that are over 20
percent. We have the data, and we'd be glad to share the data with
the committee here.
The facts are when you look at the interest rates, and you look
at these charts and look at those interest rates, you see interest
rates of 24, 28 percent. You see them 30 and 40 percent. You see
virtually no interest rates less than 20 percent. That's true on all
of those mortgages.
The CHAIRMAN. Let me be clear.
You are asserting here today, that these loans are continuing to
be made. Are you talking about loans out of the past, or loans that
are still being made that would be well above the 20 percent, because they are sold off to somebody else. They don't show up on the
portfolio, so that we would have to look at both categories to really
understand what the history was. Is that what you're saying?
Mr. MARKS. Right. What I'm saying is, the loans in the past ,
you've got to look at one, we're talking about the loans that were
originated by brokers that were financed by Fleet.
So don't take the whole portfolio. You've got to look at those
predatory loans. We're not saying the loans that they made directly. When you look at the loans that were made by what we call
the seven dwarfs, the seven mortgage companies that were controlled by Fleet, those loans , the vast majority of them were over
20 percent. Many of those, the vast majority of those were sold .
So when Fleet says to you, of the loans we have in the portfolio,
the fact of the matter is, they're not being straight. I think if this
was a courtroom , the very proper recourse would be perjury. That's
what's really going on. And if you look at what the first month of
these mortgages are, the first month charges are, again , 15, 20, 30

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percent. They're not telling you the truth. They are dealing with
the technicalities on those issues .
Let me go on to what we consider to be also a major issue. It's
the safety and soundness issue.
When you look at Fleet, and we've been in touch with the regulators for the last 18 months, we said, even if you're not going to
consider the social impact of what Fleet does, consider the safety
and soundness issue.
You have approved Fleet's purchase of the Bank of New England
because of Fleet Finance. But in reality, Fleet Finance is an albatross around Fleet's neck. So what is happening is, when we said
to the Federal regulators, you have to scrutinize Fleet Finance,
they knew nothing about it, because the Federal Reserve Bank
does not regulate the finance companies or the bank holding companies. They have no basis on which to make an evaluation of it.
So what is happening now is that we have requested the Federal
Reserve Bank do an analysis of Fleet Finance, and to prevent Fleet
from expanding or acquiring any more institutions before they really understand what's really going on with Fleet Finance. Because
how can you make a determination of the safety and soundness
issue when the most profitable entity you have is in the business
of predatory lending?
When the most profitable business you have is basically loan
sharking? Because that's the reality. It's loan sharking. Anybody
that charges 20 points up front over 30 percent interest rates and
has the collection tactics that they have, I don't think there's another term for that.
That's why we have a meeting at 4:30 this afternoon with the
Board of Governors of the Federal Reserve Board. What we are requesting them to do is, we are requesting them to put a halt to any
acquisitions of Fleet, so they cannot prey on any more people.
There can be an effort to make a lot of these people here, who
are Fleet victims, whole in the communities that they have devastated, to recompensate those communities. That's where we're at.
But we have another request. That request is that there are
many many people here who are here who came overnight who are
going back this evening. We are requesting that this committee,
that you hold regional hearings, that you go to other communities ,
that you go out there and you listen to what's going on within our
communities, because when you thought, and you heard about the
environmental activism of the 1980's, you have not seen anything
yet.
When you see the tens of thousands of homeowners who have
been victimized by this type of predatory second lending around the
country, who have always blamed themselves, who said it's my
fault I lost my house. Who have taken that out on their families
because there's no other recourse .
There is a recourse now, and that anger and that frustration will
be directed at the financial institutions who have preyed upon
them .
So what we request is that you start to hold those regional hearings so the thousands of people who couldn't come here , you can
hear their stories, and you can get a better idea, because it is pervasive. It's the issue of the 1990's, and people are angry.

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These issues need to be addressed.
Thank you very much.
The CHAIRMAN. Let me say to you very directly that we're starting down this track, not just with today's hearing, but with the
other hearings that we've cited before today, the ones that have already taken place, and the ones that will be taking place, including
the one next week, when the Federal Reserve comes in, and we
take a look at these discriminatory lending patterns.
I envision field hearings. So I appreciate the suggestion.
I would also appreciate suggestions from you and others as to
where those might be held, so we don't have to have people journey
a long distance to come to Washington, although I appreciate the
fact that so many have today.
But, you know, to stay on that level of discussion for a moment,
when we look around this country at why our urban centers and
a lot of our rural centers are in such terrible difficulty, a large part
of it is that proper flow of credit and community reinvestment has
just been denied systematically over a long period of time.
There have been other factors at work, but we are choking a lot
of these communities to death by practices such as were illuminated today.
I think the pillars of strength that are out there , either older
people or other families that have had homes over the years and
really provide the bedrock in a community, we're seeing these dynamics because of how badly the credit system is functioning,
where practices spring up that actually destroy the rest of the
strength that we have.
You know, there has been, I think it's fair to say, a turning away
from the problems of our inner cities and our lower income communities over the last several years.
There was a big focus on foreign policy, everybody knows , particularly in the last 4 years, and not much attention being paid to
problems in this country. That's changing.
I think the President tonight will be talking about the sense of
the State of the Union as he sees it.
And part of that will be new strategies and new efforts and new
resources directed at rebuilding our cities , and really turning our
attention inward to try to figure out how we help our own country
and our own people, which we haven't done very much of in recent
years.
In many ways, I think the neglect and the indifference , if not the
actual practice of hostile policies , has damaged our country. It's
damaged it in many ways.
We've got two women sitting here right now who in effect have
been damaged in the ways that they have described , but there are
many others in this audience and many many more who can't be
here today who, either through these problems and absence of credit, or an absence of credit on fair terms , because if somebody is
creditworthy at 15 percent with 25 percentage points up front, they
sure are creditworthy at a lower figure, especially if you've got a
minuscule default rate, which is what we were hearing earlier.
The basic economics actually turn right upside down . Because if
that's the case, if we can make these loans at very high rates and
people can meet them, then obviously they're going to have an easi-

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er time of meeting them and your default rates will even be lower
if the rates are lower.
But our banking system, our insured banking system, has a responsibility here, and frankly it hasn't been met. It hasn't been met
either in terms of an adequate community reinvestment effort, nor
has it been done with respect to fairness to credit.
The cold fact of the matter is, we've had patterns of discrimination in this country from the very beginning. Whether somebody
tuned into the TV show last night, the Queen show that was on,
talking about the problems facing black people over the history of
this country, these discrimination problems are right here and now.
They're pervasive and they're going on every single day in this
country, and they're grinding down our people, and everybody suffers.
When that happens, the whole country is lesser for it. It's not
right, it's not decent, it's not what the country should be about, and
it's not what our laws should tolerate.
That's why we're here today to talk about this . This is just one
part of the problem. The problem is much bigger than this. But
we're meeting here not just to talk about it, we're meeting here to
lay a foundation to do something about it.
And in order, by the way, I might say, to do something about it,
you need two things. You need the facts, and you need a good legislative proposal, you've got to then craft it and take it through the
Congress, but you've got to have a President who will sign it.
I think we've got both things in place now. We've got the ability
to write a good legislative proposal, and to work it through the
Congress, and I think we've got a President that will sign it, the
sooner the better, in terms of the changes that need to be made.
Ms. DIGGS. May I say something?
The CHAIRMAN . Go ahead, Ms. Diggs.
Ms. DIGGS. I have a neighbor. She's connected with Fleet, but
she's got some children that were sick, and she couldn't come here
to speak for herself today.
Her name is Louise Darrian. She lives on my street. She's asked
me to voice, she has a loan with Fleet. She's in the same boat as
all of us here. They want to foreclose on her, but they haven't done
it yet. We're the lucky ones, two of us in the same neighborhood.
Her husband died , my husband died . She's with Fleet too. She's
not working. I told her I would speak for her, as she couldn't come
here today.
The CHAIRMAN . Thank you .
Does anyone want to say one other thing?
Mr. MARKS. If I could just mention two things. One is we would
request that you work with us in terms of the Federal Reserve
Board in terms of having them take seriously the issue of Fleet and
having them take seriously the issue of the expansion of Fleet.
Second, we would suggest that when we talk about regional hearings, that you think about Atlanta, Charlotte, Jacksonville, as
three of the places, because as Fleet's name in Massachusetts is
synonymous with a loan shark, Fleet's name in Georgia is synonymous with a loan shark, soon Fleet's name in Florida will be synonymous with a loan shark.

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We think that it's important that you come forward and that the
committee deals in those areas, including North Carolina, to do
that.
If I can ask the people in the audience that came 16 hours, a lot
of people to come up, they're going back this evening, if the people,
so that you can get a sense. It's not me, it's not the people on the
panel, it's all these people who have been victimized, who have either been foreclosed on, or are being pressured in terms of foreclosure to stand up. The people who all have a Fleet mortgage who
came here today.
These are the people who have come forward. They're just the tip
of the iceberg. And many many wanted to come. We didn't have the
buses to bring them. And there are many many that just couldn't
come.
Regional hearings we need that, please, to happen.
The CHAIRMAN. Let me acknowledge everyone who stood. And let
me invite you to go ahead and sit back down , having taken note
of those who stood.
This has been a very important hearing today, and this is not a
courtroom and shouldn't be mistaken for one. I know there's a legal
case pending. We can't try that case here and shouldn't try it here.
And I don't want any misunderstanding on that issue.
You made a comment earlier about your judgment that the earlier testimony you thought, in your mind, was a form of perjury.
That's your opinion . I don't want to give any official blessing to
that kind of characterization here, either way. I think it's important that those issues be settled where they are presently lodged,
and that is in a court of law. Let me just make that plain.
With respect to the issues involved here, though, in terms of the
underlying problems facing the country, I think there is a need for
a change in our practice and a change in our law. I think the
States need to do more than they are now doing, because they have
primary jurisdiction in this area, at least with respect to some of
the practices we're talking about.
I think there needs to be a Federal response here, and we're
going to design such a response.
I appreciate everybody that's testified here today.
These are difficult issues and they are issues that are having a
big impact on our country. I'd just say that if we're going to lift this
country up again, if we're going to get our cities and our communities and our urban populations and our rural populations that
are under pressure back on their feet, and getting stronger for
themselves and their families, and for this country, we've got to
change a number of things.
We've heard about some of these things today that need to
change. Getting this credit system to work, work properly, work
fairly, work with fair prices, work in a fashion for all citizens of
this country on an equal footing, is a critical need. We're not going
to solve the problems any other way.
We talk about the private enterprise system, but if it's only for
some and not for all, it isn't going to work.
So this committee intends to act on these matters. And I thank
all of you for your appearance and statements today.
The committee stands in recess.

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[Whereupon, at 1:25 p.m. , Wednesday, February 17, 1993,the
committee was adjourned , subject to the call of the Chair.]
[ Prepared statements of witnesses and additional material supplied for the record follow:]

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PREPARED STATEMENT OF SENATOR BEN NIGHTHORSE CAMPBELL
Thank you Mr. Chairman, for holding this hearing today on home equity lending.
I am very interested in hearing from the panels concerning reverse redlining and
to learn more about what can be done to change this trend.
As you know, reverse redlining occurs when second mortgage lenders victimize
vulnerable homeowners by coaxing them into signing home equity or home improvement loans they cannot afford. Homeowners who have nowhere to go for credit because mainstream lenders are reluctant to lend to low-income families are targeted
by second mortgage lenders and charged very high interest rates on loans. If this
is taking place in the lending industry, which we are here to learn more about
today, we need to take steps to do something to stop this unfair practice.
I have always been concerned about the disadvantaged and minority individuals
in poor communities, especially in rural communities and on Indian reservations,
and am very interested to hear what suggestions you have and what steps you think
we should take to protect the disadvantaged in our society.
I look forward to hearing testimony from the consumer and housing groups, the
Office of the Attorney General, the residents, the banks and community activists.
PREPARED STATEMENT OF SENATOR PETE V. DOMENICI
I am pleased we are having this series of hearings on the access to capital in lowincome and distressed communities.
The practice of reverse redlining, that is to say targeting low income or minority
communities for credit at exorbitant rates and unscrupulous terms is certainly
something this committee should be concerned about
New Mexico is a state with a large Hispanic population . Thirty percent is Hispanic, another 10 percent is Indian. This is an issue that is very important to me.
A staff member of mine's mother was almost the victim of one of these home improvement scams. She is a widow, an immigrant to this country. She lives alone and
she was so frightened when these people came door to door trying to sell home improvements at an inflated price, on very severe credit terms. She was afraid at first
to go to the police. She was afraid the workmen would revisit her and beat her up.
I found the materials on this issue very interesting. I question whether our tax
laws, in allowing a deduction for home equity loans are partially at fault. Prior to
1986, there were very few of these open ended home equity lines. Since the 1986
tax law, these types of loans have sky-rocketed.
It also appears that the Community Reinvestment Act may also be contributing
to the problem since it does not distinguish between loans actually made by the financial institution and loans purchased by the financial institution .
We can address the tax law and the CRA shortcomings, but perhaps the greatest
service can be done by investigative reporters who can widely publicize these scams.
We need to better educate homeowners to these very sophisticated schemes and
what the ramifications really are.
The best program for low-income borrowers is to have a vibrant economy. We
want the recession to end, but we can't get from here to there without a strong real
estate market.
While most people are focused on tonight's speech by the President, much can be
done to help home buyers and the housing industry through the Banking Committee.
Nothing in our national experience captures the American dream more than home
ownership. All Americans need to be part of this dream. While bankers for years
have denied that mortgage discrimination exists, the recent Federal Reserve data
proves that mortgage discrimination exists .
The decline in real estate values has sharply reduced the net worth of many
American families since two-thirds of all American families' wealth is in the form
of real estate. Reviewing these statistics, it is easy to understand that the decline
in real estate values has contributed to consumers' lost confidence .
Federal Housing Administration (FHA)
I have a proposal to expand home ownership through the Federal Housing Administration (FHA) by helping first-time, low-income, and minority borrowers.
Since FHA is a 100 percent federal guarantee, it should be better targeted to
those who are denied mortgage credit and provide a back up reassurance to reluctant lenders.
The fundamental impediment for first-time home buyers is the downpayment.
Most private sector mortgages want at least 20 percent in a downpayment or pri-

306
vate mortgage insurance. However, FHA borrowers can put up as little as 3 percent
in a downpayment.
This bill requires FHA to develop new programs to improve its ability to better
serve low-income, minority, and first-time home buyers. HUD will be required to report to Congress within one year on how it plans to implement new programs.
According to Census Bureau data, nearly 85 percent of all first-time home buyers
are white, while 10 percent are black and 5 percent are other minorities . Nearly 90
percent of all homeowners are white.
According to Federal Reserve data, only about 15 percent of FHA's portfolio is
serving low-income borrowers. An FHA guarantee is obtained based on home purchase price, not income of the home buyer. FHA needs to better target its resources
to low-income borrowers and provide government guarantees to those who are being
denied mortgage credit.
This bill stimulates the housing market by increasing the FHA mortgage amount
of $125,000 for first-time home buyers in high cost areas. Nearly 33 percent of all
first-time home buyers take advantage of a federal guarantee to obtain a mortgage.
This bill allows borrowers in high-cost areas to take advantage of the FHA government guarantee .
Nothing in this bill changes the intent or the need for the FHA reforms. The reforms were needed to guarantee the fund operates in a financially sound manner.
FHA can target the federal guarantee without threatening safety and soundness.
PREPARED STATEMENT OF SENATOR CAROL MOSELEY-BRAUN
I wish I could say I am pleased to be here this morning, Mr. Chairman, but I
am sorry to have to be looking at lending practices that take unfair advantage of
low-income American homeowners.
Home ownership is at the core of the American dream, and achieving home ownership is particularly tough for low-income Americans. Lending practices that prey
on the vulnerabilities of low-income homeowners, therefore, are particularly troubling.
"Reverse Redlining" is a new term. It refers to lending practices that involve
charging very high rates of interest and equally high up-front loan origination fees
to borrowers that really cannot afford the loans. The results of "Reverse Redlining"
range from less money for the basics like food, heat, and electricity for the low-income borrowers, to ever-increasing debt loads, to outright loss of the low-income borrower's most precious possession- his or her home.
We have recently held hearings in this committee on how to get more money into
low- and moderate-income communities through a community banking initiative and
by strengthening the Community Reinvestment Act. Today's hearing demonstrates
clearly why those objectives must be priorities for the committee this year.
It is clear that we have to act to address the "Reverse Redlining" problem. I do
not want to suggest, however, that mortgage brokerage and finance company activity is in and of itself a problem, or and purchases of loans by one financial institution from another, are not in most cases appropriate. Mortgage brokers and finance
companies fill a real need in our finance system, and in the great majority of cases,
loan purchases are entirely legitimate. And I do not want to suggest that mainstream financial institutions are engaging in behavior that hurts low-income homeowners as a standard business practice . I am sure that virtually every mainstream
financial institution in this country joins me in condemning fraudulent lending practices .
What I hope we will focus on, therefore, is what should be done. What I want
to know is how can we improve our laws and our law enforcement so that we can
put an end to "Reverse Redlining." I congratulate you for calling this hearing, Mr.
Chairman, and I look forward to working with you, with my colleagues on the committee, with our witnesses this morning, and with all interested parties in an effort
to answer the legal and enforcement questions and take the actions necessary to
solve this problem.

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SCOTT HARSHBARGER, ATTORNEY GENERAL
COMMONWEALTH OF MASSACHUSETTS
A SPECIAL REPORT ON THE ATTORNEY GENERAL'S RESPONSE TO THE
HOME IMPROVEMENT AND MORTGAGE SCAMS IN MASSACHUSETTS :
ENFORCEMENT, LEGISLATION AND REGULATION

OCTOBER 30, 1992
A LETTER FROM THE ATTORNEY GENERAL
To Whom It May Concern:
During the last 18 months, my office has undertaken a comprehensive program
of enforcement, and regulatory and legislative action to address the consumer harm
resulting from unscrupulous lenders and home improvement mortgage contractors.
Investigations by my office showed that vulnerable homeowners many of them elderly, minority and inner-city residents- were targeted by certain brokers, lenders
and contractors, to take out second mortgages with unconscionable terms and conditions. The most decisive factor for these lenders was whether the consumer had sufficient equity in his or her home to cover the loan in case of default. In many cases,
irresponsible lenders gave scant attention to whether consumers could repay their
loans with their monthly income. As a result, these consumers were laden with unmanageable debt and, in numerous cases, lost their homes through foreclosures.
Following complaints received by my office, I mobilized a Home Improvement and
Mortgage Task Force to take swift action on a variety of fronts to end this insidious
form of urban economic violence, in this case blatant victimization of vulnerable
homeowners .
This report describes the origins of the second mortgage lending scams, the nature
of the illegal activities that took place, the actions my office took to remedy those
problems and, most importantly, how to prevent these scandals from happening
again.
Some ofthe major highlights, finding and recommendations of the Task Force are:
• The Home Improvement and Mortgage Task Force has initiated 13 enforcement
actions in the last year. These actions have already produced more than $40 million in legally enforceable benefits to Massachusetts consumers, particularly consumers of low and moderate income. More than 1,000 families will be assisted by
settlements already reached.
• Unprecedented and creative regulations have been promulgated to curb future
abuses, and new mortgage licensing and home improvement laws have been enacted to legislate positive change.
• The widespread home improvement and mortgage scams apparently are primarily
the by-product of greed and of the failure of numerous Massachusetts institutions.
• Large financial institutions failed to police their own industry; community organizations and educational institutions and agencies failed to regulate adequately
abuse by home improvement contractors and lenders.
• Greater community access to the services of respected financial institutions is required.
• More diligent monitoring of financial abuses must be a priority for the mainstream financial institutions and for regulatory agencies.
• Extensive educational efforts to advance consumer understanding of financial
transactions are also required.
I am proud of the success of the Task Force, which consisted of attorneys, investigators and support staff, whose commitment, skill and dedication made this all
possible. The Task Force enforcement actions will provide relief for thousands of victims and hopefully prevent the tragedies which occurred from being repeated in the
future.
I welcome your comments and suggestions on this report and important issue. It
is only through working together in partnership that we will be able to protect those
in society who need it the most and prevent victimization before it occurs.

Sincerely,
Scott Harshbarger

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I. INTRODUCTION
In recent years, across cities and towns in Massachusetts, a familiar sequence of
events took place: inner-city and suburban homeowners, who were income poor, but
had considerable equity in their homes, were targeted to enter into high interest
rate mortgage loan transactions, often with unconscionable terms and conditions attached. The irresponsible lenders who preyed on these vulnerable consumers were
interested primarily in the equity that these homeowners had built up in their
homes, rather than whether consumers could repay the loans with their monthly income.
In hundreds of cases, when consumers could no longer repay these second mortgages, lenders foreclosed on the family home and entire families were evicted.
As homeowners are foreclosed upon, the social fabric of a community is torn apart
and the community is destabilized. Destabilized communities are breeding grounds
for further forms of economic and other types of urban violence.
Over the past 18 months, the Office of the Attorney General has been investigating and prosecuting unscrupulous lenders, brokers and contractors who engaged in
home improvement or second mortgage schemes in an effort to steal the homes of
consumers . This work has been largely undertaken by the Home Improvement and
Mortgage Task Force which Attorney General Harshbarger created in July, 1991,
by drawing upon the resources of numerous divisions within his office. Prior to taking any formal legal action, the Task Force issued dozens of subpoenas, interviewed
hundreds of consumers and sought the advice of various banking and lending industry experts. The actions that were eventually taken by the Task Force were based
on a careful assessment of the facts and the law that was part of the exhaustive
investigation.
This report is intended to alert individuals, homeowners, community organizations, regulatory and law enforcement agencies and our major financial institutions
to the various scams that the Office of the Attorney General investigated and
brought to light and that can be so destructive to families and whole communities.
II. BACKGROUND-SETTING FOR THE PROBLEM
During the 1980's, the Massachusetts real estate market experienced unprecedented growth. Property values skyrocketed, and individuals who had purchased
properties in the 1960's and 1970's saw the equity in their property increase dramatically.
During this period, scams emerged that were designed to persuade homeowners
to transfer the built-up equity in their homes to lenders, brokers and home improvement salesmen under loan conditions that contained unconscionable terms, or under
promises of home improvement repairs that were overpriced, faulty or never took
place. Those hardest hit by these scams were the elderly, those already in financial
distress, those unsophisticated in financial transactions, communities of color and
others, who while income poor or on fixed incomes, had built-up significant equity
in their homes.
These schemes flourished for a number of reasons. First, it appears that the only
credit available to these consumers was from the then unregulated and unlicensed
second mortgage companies and brokers. These lenders and brokers were not able
to police themselves sufficiently to prevent economic exploitation by a certain few.
This exploitation was aided by unethical brokers who extracted large, unconscionable fees from consumers and who, in some instances, had undisclosed financial and
corporate ties to lenders whose primary goal apparently was the acquisition of real
estate .
Second, the simple fact is that many inner-city communities across this state were
abandoned by mainstream lending institutions during the 1970's and 1980's. Even
during the economic boom years of the 1980's, little attention was paid to capturing
inner-city markets, and creating loan products or providing access to banking services to these communities.
Given the void of credit options created by mainstream financial institutions, the
unscrupulous contractor and high rate lender entered the picture and marketed
their products to vulnerable homeowners. While there was a lack of access to traditional credit products for these consumers, mainstream financial institutions were
funding high rate second mortgage lenders and unscrupulous contractors who were
selling loans to these communities. Thus, in addition to the law enforcement attack
directed toward specific second mortgage lenders and brokers, the Task Force also
took a hard look at those mainstream financial institutions that provided lines of
credit to or purchased mortgages from unscrupulous second mortgage lenders.

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III. ALLEGATIONS APPARENT SCOPE OF PROBLEM
The Task Force uncovered wide-ranging allegations of wrongdoing falling into the
categories listed below. Consumers, community organizations and law enforcement
agencies should familiarize themselves with the listed scams and be on guard for
them in their individual communities.
A. Misrepresenting the Nature of the Transaction
• Informing consumers that they are mortgaging their homes when they actually
are deeding them away and merely retaining a right to repurchase the home;
• Misrepresenting the home improvement work to be performed, the price to be
paid, the interest rate, the amount of the loan, the monthly payment or other
term ofthe loan; and
• Misrepresenting that a broker is a lender when, in fact, the broker is merely arranging the loan for a fee rather than actually making the loan.
B. Illusory Inducements
• Promises by a home improvement contractor or lender that he will give the
consumer a job to help pay off the loan;
• Promises that onerous loan terms will be rewritten in the future, if the consumer
just agrees to pay those terms for a brief period;
• Charging a cash fee in return for a promise to find immediate refinancing for a
consumer already facing imminent foreclosure when, in fact, nothing is done for
the consumer other than taking the fee; and
• Giving consumers lump sum cash payments "to use as they see fit" as part of
mortgage loan proceeds disbursements in order to induce consumers to agree to
unaffordable loans.
C. Pressure and Coercive Tactics
• Consumers are rushed through the loan documents without an adequate time to
read and understand them;
Consumers are told that no lawyer is needed to assist them;
Consumers are told that the contractor cannot get funds to begin home improvements until the bank releases funds and that the bank will not release such funds
until the consumer signs a completion certificate indicating work is complete even
though work has not even begun; and
The consumer's ability to read loan documents is physically obstructed by the
arms of the contractor across loan documents or because loan documents are
rolled up, only revealing signature lines.
D. Failure to Disclose Key Elements of Transaction
• Asking consumers to sign incomplete documents missing such key elements as the
interest rate, the finance charges and the number of payments;
• Failure to disclose that a mortgage is being taken on the consumer's property to
secure the loan; and
• Failing to disclose that a consumer has inadequate income to repay the loan and
that default is therefore likely.

E. Forgeries and Falsification
• Forging a consumer's signature to the certificate of completion credit application
or other loan document; and
• Falsifying a consumer's income, by use of false or forged tax statements and rent
receipts, in order to inflate the consumer's income and thereby arranging loans
the consumer cannot afford.
F. Unconscionable or Unaffordable Loan Terms
• Balloon payment requiring consumers to make large payments of principal usually within a year or two of the loan closing;
• Excessively high loan fees, including broker fees, origination fees and late payment fees;
• Escrow and security fund accounts on which the consumer is charged interest but
from which the consumer derives no tangible benefit; and
Excessively high interest rates.
IV. ACTIONS BY THE TASK FORCE
Attorney General Harshbarger charged the Task Force with initiating a multipronged attack on the scams. This included initiating litigation, drafting and supporting legislation, and promulgating regulations.

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A. Litigation
The Task Force has initiated 13 actions relating to home improvement and mortgage scams in approximately the last year. These include actions targeting banks,
mortgage companies, home improvement companies and individual home improvement salesmen and mortgage company executives. The actions include the following:
1. Bank Settlements
The Task Force has entered into six separate settlement agreements with Boston
area banks. These agreements were entered into following receipt by the banks of
letters from the Attorney General indicating an intention to file suit, if settlements
could not be reached. We were pleased that the banks involved, once they were
aware of our commitment to seek effective remedies, chose to negotiate and settle
their respective cases, rather than invest the cost and time involved in litigation.
The bank settlements include:
a. BAYBANK SETTLEMENT
In February, 1992, the Attorney General reached agreement with BayBank regarding any liability it may have had in indirectly financing home improvement
transactions. Under the terms ofthe settlement, BayBank agreed to establish a program to resolve consumer complaints regarding home improvements that BayBank
financed indirectly through contractors between November, 1987 and February,
1992. BayBank, in effect, agreed to accept responsibility for any improper conduct
by home improvement contractors where BayBank has indirectly financed the work.
As part of the settlement, BayBank also agreed to make $5 million in below-market
rate home improvement financing available to low income communities and $6 million available for the construction of affordable housing. The Lawyers' Committee
for Civil Rights and the NAACP Legal Defense Fund, Inc. also assisted in the case
and participated in the settlement.
b. SHAWMUT BANK SETTLEMENT
Attorney General Harshbarger reached a $7 million settlement with Shawmut
Bank to resolve the Task Force investigation of Shawmut Bank's role in funding Resource Financial, a second mortgage company sued by the Attorney General . The
settlement requires Shawmut to make $5 million in mortgage loans available to low
income communities. These loans will have the following extraordinary features: (a)
no downpayment required; (b) no closing costs; (c) an interest rate one point below
Shawmut's regular rate. The settlement further requires Shawmut to make $2 million in below-market rate home improvement loans available in targeted low income
communities. In addition, the agreement requires Shawmut to provide either a new
loan or an average of $6,000 in cash to approximately 50 specific Resource borrowers whose loans were funded by Shawmut. The Union Neighborhood Assistance Corporation provided the Task Force with information regarding certain Resource borrowers who are aided by the settlement and others described below.
C. FLEET BANK SETTLEMENT
The Attorney General, in April of this year, reached a settlement with Fleet Bank
to resolve its role in funding Resource Financial Group. This settlement requires
Fleet to establish a $ 12 million mortgage program for low income communities. The
program will have the same extraordinary features as in the Shawmut settlement.
In addition, Fleet agreed to provide new loans or a $6,000 cash payment to each
ofthe approximately 40 Resource borrowers whose loans were funded by Fleet.
d. QUINCY SAVINGS BANK
A settlement also was reached with Quincy Savings Bank to resolve claims
against Lincoln Trust Company, which merged into Quincy Savings in early 1992
and which also had funded Resource Financial Group. Quincy Savings Bank agreed
to provide either a new loan, on very favorable terms, or a $ 1,250 cash payment
to 100 Resource borrowers. As part of the agreement, Quincy Savings also agreed
to make $3 million in mortgage money available, again on terms extraordinarily favorable to consumers .
e. SOUTH SHORE BANK
In June, 1992, the Attorney General settled mortgage related claims with South
Shore Bank, which also funded Resource Financial Group. South Shore agreed to
provide relief to 367 Resource borrowers. Of this total, 278 Resource borrowers who
have already paid off their Resource loans will receive a flat cash payment of
$2,350. An additional 68 Resource borrowers whose loans are still outstanding will
receive either the cash or a refinancing of their loan on very favorable terms. The
remaining 21 Resource borrowers whose properties are currently held by Resource

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will either receive cash or a loan: to reacquire their homes. Finally, the agreement
requires South Shore to donate $ 150,000 in cash to establish a legal assistance program for consumers facing foreclosure by lenders other than Resource.
f. USTRUST SETTLEMENT
A sixth and final bank settlement was reached with USTrust to resolve claims
regarding its role in indirectly financing home improvement transactions. USTrust
agreed to establish an arbitration program for any consumer who has a complaint
regarding home improvement loans funded by USTrust. Under the program, a
consumer with a valid complaint can obtain up to $ 1,000 for Truth-in-Lending violations, can have his or her home improvement loans rewritten on favorable terms
and can have shoddy home improvement work repaired at no cost, among other
types of relief. Several hundred consumers could qualify for the arbitration program.
ÚSTrust also agreed to provide a $3 million mortgage program targeting low income
communities. Finally, USTrust agreed to make $2 million in below-market rate
loans available to minority owned businesses.
2. Mortgage Company Litigation
The Task Force also has initiated litigation directly against a number of mortgage
lenders including Seacoast Industries, Resource Financial Group, Inc., the Money
Tree, Inc., Rhodes Financial, Inc., and State Finance and Mortgage Company of
Springfield. Each of these cases is in litigation, although several defendants have
announced that they are going out of business in response to the suits.
3. Home Improvement Company Litigation
The Attorney General also has sued a number of home improvement companies,
including Seacoast and Carefree Building Products, Pro-Tec-To Rolling Shutters of
New England, Inc., and Rolling Shutter Systems of New England, Inc. These suits
are pending.
4. Home Improvement Salesmen
The Attorney General also has initiated two separate consumer protection actions
against four former salesmen for Vinyl Distributors of New England.
B. New Consumer Protection Regulations
In addition to litigation that will provide relief to consumers for past injuries, the
Office of the Attorney General promulgated a comprehensive set of consumer protection regulations that are intended to create a level playing field for all lenders and
to protect consumers from future abuses by unscrupulous lenders and brokers. The
key features of these unprecedented regulations, which were promulgated following
public hearings, include:
• Requiring that all brokers and many lenders provide borrowers with standardized
copies of the Attorney General's Mortgage Broker and Lender Disclosure Forms.
These forms identify in simple and clear language the essential features of a
mortgage loan transaction as well as the cost and interest rate the borrower will
have to pay;
• Requiring that lenders and brokers take reasonable steps to assure that borrowers understand the loan transaction. This is an effort to address the needs of nonEnglish speaking borrowers. The regulations recommend the use of adult interpreters or translated disclosure forms, which will be provided by the Attorney
General's office in several languages.
• Prohibiting unconscionable rates or other loan terms. As an example of
unconscionability, the regulations indicate that factors to be considered include
whether an interest rate is 10 percent above the Wall Street prime rate, or 20
percent.
• Prohibiting the advertisement of various inducements such as use of the words
"immediate approval" of loan applications or "immediate closings;" the regulations
also prohibit the advertisement of a "no points" mortgage loan when that is not
the case.
• Severely restricting the use of certain other inducements such as "bad credit no
problem" and "avoid foreclosure." Lenders and brokers cannot use these terms in
advertisements unless they fully disclose all the restrictions that may apply to
such loans. In addition, brokers and lenders who use such inducements must provide the following warning: "You may lose your home if you cannot make all of
the payments or if you miss any of the payments on this loan."
A number of organizations assisted in the development of these regulations, including the Massachusetts Bankers Association and the Massachusetts Association
ofMortgage Lenders and Brokers.

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C. Legislation to Regulate Home Improvement Contractors
The Attorney General played a major role in working with the Legislature to secure passage of the new law regulating home improvement contractors. The law enacted includes several important provisions which will:
• Prohibit home improvement contractors from also acting as mortgage brokers or
lenders in connection with the home improvement contracts they enter into;
• Require contractors to register with the Commonwealth's Bureau of Building Regulations and Standards;
• Require a written contract between a contractor and a homeowner for any job over
$1,000, detailing the work that needs to be completed and the terms of the agreement;
• Establish a Guaranty Fund to provide limited restitution to consumers who have
been defrauded by a registered contractor but are unable to collect on the judgment; and
• Provide for criminal penalties for home improvement contractors who fail to obtain a certificate of registration.
D. Foreclosure Assistance
In response to the widespread incidence of foreclosures related to home improvement and mortgage schemes, the Attorney General, in June, 1991 called for and received extensive cooperation from over 100 lenders in a voluntary 120-day moratorium on foreclosures . After initiating this voluntary moratorium, the Attorney General's office supported the passage of a mandatory moratorium which was enacted
by the Legislature. The Attorney General's office worked with private bar counsel
and Registers across the state to enforce the moratorium.
In addition, the Task Force provided emergency assistance to individuals facing
immediate foreclosure. As a result of this assistance, hundreds of foreclosures were
delayed or cancelled. In those instances where it was not possible to stop a foreclosure, consumers were referred to appropriate social service agencies for assistance.

VI. CONCLUSIONS AND RECOMMENDATIONS
As a result of its 18 months of work in the home improvement and second mortgage arena, the Task Force has reached the following conclusions and makes the
following recommendations:
A. Conclusions:
• The unregulated and unlicensed mortgage broker and lender industry was unable
to police itself to restrain adequately unscrupulous lenders and brokers from unfair and deceptive practices in the provision of second mortgage lending services.
• Entire communities abandoned by mainstream financial institutions are attractive
prey to high pressure and illegal tactics by unscrupulous lenders and brokers in
the provision of second mortgage products.
• Vulnerable and unsophisticated consumers need to be educated to the dangers of
urban economic violence that can accompany equity-based financing.
B. Recommendations:
• Lending associations should establish rules of conduct and codes of ethics for
members and discipline those who breach such rules and codes.
• Consumers in low income neighborhoods need greater access to more branches in
low income communities. Financial institutions need to create innovative credit
products for these communities, and must aggressively market these and traditional products to low income consumers.
• In fulfilling their Community Reinvestment Act responsibilities, mainstream
banks should actively reach out to low and moderate income, minority and nonEnglish speaking consumers. There is a compelling need for banks to become
more "user friendly" to low and moderate income communities all across Massachusetts.
• In particular, banks should develop mortgage loan programs that are maintained
in their portfolios so that more liberal and more flexible lending criteria can be
applied to low and moderate income applicants. Mainstream financial institutions
should expand second mortgage and equity based lending programs, with appropriate safeguards, so that more such lending can be made available to low and
moderate income consumers.
• Banks should formulate long-range plans to include branches, loan production
centers and automated teller machines in low and moderate income neighborhoods. Access to banking services is an essential part of modern life, and it is as
necessary as telephone, gas or electric utility services.

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• Mainstream banks should examine and scrutinize their financial relationships to
other lenders that provide credit in low and moderate income and minority neighborhoods. Banks must look at the impact of the mortgage companies they finance
on affordable housing and gentrification. Financial institutions must make sure
that the mortgage companies which they finance are lending on terms that are
fair and that such terms are not unconscionable. Mainstream banks must avoid
financing high-rate equity-based lenders.
• Second-mortgage lenders' and brokers' associations should aggressively police
themselves consistent with the Attorney General's consumer protection regulations and with the Commissioner of Banks licensing regulations.
• Public schools and community organizations must expand consumer education
programs so that consumers fully understand the fundamental terms of basic financial transactions. At a minimum, each graduating student should understand
the concept of interest and credit, and the basic elements of a mortgage transaction.
• Public institutions and agencies need to monitor newly-adopted regulations to insure that they are effective in curbing past home improvement and mortgage
abuses. They likewise need to enforce aggressively compliance with the new mortgage licensing and home improvement statutes.
The problems that created the second mortgage scandals are complex and cannot
be eradicated overnight. However, the recommendations outlined in this report, if
adopted and carried out by mainstream banks, second mortgage lenders, brokers,
communities and public agencies, are a necessary first step to changing the urban
economic landscape from one of deprivation and disintegration to one of hope and
opportunity. The equity-based lending that was carried out under unconscionable
terms and conditions by irresponsible businesses is just one form of urban economic
violence that we must seek to prevent. But, only by aggressive vigilance, and the
availability and access to products to meet the needs of the consumers who were
targeted can the remedial process begin. And it is the responsibility of all of us.
TESTIMONY OF THE NATIONAL CONSUMER LAW CENTER
(KATHLEEN KEEST, ROBERT HOBBS, MARGOT SAUNDERS, GARY KLEIN)
PREDATORY HOME EQUITY LENDING
FEBRUARY 17, 1993
PROBLEMS IN THE HOME EQUITY MARKET: PREDATORY LENDING¹
Mr. Chairman and Members of the Committee, thank you for your invitation to
testify today.
The National Consumer Law Center is an organization which acts in part as a
national support center for legal services attorneys and pro bond attorneys representing low income consumers around the country. These attorneys routinely request us to help analyze credit transactions and determine what legal rights and
remedies their clients might have. As a consequence, we have seen examples of
predatory home equity loans from all over the country-the kind of lending which
can devastate its victims.
Today you will hear from several other witnesses who can give you some vivid,
real-life examples of overreaching lending practices which have contributed to record
high foreclosure rates and the heartwrenching loss of homes to the auction block
throughout the country. Rather than add to that litany, we will focus on what we
believe has contributed to the increased incidence of predatory lending during the
past decade, and on what reforms we believe may help curb the excesses.2
¹This statement may use the more common term "second mortgage" to refer to what are more
precisely called "home equity" loans; that is, non-purchase money loans secured by residential
real estate, irrespective of the priority of the lien.
Some examples of the kinds of outrageous practices we have seen may be found in NCLC
publications, such as: Hobbs, Keest, DeWaal, " Consumer Problems with Home Equity Scams,
Second Mortgages, and Home Equity Lines of Credit," (AARP 1989) [hereafter "Consumer Problems"]; Keest, "Second Mortgage Lending: Abuses and Regulation," (NCLC, for Rockefeller Family Fund, 1991 ) (hereafter "Abuses and Regulation"]; "Nature Abhors a Vacuum: High-rate Lending in Redlined, Minority Neighborhoods in Boston," and "Principal Padding. The Prepaid Payment Pyramid," 9 NCLC REPORTS Consumer Credit & Usury Ed. (May/June 1991 ).

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THE CAUSES
Though home equity lending abuses are not new, the 1980s witnessed a major
upswing. "Equity-skimming," or "equity-theft" became a major threat to many homeowners in particular to the most vulnerable. A number of factors converged to
contribute to the problem:
Deregulation: In tandem with the appreciation of real estate values, (see below),
the deregulation of consumer lending in the 1980s left the door wide open for unscrupulous operators. Congress' contribution was to preempt both state usury ceilings on mortgage lending secured by first liens (whether purchase money or not),5
as well as state limitations on risky "creative financing" options, such as negatively
amortizing loans.
Federal deregulation also set the stage for many states to remove rate caps and
other limitations on other lending- including second mortgage lending. Whatever
the overall merits of economic deregulation, it undeniably unleashed the greedy instincts of unscrupulous operators all over the country. In keeping with the conventional wisdom of free market theory, "the market" was supposed to take care of any
problems. Unfortunately, there are market failures, and predatory home equity
lending provides a good example of one. Even as the cost of funds has declined,
these lenders have not lowered their rates, and for a number of reasons, competition
and market forces don't operate according to theory in these loans.7
The Rise in Real Estate Values: The inflation in real estate values in the 1980s
created much new wealth-the equity pool. Since real estate secured lending-particularly owner-occupied residential real estate-has historically been among the
safest kind of lending, creditors of all stripes strove to develop or increase their portfolio of real-estate secured loans. Legitimate lenders simply sought increasingly secure loans. The marginal lenders-the equity skimmers- looked to this new equity
pool as something to enrich them.
In turn, the appreciated value of the property led to "asset-based lending"-that
is, loans made based on the value ofthe security, rather than on the borrower's ability to repay. This has been common in commercial lending, but is unsuitable for
consumer loans in a humane society. Most borrowers are simply wage-earners who
look to their regular income to repay their debts. The amount of equity in the collateral is only relevant to the ability to repay a loan if the borrower intends to liquidate the collateral . In short, " asset-based lending" is a legitimate-sounding justification to ignore sound underwriting principles, and make unaffordable loans .
Equity skimmers may write loans with repayment terms which borrowers could
not hope to meet over the long haul: monthly payments which are 70 percent or
more of monthly income (or, in one case we've seen, monthly payments more than
monthly income ); or large balloon payments which the borrower has no realistic
hope of making. The loans are made because the lender can't lose: either they will
be repaid at a high interest rate, or, too often, through the foreclosure process . 10
The Rise in the Secondary Mortgage Market: Some high-rate mortgage lenders, particularly home improvement contractors, have historically operated by assigning installment contracts they write to other lenders, such as finance companies
or banks. But the 1980s added a new wrinkle-bundling mortgage loans into large
portfolios and selling them on the secondary mortgage market. This enabled mortgage companies specializing in home equity lending-unregulated in many statesto operate. Since there was a "back-end" income stream, they could operate with litIn fact, during the last cycle when serious abuses in this industry attracted public outcry
and led to regulatory reforms , Congress created the Truth in Lending rescission right, 15 USC
§ 1635, now one of the most valuable tools available to attorneys representing second mortgage
scam victims.
See p. 5, infra.
"Depository Institutions Deregulation and Monetary Control Act of 1980, § 501 (DIDA) , codified at 12 USC § 1735(-7a.
The Alternative Mortgage Transaction Parity Act of 1982 (AMTPA). 12 USC § 3800, et seq.
7See, e.g., pp. 7-10, infra.
The portion of homeowners with home equity loans more than doubled between 1977 and
1988. In 1977, 5.4 percent of homeowners had such loans; in 1988 , 11 percent (6.5 million families) had home equity loans . Canner & Luckett, "Home Equity Lending," 75 Fed. Reserve Bull.
333 (May, 1989).
In this case, where default was absolutely predictable and inevitable as of the first payment
on a 12- month balloon note, the contract provided for extremely high late charges plus a 42 percent default interest rate. Thus, at the end of the 12 month term, the lender could claim a lien
on the property that was approximately $50,000 greater than than the original principal plus
22 percent interest provided for in the note.
10In fact, state laws on foreclosure almost universally allow foreclosing creditors to buy the
property at a significant discount from fair market value and then to resell it at full value, pocketing the difference.

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tle capitalization base. They could obtain a line of credit from a major bank; originate predatory loans, taking out very high up-front fees; then dump the loans onto
the secondary market.
It is a good deal for an equity-skimmer who originates the loans, because it can
charge enormous up-front fees, be careless about underwriting, and then pass the
consequences along. Ifthe loan defaults, it is the new creditor's problem. Apparently
the buyers on the secondary market thought it was a good deal: they'd save the expense of originating loans, and, if the borrower alleges the originator defrauded
them, or engaged in usury or other violations of the law, they could hide behind a
holder in due course defense.11
"Tax Reform:" The amendment of the tax laws which retained the deductibility
of interest only for home-secured loans added to the massive increase in home-equity debt. Many consumers and taxpayers are not well -equipped to calculate how
the tax savings would weigh against the extra interest to be paid. Yet that is a sales
pitch given by many creditors, and many homeowners listen to that siren-call.
Cultural & Business Mores: Finally, these economic and legal changes happened in a context of shifting cultural attitudes. The business ethic was that "anything goes," and greed was no longer the subject of opprobrium, but rather viewed
as an engine for growth. Unfortunately, home equity lending became one of the targets for the speculators.
THE VICTIMS
The problem of second mortgage scams and home improvement scams is not limited to certain regions; we have seen them from most parts of the country.12 But
there are certain factors which make it worse in some areas than in others:
-areas which had the greatest increase in real estate values tended to have more
problems;
-the more permissive the legal environment (i.e. the less regulation), the greater
the problem.
Most poignantly, the more vulnerable the population, the greater the problem.
Thus the less educated and less sophisticated are particularly victimized by these
lenders; as are the elderly (who often have a lot of equity in their homes); and those
whose other
13 borrowing options are blocked, or who perceive themselves as having
no options.¹
THE PERPETRATORS
When one looks at both the "sins of commission" and the "sins of omission," there
is a great deal of culpability across the spectrum.
"
Tin Men:" Fraudulent home-improvement contractors, particularly the door-todoor operators, have long been a major source of complaint about abusive home-secured loans. They have been with us always, and probably always will. But as to
whether they are isolated actors, or are commonplace depends upon whether the ultimate sources of the financing -and the regulatory environment-encourage or discourage oppressive business practices.
In addition to needing a source of financing to run their business at the outset,
these contractors must have an outlet for their credit sales , as they cannot afford
to carry the credit accounts themselves. Thus they will either arrange for lenders
to make direct loans, with the proceeds to pay off the sales ; or will write financing
contracts themselves, to be immediately assigned by prearrangement to a lender. In
some instances, it may be the ultimate financier who drives the operation, in essence using the contractor as a "bird-dog" to drum up mortgage business for it.14
These ultimate lenders can be second mortgage companies (which may or may not
be regulated by the state); often they are finance companies (which are regulated
by the state); or banks (which are regulated by either the state or a federal agency,
11 The holder in due course doctrine generally gives assignees or other subsequent holders of
negotiable instruments (such as promissory notes) immunity against legal claims and defenses
that the borrower may have had against the original creditor. (See also p. 11 , infra. ) Some also
bought the loans with a recourse arrangement, whereby they would return non - performing loans
to the originator, giving them yet further protection against risk-at least until the originator
went bankrupt.
12 One exception is Texas, which has strict limitations on the kinds of home equity loans
which can be written at all.
13This factor helps explain the disparate impact of predatory lending felt by minority borrowers and people living in minority neighborhoods. See, eg. "Abuses and Regulation," note 2,
supra., Appx. B-"Race and Risk: High Rate Lenders for High Risk Borrowers -Myth or Fact?"
14 This was the heart of the claim in Baker v. Harper, in which a mortgage company was ordered to pay $45 million to 5 families. See "Alabama Jury Orders Lender to Pay $45 Million
in Fraudulent Lending Case," 57 BNA Banking Rept. 270 (Ăug. 12, 1991).

70-832 O · 93 - 11

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depending upon their charter). It is the cooperation of the ultimate financing
sources which keep a contractor in business. Thus the lender is in a position to help
assure that legitimate value be given for the money, or to help compound the problem by trying to disassociate themselves from any complaints the borrower may
have about the contractor or his work.15 Unfortunately, many ultimate lenders, despite their heavy involvement in facilitating the transaction, choose the latter
course.16
Second mortgage companies: As was noted above, the 1980s witnessed the
growth of second mortgage lending companies-many of which received notoriety:
Landbank Equity; First American Mortgage Company; Freedlander. In many states,
these companies were not (and still are not) regulated. The earlier discussion about
the secondary mortgage market explains how these companies generally operated.
As with the "tin men," it is frequently regulated lenders-banks and thriftswhich provide the wherewithal for these companies to survive. Again, there are degrees of culpability among these "enablers." Some may actually know what kind of
operation the second mortgage lenders are running; others simply choose to ignore
the red flags in these transactions , and buy up the paper anyway 17 The more "the
legitimate" lenders opt to purchase these kinds of loans with an “ostrich" approach
to their investment, the easier it is for the predatory lenders to flourish.
Finance companies: 18 Finance companies moved into home equity lending in a
big way in the past 15 years. Some of the finance companies have been particularly
bad at "loan-padding:"-inserting costly add-ons onto loans, making them much
more expensive for borrowers.19 Finance companies are regulated (with varying degrees of success) by the states, but some are subsidiaries of banks, which, in turn,
are regulated by either the states or a federal agency, depending upon their charter.
The supporting cast: Mortgage brokers have played a major role in steering borrowers into bad loans. As their fees are a percentage of the loans, there is a "reverse
competition" effect which encourages them to hook borrowers up with expensive,
loan-padding lenders. Many of these brokers advertise as if they are market-rate
lenders and do not disclose their true role-or their commissions-until loan closing.
By that time many borrowers have lost their leverage to object or walk away. Loan
brokers are not regulated in many states, and some regulation which does exist is
token only.
Banks and thrifts: As the above discussion indicates, even if banks and thrifts
are not directly engaging in predatory business practices, it often is their ultimate
financial support which enables the predatory lenders to operate on the scale we
have seen in recent years.
ALLOCATING RESPONSIBILITY
To anticipate one reaction we've heard too often in telling of these loans, I'd like
to make a few other observations. That reaction: "Well why do people get themselves into these deals? Don't they have to take some responsibility for what they
sign?"
There are a lot of reasons why that's not an appropriate response.
• Most obviously, it blames the victim, while relieving the business of any ethical
obligation, as ifthe public policy is that a lender can do anything it can get away
with. After all, we prosecute burglars even if the apartment window wasn't
15 See, e.g. "Spiking and Loan-Splitting in Home Improvement Contracts: Artful Dodges," 26
Clearinghouse Review 415 (Aug. 1992). Where the sale of home improvement goods and services
is involved, the Federal Trade Commission's "holder rule" ( 16 CFR 433) provides that a related
financier has vicarious liability for any claims or defenses the consumer has against the seller.
16 More and more frequently, the same principals direct both sides of the business. But they
try to disguise the connection, so as to try to claim the borrower's obligation to pay is distinct
from the contractor's obligation to perform its part of the contract.
17 Unlike the home improvement sales financing contracts, the FTC " holder" rule does not
apply to straight loans, so these assignees can try to assert a holder-in-due course defense to
claims the borrower may raise based on the originator's wrong-doing.
18Finance companies, such as Beneficial, ITT Financial, etc, are what used to be thought of
as “small loan" companies, though in many states today they can make relatively large, mortgage secured consumer loans. It has been our experience that finance companies tend to keep
the home equity loans they make (refinancing them frequently), rather than using the secondary
market.
19 "Insurance-packing" is one of the more common means of loan padding favored by finance
companies. For a description of the practice, see National Consumer Law Center, Usury and
Consumer Credit Regulation Chap. 7 ( 1987 and Supp.). For a good example of how it can distort
the price of credit to a borrower, see Besta v. Beneficial Loan Co. of Iowa, 855 F.2d 532 (8th
Cir. 1988). In that loan, insurance packing enabled the lender to skim an extra $3,000 from
what was really a $1,400 loan. In one loan seen at the Center, the very same scheme was used
to skim an extra $23,000 from a loan.

317
locked. We prosecute muggers even if the victim didn't bother to learn martial
arts for self-defense.
• Credit-especially given the credit fads of the late 1970s and 1980s- is enormously complex and hard for most people to understand. It is even more so for
people with language barriers, educational barriers or any other of the multitude
of barriers a lot of consumers face. A recent Consumer Federation of America
consumer survey showed that though 70+ percent of respondents knew what the
letters APR stood for, only half of them understood its significance as an indicator
of the cost of credit. (Recent experiences with ARMS and consumer leases suggest
that some credit products are so complex that even the employees of the financial
institutions can't figure out what these contracts say.)
• Even aside from the issue of the products being too complex to be described in
easily understood terms, disclosure laws like TIL aren't as much help as they
should be. In fact, for residentially secured real estate, TIL actually encourages
distortion in disclosing the cost of mortgage credit . Because of the special treatment given closing costs and brokers fees by TIL (in some cases exacerbated by
FRB interpretations) in real estate secured loans,20 unethical creditors are encouraged to pack a loan up with exorbitant costs that, on their face, are permitted
by TIL to be excluded from the APR calculation.21 For these kinds of loans, TIL
has become part of the problem, not part of the solution. Moreover, TIL disclosures are often not finalized until the time of the closing on a loan, by which time
the borrower may have foreclosed other options, and no longer have the choice of
walking away.
Furthermore, contracts are not written in understandable language, and the sheer
volume of paper is overwhelming. One transaction, for example, had at least 40
pieces of paper that the consumer would have had to wade through. (The vast majority of those 40 pages were not "government-mandated ." Lenders wanting lopsided protections and verbose lawyers are the primary culprits for this excess
paper.) The prose isn't exactly targeted for an 8th, grade reading level, and on some
of these transactions, the numbers can take a lawyer a day or more to sort out.
• The dynamics of the sale must be understood as well. From our reports, some of
these brokers solicit the customers, rather than being sought out by the customers. Like any good salesperson, they are well -schooled in retail seduction, and
know how to gloss over their product's weak points.
That is problem enough when piled onto all the other factors mentioned here, but
it also must be remembered that, at least for most of us, the tendency is to trust
people. If it is hard to figure out what's going on, it seems the proper thing to do
to trust the nice man or woman who seems like he or she is trying to help you.
Many people don't operate from the assumption that all business people are out to
20Many costs associated with these transactions would fall within the overall definition of a
finance charge, except that they are specifically excluded from the finance charge because these
transactions are secured by real-estate. 15 USC § 1605 , 12 CFR 226.4(cX7). To the extent the
purpose of TIL was to disclose the full cost of credit to a consumer, there is absolutely no justification for some of the (cX7) exclusions. (The ones that were justified would be justified in
the purchase money mortgage context, but not in the second mortgage context. In a cash transaction real estate purchase, title fees and abstract fees would be incurred, so these fees would
be imposed in a comparable cash transaction, and therefore wouldn't be a finance charge. In
a straight second mortgage loan, there is no comparable cash transaction .) When TIL was
passed, second mortgage lending was more rare, and closing costs were small in relation to the
loan amount, so the degree of distortion was less significant to a consumer. See generally
Rohner, The Law ofTruth in Lending, § 3.03 [ 1 ] ( 1984).
Additionally, the FRB interpretation as to brokers ' fees is arguably wrong, at least in some
factual circumstances, but until a court declares the interpretation "demonstrably irrational,"
creditors will exclude the fee from the finance charge. ( 15 USC § 1605(aX3) declares a finders
fee a finance charge, and nowhere in the statute is any exception to that authorized. Thus,
where the broker acts as a finder for the lender, as many of these do, the fee should be a finance
charge. But Official Staff Commentary § 226.4(aX2 )-3, while clearly in direct contradiction to
§ 1605(aX3) and thus not legally entitled to deference, offers the creditors a convenient haven.
Though at least two court cases have offered courts the opportunity to address this issue, neither of them choose to do so, and the issue remains an open one.)
So today, with the surge in home equity lending, the increased costs tacked on to these loans,
exacerbated in the case of abusing lenders, the (cX7) exclusions and broker's fee interpretation
are beginning to be the exceptions that swallow the rule. This undermines the usefulness ofTIL
as an indicator of the cost and a tool for comparison shopping.
21 Regulation Z, § 226.4(cX7) does require that these charges be "bona fide and reasonable"
in order to qualify for the exclusion, but that's of little help to a consumer at the outset . We
grocery shop often enough to know what a bona fide and reasonable price for a loaf of bread
is; most of us don't get mortgage loans often enough to know what a bona fide and reasonable
price is for a brokers fee or an attorneys fee or a title search fee.

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rip them off until proven otherwise, and we as a society should think hard before
we decide we want our economy to operate that way.22
• And of course, one of the central questions raised by the distribution of these
loans is to what extent, if any, the high-rate lenders' customers have alternatives.
This public saga began with the allegation that predatory lending operated in a
credit vacuum created when mainstream banks abandoned direct lending in minority neighborhoods. In response some creditors have asserted that these are
high risk borrowers who could not get credit elsewhere, and that the high rates
are justified by the high risks.
Issues of redlining are for another proceeding, but there are some points we would
like to make concerning the "high risk” allegations:
-Most important, many of these borrowers are not in fact any riskier than others.23
There may be self-selection, with some people assuming they wouldn't qualify, or
assuming that "regular" lenders don't want their business. Though some borrowers really may not have alternatives, many simply may believe they do not. (And
in fact, the differences between market-rate lenders and high-rate lenders in their
advertising campaigns and target markets may reinforce that belief.)
-Some consumers actually may present increased risk of default. But the way some
of these loans are structured, these creditors seem to opt for writing a more risky
loan, instead of one that might have a chance of working out, in order to suck
more equity from the home. As discussed earlier (p. 3), the more than ample security given by the home eliminates the kind of financial risk which might otherwise
justify such high rates.
-Finally, some of the consumers in fact could not get credit elsewhere-and perhaps should not. Whether the high-rate creditors are offering them a service or
are simply making improvident loans to milk these people dry is yet another
issue. Some of these loans are designed for failure-to simply suck out the last
remaining equity in the consumer's home, leaving the consumer with nothing
when the home is sold. High rates, loan packing, and unaffordable balloons all
add to the notion that equity-stealing is too often the motivation.
RECOMMENDATIONS
The problem of predatory home equity lending has a multitude of sources, and
the solutions will have to come on many fronts. NCLC has developed a catalogue
ofrecommendations to address both the overall problem and individual pieces of the
overall pattern. Following is a two-part appendix which contains full discussions of
that catalogue, and for ease of reference, a summary thereof. While that list is comprehensive, it does not rank the suggested reforms in order of importance to consumers.
So to conclude our remarks today, we would like simply to highlight those reforms
which we think would be of greatest value in combatting the overall problem of
predatory lending practices.
• Interest rate ceiling and limitations on other charges.
As a result of an anomalous mismatch between statutory usury ceilings and market rates in the late 1970s, the entire concept of rate caps became anathema to lenders and regulators. Consequently, we threw the baby out with the bath water.
In 1827, the Virginia Supreme Court observed that "It has been a good deal the
fashion of late, to decry the policy and justice of our laws regulating the rate of interest.... It may be permitted to observe, however, that if the experience of the
ages, and the general opinion of mankind, deserve weight in legislation, their voice
is in favor of usury laws. They have prevailed in all civilized countries, and in all
time." 24
The experience of the "deregulation decade" simply proves the point. The experience proves that rate caps are needed to protect the trusting, the unsophisticated,
the unwary, and the necessitous consumer from "the oppression of usurers and
monied men, who are eager to take advantage of the distress of others" 25 now no
less than 150 years ago. The 1970s problem of a mismatch between statutory cap
and market rate is easily resolved by the imposition of a statutory ceiling which can
float with a specified market-related index.
22 Some courts have considered this "trust no one" approach and rejected it as untenable. See,
e.g. Northwestern Bank v. Roseman, 344 S.E.2d 120 (N.C. Ct. App. 1986), aff'd 354 S.E.2d 238
(N.C. 1987).
23 See "Race and Risk," note 2, supra.
24Whitworth & Yancy v. Adams, 5 Rand 333 , 335, 26 Va. 333 (Va. 1827).
25 Id.

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Furthermore, the usury ceiling should be combined with limitations on additional
non-interest charges (points, brokers fees, closing costs, credit insurance, bogus escrows, etc.), which will curb loan-padding.
In the absence of a federal cap, the DIDA 26 should be amended to permit states
to reintroduce rate caps on home equity loans should they choose.27
• Eliminate holder-in-due course status for assignees and purchasers of
home equity loans.
This will force the industry to do more self-policing. If holders will clearly be liable for the claims the borrowers have against the originators, they should more carefully screen those with whom they do business. That, in turn, should help dry up
the financial lifeline that has enabled the predatory second mortgage companies to
operate.
There is already federal precedent for this: the Federal Trade Commission has
eliminated the rule for the purchase of consumer goods or services. 16 C.F.R. § 433.
(It thus already applies to home improvement credit sales, but does not apply to
straight loans .) Congress also limited the holder rule somewhat for certain credit
card purchases. 15 USC § 16661. The limitation on the holder rule certainly has not
dried up the legitimate auto financing market, so there is no reason to assume that
extending it to home equity loans would dry up the legitimate home equity lending
market.
• Define improvident lending and overreaching home equity lending as an
unconscionable practice or an unfair practice, and provide a private remedy.
The 1974 model Uniform Consumer Credit Code § 5-108 contains a provision
which provides consumers relief against unconscionable conduct or unconscionable
terms. Among factors to be considered in determining unconscionability are:
-Belief by the seller, lessor, or lender at the time a transaction is entered into that
there is no reasonable probability of payment in full of the obligation by the
consumer or debtor.
-The fact that the seller, lessor, or lender has knowingly taken advantage of the
inability of the consumer or debtor reasonably to protect his interests by reason
of physical or mental infirmities, ignorance, illiteracy, inability to understand the
language of the agreement, or similar factors.
It provides that courts may refuse to enforce an unconscionable agreement, or
refuse to enforce any unconscionable term, or limit the application so as to avoid
any unconscionable result. It authorizes injunction and actual damages. A similar
provision in the model National Consumer Act provided for punitive damages as
well. (NCA, 88 5.107(4), 5.304).
As the attached appendix demonstrates, there is a wealth of steps -some major,
some minor-that can be taken to address various aspects of this problem. But we
feel that these are among the most useful to get to the heart of the matter.

26Note 5, supra.
27See p. 3, supra. It will be also necessary to assure that a state's law is not further subject
to preemption by a sister state with less inclination toward consumer protection through the
"exportation" doctrine as a result of recent interpretations of § 521 of DÌDA, 12 USC § 1831d.
Cf. Greenwood Trust v. Commonwealth ofMassachusetts, 971 F.2d 818 ( 1st Cir. 1992).

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APPENDIX
REGULATORY REFORM FOR PREDATORY HOME EQUITY LENDING

Summary
Issue

Alternatives

1.

Federal encouragement of
exorbitant rate HELS

Amend 12 U.S.C. Sec . 1735f- 7a.

2.

Federal encouragement
of HELS with balloon
payments , etc.

Amend 12 U.S.C. Sec . 3800 .

3.

Equity skimming

A.

Prohibit holder in due
course status .

B.

Establish claim that it
is unfair to lend so that
payments overburden the
consumer's income .

C.

Establish floating
interest rate ceiling .

D.

Require disclosures to
investors .

A.

Impose fiduciary duty on
loan brokers .

B.

Include fees in Truth- in
Lending finance charges .

C.

Enact maximum fee .

D.

Require early disclosure
of fees .

E.

Require Truth- in- Lending
disclosures by brokers .

F.

Require brokers to
advertise that they
arrange loans but are
not lenders .

A.

Prohibit balloon payments
generally .

4.

5.

Unfair and deceptive
practices by loan brokers

Balloon payments and
demand notes

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6.

7.

Credit insurance

Costly refinancing

B.

Alternatively , provide a
right to refinance
a balloon payment .

C.

Amend Truth-in- Lending
to require conspicuously
disclosed demand clauses .

A.

Require credit insurance
to be written on
declining monthly balance
basis .

B.

Require creditors to
take competitive bids
on credit insurance .

C.

Establish a 75 percent
minimum loss ratio for
credit insurance .

D.

Establish maximum rates
for credit insurance .

A.

Prohibit mandatory loan
consolidation .

B.

Establish an unfair and
deceptive practice claim
for requiring imprudent
refinancing .

c.

Require lender disclosure
of disadvantages of
refinancing .

D.

Require lenders to
provide consumers a
choice of a consolidation
HEL, a HEL without
refinancing , and
unsecured credit .

8.

Closing costs on home
equity loans

Amend Truth-in- Lending
to include HEL loan closing
costs in finance charge .

9.

Wraparound mortgages

Prohibit wraparound mortgages ,
or require the amount financed
to include only actual
advances for Truth- in Lending
and usury purposes .

10.

Prepayment penalties

Limit to one
month's interest .
2NDMTGAPP

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11.

Punitive foreclosure laws

A.

Establish right to cure
delinquency .

B.

Amend Bankruptcy Act ,
11 U.S.C. Sec . 1322 ( b ) ( 5 )
to allow cure until a
bona fide sale of home
occurs , and to authorize
cram-down .

C.

Require private sale of
foreclosed residence .

D.

Require notice of
redemption right .

E.

Establish a mortgage
assistance loan program.

F.

Allow moratoria on
payment of principal .

12 .

Lender pockets property
insurance proceeds .

Allow homeowner to decide
whether to apply insurance
proceeds to home or loan .

13 .

Untimely disclosures .

Provide advance disclosures .

2NDMTGAPP

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ALTERNATIVES FOR HOME EQUITY LOANS (HELs)
REGULATORY APPROACHES¹

DISCUSSION
1. Issue: Federal Encouragement of Exorbitant-Rate HELs.
Problem: There has been a dramatic increase in predatory HEL lenders who encourage homeowners to take out large HELS at high annual percentage rates. Many
of these mortgages are really first mortgages, particularly when the homeowners are
elderly, because the homeowners' prior mortgages have been paid off. Under § 501
of the Depository Institutions Deregulation and Monetary Control Act of 1980
(DIDMCA),2 these HEL lenders were inadvertently set free to gouge consumers.
DIDMCA was intended to repeal state usury laws which, because of high market
interest rates, were impinging on home sales. However, it was written too broadly
because it applied to any "first lien on residential real property," whether it was to
be used for purchase or not. Unscrupulous HEL lenders use this loophole to target
consumers with a lot of equity or to require homeowners to pay off existing low-rate,
purchase money mortgages with high-rate HELS.
Alternative: Amend DIDMCA to limit it to first liens taken to secure a loan for
the acquisition or construction of a residence or to first liens taken to refinance such
loans if the annual percentage rate on the new loan is at least two percentage points
lower than the interest rate associated with the original loan.
2. Issue: Federal Encouragement of Balloon Payments, Negative Amortization, Demand Clauses.
Problem: Another sweeping federal preemption of state consumer credit laws became effective on October 16, 1983 with the 1982 Depository Institutions Act. The
primary preemption in that act is contained in the Alternative Mortgage Transaction Parity Act (AMTPA), 12 U.S.C. Sec. 3800. AMTPA does not affect interest
ceilings on mortgage loans, but rather addresses the structure of mortgage loans by
overriding state laws that restricted "creative financing," e.g., laws limiting variable
interest rates, balloon payments or negative amortization . AMTPA, like DIDMCA,
applies to HELs as well as mortgages to acquire a home, though the purpose of
AMTPA, as well , was to encourage home construction and home purchases . In addition, AMTPA applies to any mortgage regardless of priority. Like DIDMCA, it has
thus repealed traditional regulation by the individual states of the terms and conditions of consumer credit transactions that are secured by a family home. This preemption prevents states from taking such traditional steps as putting annual or lifetime caps on variable interest rates, limiting or prohibiting balloon payments (see
Issue 5 below) or negative amortization³ and limiting prepayment penalties (see
Issue 10 below).
Alternative: Amend AMTPA to limit it to first and second liens primarily for the
acquisition or construction of a residence, or to refinance first liens at an annual
percentage rate that is at least two percentage points lower than the interest rate
associated with the original liens.
3. Issue: Equity Skimming.
Problem: Equity skimming may come in several guises. It may involve writing a
home equity loan that is likely to be unaffordable by the consumer: either the regu
lar payments are too high for their income, or low regular payments lead to a final
balloon payment that the consumer does not have the resources to pay. It also may
be "padding" the loan with unnecessary and costly charges of no benefit to the borrower in order for the creditor to extract more of the home's equity, either through
the borrower's repayment of the padded loan or through foreclosure in the event of
default.
NCLC first started observing equity skimming loans in the late 1970s and early
1980s when many states began deregulating consumer credit laws. Some equity
skimmers were most interested in obtaining a quick foreclosure sale of consumers'
homes, which they could buy and then sell for a large profit . Others were engaged
in what resembles a classic Ponzi scam. That is, they were in the business for the
short-term , extending credit with large front-end charges and high interest rates,
using underwriting criteria unlikely to prevent many defaults and foreclosures, and
then selling the mortgages to investors attracted by the high interest rates . They
' This is adapted from Hobbs, Keest & DeWaal, "Consumer Problems with Home Equity
Scams, Second Mortgages, and Home Equity Lines of Credit,” (AARP, 1989).
212 USC § 1735f-7a.
This occurs when the monthly payments are insufficient to meet the accruing interest on
the loan. This results in an increasing loan balance even though installments are timely paid.

324
would collect payments ("servicing") for the investor. (As with other Ponzi schemes,
these sometimes collapsed into bankruptcy.) Finally, those who skim simply by loanpadding are trying to extract extra wealth from the vast real estate equity pool for
themselves, without giving any real additional benefit to the borrower for the added
cost.
Alternatives:
A. "Holder-in-due course" status prevents the investor/assignee from being subject
to claims and defenses, e.g., fraud or usury claims, which the borrower might have
against the original lender. Removing holder in due course status for home equity
loans would put the burden on investors to make sure that they investigate the
lender before they purchase the paper. With such investigation, financing for predatory lenders dries up. While it is not clear that equity skimmers' investors could
technically prove they were holders in due course in a court proceeding, this is generally the investors' first line of defense when a consumer tries to protect the family
home by suing for fraud or other claims.
The Federal Trade Commission's "Holder Rule," 16 C.F.R. Sec. 433, abolished
holder in due course status for consumer credit sales in 1976. Because the FTC's
rule was fashioned before the rise in HELS, the need to cover consumer loans was
not considered. Legislation modeled on that rule, but applied to HELS, would help
to dry up the sources of funds for home equity skimmers.
B. An additional approach is to make it an unfair practice to extend a home equity loan to a consumer if the payments on the HEL, together with the other debts
which the consumer owes, are equal to or more than 40 percent of the consumer's
net income, or otherwise prohibit improvident lending." Most lenders would consider a 30 percent ratio of debt to income to be a dangerously high level of debt.
This prohibition would give consumers a claim against the lender who pushed the
consumer into insolvency. An individual's right of action, similar to that provided
in the Truth-In-Lending Act, or model statutes such as the 1974 Uniform Consumer
Credit Code would be necessary.
C. The most effective approach would be statutory interest rate ceilings, combined
with prohibitions or restrictions on non-interest charges, e.g., points, brokers' fees,
service charges, unearned interest, late charges. Effective yields on predatory HELS
are presently in the range of 20 percent to 23 percent or higher, a rate well above
legitimate lending. A floating statutory ceiling which gives a yield just above the
level charged by legitimate lenders may be the most workable.
D. A fourth-though weak-approach would be to require the home equity lender
to provide investors with a disclosure statement describing the investment, modeled
after the requirements of the Securities and Exchange Act, which might include an
independent appraisal of the property, the underwriting criteria applied by the lender, and how the consumer met those underwriting criteria. For this approach to
have any effect, state or federal regulatory officials would have to regularly examine
such lenders and statements.
4. Issue: Unfair and Deceptive Practices by Loan Brokers.
Problems: Loan brokers are people who offer to find credit for consumers who believe they cannot find it on their own. The business does not seem to take place
at all in some states while it flourishes in others. Loan brokers charge a large fee,
usually calculated as a percentage ofthe loan, often doing little or no work at allat least not for the consumer's benefit. (They may do a lot of work for the creditor,
acting as a "bird-dog" to flush out business for one or two lenders with whom they
have pre-existing relationships .)
Creditors guard their underwriting criteria and do not make them generally available to the public. Consumers must apply for credit to determine whether they qualify. Theoretically, loan brokers match borrowers and lenders by knowing the details
of lenders' underwriting criteria, but generally home equity brokers simply funnel
consumers to their related lenders, who do the actual credit screening. For this they
charge a fee of hundreds and sometimes thousands of dollars.
Since loan brokers' fees are often based on the amount of the loan to the
consumer, the broker has an incentive to increase the loan size. Thus there is "reverse competition" operating, encouraging the broker to steer the borrower to lenders who engage in loan-padding. Also, he or she may encourage the consumer to refinance or consolidate debts that should not be refinanced because of prepayment
penalties, partial rebates of unearned finance charges, or front-end charges. In some
instances loan brokers have encouraged consumers to refinance low-rate debts with
high-rate credit they arrange. Such refinancing may cost the homeowner thousands
of dollars in additional finance charges, often with higher monthly payments.
Loan brokers are usually paid their fee directly by the lender out of the consumer's loan proceeds. This reduces the consumer's cash from the loan: it also makes

325
the annual percentage rate lower because, under the Truth-in-Lending Regulation
Z, a loan broker's fee is usually not counted as a part of the finance charge. Thus,
brokered loans appear to have a lower APR than loans that are not brokered, which
is deceptive. (Perhaps to take advantage of this, we have seen lenders pay "brokers's
fees" where no broker was used by the consumer. ) The broker's fee is a cost of credit
to the consumer, and should be included in the finance charge.
Often, the consumer first realizes the size of the broker's fee only upon receipt
of the Truth-in-Lending's itemization of the amount financed . The problem is worse
if the person actually extending credit is a private investor who makes fewer than
6 real-estate secured loans a year, as no TIL disclosures are required at all then.
Some loan brokers advertise as if they were a lender and deal with the consumer
in ways that hide their role. Consumers do not expect a "broker's commission," because they did not know they were dealing with a broker. And because many loan
brokers operate their loan brokerage as a sideline to other business real estate,
working for a lender, a law practice further confusion is created about their role.
Alternatives:
A. Impose upon loan brokers a fiduciary duty to use reasonable efforts to obtain
financing at the lowest available rate for the consumer and for an amount that is
in the consumer's best interest. Through the fiduciary duty, prohibit a loan broker
from encouraging a consumer to refinance credit when the refinancing is disadvantageous to the consumer's financial interest. Breach of fiduciary duty can give
rise to a legal claim by the borrower.
B. Amend the Truth-in-Lending Act to require that loan broker fees be included
in the finance charge.
C. Enact a maximum fee for loan broker charges.
D. Require that a loan broker disclose the method of determining, or the amount
of, the broker fee before the consumer is obligated to use the loan broker's services.
More preferable is to require written contracts between brokers and borrowers
which set out the brokers fees and responsibilities in advance.
E. Require brokers who arrange home equity loans to provide Truth-in- Lending
disclosures ifthe creditor is not required to make Truth-in-Lending disclosures .
F. Amend the Truth-in-Lending Act to require a loan broker's advertising to conspicuously state: "[ name] is not a lender. This is an offer to arrange a loan."
5. Issue: Balloon Payments and Demand Notes.
Problem: Many predatory HELs include a balloon payment. A balloon payment is
a payment substantially larger than the other installments-usually the final payment. It is not uncommon to see balloon payments in HELS that exceed the amount
that the consumer actually borrowed because of other charges or negative amortization.*
A demand note contains a clause allowing the lender to demand payment of the
full balance at some point prior to the scheduled maturity. For example, the contract may be set up as a 10-year note, but buried in the contract is a clause allowing
the creditor to call the loan in 3 years.
Through the 1970s most states prohibited balloon payments and demand clauses
in consumer credit transactions, either by requiring that all payments be in substantially equal installments or by expressly prohibiting balloon payments and demand clauses. AMTPA repealed those prohibitions of balloon payments and demand
clauses for home equity loans . (See Issue 2, above .)
Most consumers plan to play their installment credit from future income and do
not have sufficient savings to make a balloon payment or demand payment. A balloon payment or a demand for the balance by the lender puts the family in a position of either having to refinance their home equity loan (if they can find a willing
lender) or losing the home. In many cases, predatory lenders use the threat of an
unaffordable balloon to force refinancing at a higher rate or otherwise making it
more costly with added penalties and costs . This subsequent loan just sinks the
consumer deeper in unmanageable debt.
Alternatives:
A. The most restrictive approach would prohibit balloon payments and demand
clauses on home equity loans. This could be done by federal or state law. Alternatively, they could be prohibited unless the balloon payment could be met from the
consumer's reasonably anticipated future liquid assets or income.
B. If a HEL contains a balloon payment, the consumer should be given the right
to refinance, without penalty, the amount of that payment before or at the time it
is due. The terms of the refinancing must be no less favorable to the consumer than
the terms of the original transaction. This is the general approach of the 1974 Uni-

*See note 3, supra.

326
form Consumer Credit Code, which has been enacted in some states, as proposed
by the National Conference ofCommissioners on Uniform State Laws.
C. Amend the Truth-in-Lending Act so that the effect of a demand clause is
prominently displayed in or near the disclosure of the scheduled payments in a
home equity loan, instead of being cryptic and buried, as is presently permitted.
6. Issue: Credit Insurance.
Problems: Selling high-priced insurance in connection with consumer credit transactions has been a problem for decades. "Reverse competition," profit to captive insurers and greater interest on the insurance-padded principal all provide strong
incentives for creditors to push insurance onto consumers. Credit insurance premiums-priced in most states unreasonably and unjustifiably high -can amount to
thousands of dollars when written in connection with a large, long-term home equity
loan. We have seen home equity loans with $ 10,000 in insurance premiums. (See
National Consumer Law Center, Usury and Consumer Credit Regulation Chap. 7
(1987 and Supp. ) for more detailed explanation ofcredit insurance problems. )
Credit insurance premiums (including the commission portion) are usually considered part of the amount financed under TIL, so the presence of large insurance premiums can distort the APR, making the credit look cheaper than it is.
Alternatives:
A. While regulation of credit insurance rates has traditionally been a state function, Congress should legislate nationally on this issue. One step which might help
is to require "net coverage," which would prohibit insuring unearned interest, as is
common now.
B. Massachusetts formerly pioneered a free-enterprise approach of requiring state
banks that offer credit life insurance to take competitive bids from insurance companies for underwriting their credit insurance. They were then required to accept the
lowest-priced credit life insurance with acceptable coverage and underwriting for
sale to their borrowers. This could be adopted by other states or Congress.
C. Credit insurance could be required to be written so that the loss ratio is no
less than 75 percent. Many states have loss ratio requirements, though they are
generally too low and even then are rarely enforced.
D. Provide for a genuinely reasonable maximum rate.
7. Issue: Costly Refinancing.
Problem: Most of the second mortgages extended by finance companies or second
mortgage companies are what the industry would call "consolidation loans." That is,
the consumer has used a substantial portion of the, loan proceeds to pay off other
creditors, in many cases contrary to the consumer's financial interests.
The refinancing of existing credit may be disadvantageous to the consumer in several ways. A low-rate loan may be paid off by a high-rate loan; the new payment
maybe higher than the old payments combined. Front-end charges, prepayment penalties, failure to rebate unearned interest or use of the Rule of 78s make the actual
remaining cost on an annualized basis of the existing credit less than the annual
percentage on the new home equity loan. (This may be true with "same-creditor refinancing, as well as consolidation lending.)
Finally, in most instances, it is to the consumer's disadvantage to use a home equity loan to pay off debts that do not threaten the consumer's home, e.g., a medical
debt or a car loan. Ifthe consumer is unable to keep up with the payments on those
transactions, the home would probably be protected by state homestead exemption
laws or the federal bankruptcy code. However, a home equity loan would waive
those protections (except in Texas), thereby putting the consumer's home at risk of
a foreclosure and sale at a distress sale price.
Alternatives:
A. The most extensive protection would prohibit a home equity loan lender from
requiring a consumer to pay off preexisting debts as a condition of extending credit
unless the pre-existing debt is secured by the residence and has an interest rate
higher than the annual percentage rate on the new home equity loan.
B. An alternative to A. would make it an unfair and deceptive practice, with a
private right of action, for a HEL lender to require a consumer to pay off pre-existing debts where the pre-existing debt was not secured by the consumer's home, or
The commission to the creditor is greater from more expensive insurance, thus giving creditors incentive to sell consumers higher- priced insurance. Finance companies and other lenders
may take 40-50 percent of the premium as commission.
Many of the major finance companies now have affiliated insurance companies whose products they sell, thus keeping the considerable profits "all in the family."
' One recent study estimated that consumers were overcharged $1 billion per year just on
credit life insurance alone.

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the annualized future cost of the pre-existing debt was less than the effective rate
offered under the home equity loan, adjusted for any income tax savings.
C. Require a lender who refinances existing debts with a home equity loan to disclose to the consumer the disadvantages of refinancing the existing debt. This would
involve a disclosure comparing the total finance charges, the amounts financed, the
payment schedules, the total amount to be paid, and the collateral on the existing
debt with those for the proposed new loan.
D. Where a lender requires or offers to refinance existing debts with a home equity loan, the lender should also be required to offer the consumer an additional alternative: an extension of credit that does not refinance existing debt.
8. Issue: Closing Costs on Home Equity Loans.
Problems: Regulation Z, 12 C.F.R. Sec. 226.4(c)( 7), allows the exclusion of closing
costs from the finance charges if they are bona fide and reasonable in amount.
There has been almost no examination of the reasonableness of closing costs under
this standard, and they are always added to the amount financed . This can distort
the APR, which is what consumers are taught to look to as the "price tag" for the
credit. A creditor who pads the closing costs thus might show a lower APR than one
who doesn't, even though overall its loan is more expensive. This is not "truth" in
lending.
Alternatives: Amend Regulation Z to require that closing costs for home equity
loans are included in the finance charge.
9. Issue: Wraparound Mortgages.
Problem: A wraparound mortgage is a second mortgage which obligates borrowers
to make the payments on the first mortgage through the second mortgage lender;
the wraparound mortgage could be a third or lower mortgage requiring payments
on all or some of the higher mortgages to be made through the wraparound mortgage. For Truth-in-Lending purposes (as well as usury purposes under many state
laws), the amount financed for the wraparound mortgages is considered to be the
sum of the amount actually lent by the wraparound mortgage lender plus the remaining balance on the first mortgage. This is permitted even though the wraparound mortgage lender does not advance any funds on the first mortgage. The
usual Truth-in-Lending result is that the annual percentage rate considerably understates the actual cost of the wraparound mortgage to a consumer. In effect, the
wraparound mortgage offers a way to avoid consumer comparison shopping and
state usury limitations.
Alternative: Wraparound mortgages in consumer credit transactions could be prohibited by federal or state legislation. Alternatively, Truth-in-Lending and state
usury laws should require that to calculate the annual percentage rate and interest
rate, the amount financed be composed only of the amounts actually advanced.
10. Issue: Prepayment Penalties.
Problem: It is not unusual for home equity loans, particularly second mortgages,
to require the consumer to pay a penalty for prepaying the home equity loan. This
is a way that lenders, particularly high-rate lenders, try to create captive customers
by making it too expensive for consumers to refinance elsewhere at market rates.
(Particularly unscrupulous creditors may encourage unsophisticated borrowers to do
an in-house refinance, and pad the loan balance by adding in the penalty.)
Alternative: Limit prepayment penalties to no more than the amount of interest
that would accrue on the payment following the prepayment.
11. Issue: Punitive Foreclosure Laws.
Problem: Most states strictly enforce the acceleration clause in a mortgage that
allows the lender to demand the balance of the debt for any default, which is generally defined as the failure to pay any single installment on time. It may also include allowing the collateral to depreciate or failing to abide by any other term of
the mortgage .
When a mortgage lender forecloses, most states allow the property to be sold at
a sheriff's sale, at which the lender generally buys the property for the balance of
the outstanding mortgages. If it is a home equity loan, the foreclosing lender generally buys the home for the amount of first mortgage, thus paying off the first
mortgage holder. The lender is then free in most states to resell the property in the
private market for fair market value and pocket the profits.
Alternatives:
A. Homeowners should be given a right to cure (the right to bring their mortgage
current and reinstate their right to pay it in installments). Many states already
allow delinquencies on other consumer credit transactions to be cured by the

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consumer making up missed payments. Federal regulations under DIDMCA also
extend the right to cure to mobile home owners.
B. The federal Bankruptcy Code allows debtors to cure by repaying their debts
through a Chapter 13 bankruptcy, 11 U.S.C. Sec. 1322(b)
( 3). The courts are divided
on how soon a Chapter 13 bankruptcy must be filed in order for the consumers to
forestall a foreclosure and cure a default on a mortgage. The bankruptcy code could
be amended to provide for a cure up to the point that the residence is sold to a bona
fide third party and state redemption rights have expired.
C. The Bankruptcy Code currently provides special protection from modification
for all creditors "secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)
( 2). This provision has been invoked by
home equity lenders with no legitimate right to protection ahead of other secured
and unsecured creditors. The Bankruptcy Code should be amended to eliminate special protection for home mortgages other than purchase money mortgages and
refinancings of purchase money mortgages made at least two percentage points
lower than the original loan. Bankruptcy debtors would then be able to use their
full panoply of Chapter 13 options to avoid foreclosure of HELs by payment in the
bankruptcy process.
D. Adequate sale prices upon foreclosure would be encouraged if a foreclosure
creditor is required to have the property listed for private sale with a realtor in the
same fashion as any voluntary home sale. Some type of legal supervision of this sale
would be necessary. Possibilities for supervision include a judge, a court-appointed
receiver or an arbitrator. When a dispute arises (such as whether to accept an offer
to purchase or wait for another offer), the judge, receiver or arbitrator would resolve
the dispute.
E. Homeowners should be provided with a notice explaining that they have a redemption right, and that they can sell the redemption right to a buyer who can exercise that right. They should be informed that this is a way to recover their equity
that would otherwise be lost in the foreclosure sale. The former homeowner could
use these rights to get a fair value for the home rather than the foreclosure distress
price.
F. The establishment of state mortgage payment assistance programs, such as
those adopted by Pennsylvania and Maryland and considered several times in Congress in the past decade, is another solution to foreclosure problems. These are revolving loan programs that lend money to temporarily distressed households to pay
part of their mortgage payments. The loan is usually for a limited time, e.g., three
years in Pennsylvania. After that, the consumers are obligated to repay the mortgage assistance loan. This has been especially helpful to displaced workers and to
other debtors who suffer temporary financial setbacks caused by illness, divorce,
temporary disability, death of a wage earner, etc.
G. Moratoria laws, which were used a great deal in the Great Depression and by
several states in the recession during the 1980s, allow homeowners to avoid foreclosure as long as they pay the current interest on their mortgages. The moratorium
is on payment of principal. These laws may be triggered by a household's financial
distress or, more commonly in modern times, by an economic emergency.
12. Issue: Lender Pockets Property Insurance Proceeds.
Problem: Mortgages generally require the homeowner to maintain casualty insurance on the property. The consumer is generally not required to purchase such property insurance through the lender, although it is usually required that any insurance procured elsewhere be acceptable to the mortgage lender. Requiring property
insurance is generally felt to be prudent to prevent a loss if a catastrophe happens
to the home. However, most mortgages, whether for purchase money or a home equity loan, also contain a clause requiring the lender to be named the insurance loss
payee and allows the lender to apply the proceeds either to the balance of the debt
or to the repair of the home. If the lender applies the insurance proceeds to the balance of the debt, there may still be a debt outstanding on a home that remains damaged. The consumer receives no insurance proceeds in that situation to make the
necessary home repairs. When mortgage interest rates are low, there are very few
complaints of mortgage lenders pocketing insurance proceeds to pay off mortgage
debts. However, the last time mortgage interest rates were high, there were many
complaints of mortgage lenders paying off older, low-rate mortgages with insurance
proceeds because of the rising mortgage rates generally. Because of that, the home
became uninsured against casualties.
These statutes may allow a creditor to charge a reasonable attorney fee if collection efforts
were actually undertaken by an attorney.

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Alternative: Legislation could be enacted to permit future homeowners to choose
whether to apply property insurance proceeds to repair the insured property or to
the loan balance.
13. Issue: Untimely Disclosure.
Problem: The fundamental flaw in the Truth-in-Lending disclosure approach is
that disclosures are made too late in individual credit extension: when consumers
are too psychologically bound to the transaction to reject it, their shopping and negotiation costs have already been incurred, and the lure of the credit advance and
fear of the lender's scorn are too immediate for most consumers to reject credit on
the basis of a Truth-in-Lending disclosure statement. By regulating advertising and
oral quotations of rates, Truth-in-Lending has improved the ability of consumers to
shop and the market to compete on the basis of rates, but further improvements
can be made to foster both consumer shopping and rate competition.
Alternatives:
A. Require the Federal Reserve Board to conduct surveys of lenders' annual percentage rates on HELS and make the resulting shoppers' guides available to consumers and to the press. A pilot project by the Federal Reserve Board indicated that
such guides would save consumers millions of dollars by fostering lower credit rates
through competition on some types of credit.
B. Require basic credit information, including the proposed APR, amount financed, finance charge, payment schedule, and total of payments, to be disclosed to
the consumer at the time of application. Congress requires this approach for credit
cards and home equity lines of credit.
TESTIMONY BY TERRY DRENT, HOUSING COORDINATOR, COMMUNITY
DEVELOPMENT DEPARTMENT, CITY OF ANN ARBOR, MICHIGAN
FEBRUARY 17, 1993
Problem
Many people living on fixed incomes in Michigan and the rest of the country are
facing a crisis. For many the cost of medical care, housing, and basic sustenance
is so high that they have to supplement their incomes with debt in order to survive.
In southeastern Michigan, we are seeing many low income families, senior citizens,
and disabled people who live on fixed incomes being preyed upon by unscrupulous
mortgage companies. These firms often target lower income families claiming to be
able to assist them in paying for medical care, home repairs, and property taxes.
The results, however, can lead to the misery and impoverishment of this population.
Many of these victims are suffering great hardships because of the financial "solution" offered by mortgage companies, and it has increased the burden on limited
community resources. Some people are actually being forced out of their homes.
Background
People living on fixed incomes are susceptible to abuse by mortgage companies because they have seen their expenses for vital items increase at a rate greater than
their incomes. Social security has increased at an average rate of 3.5 percent a year
over the last four years. Medical costs have increased by 15 percent to 20 percent
in the same period . Senior citizens alone account for 40 percent of all hospital stays
and have many needs not met by any insurance company. If you are a diabetic or
have cancer, you need an expensive special diet. We have seen diabetics saving needles in a coffee saucer filled with rubbing alcohol because they can't afford to buy
new needles.
When these fixed income individuals are homeowners, the burden is greater because of the need to make repairs on their home. If a furnace breaks it has to be
fixed. Additional repairs or remodeling must be completed to accommodate a sick
spouse or physical limitations of the homeowner. Increasing health problems can
create home accessibility needs. Lowering bathroom fixtures and cupboards and
building ramps and railings is a very expensive undertaking, though less so than
hospitalization. An additional problem is the increase in property taxes over the last
several years as localities and school districts continue to face budget imbalances,
some due to cuts in Federal funds.
Lower income families have less and less disposable income and are being forced
to make difficult choices. They must often choose between paying their medical bills
or buying food, paying for a special need for themselves or an ailing spouse or paying property taxes, paying for home repairs or paying their property taxes. Like
most ofus they choose to pay for their basic needs, and the property tax bill is usually the one that goes unpaid.

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In Michigan and many other states, if you are unable to pay your property taxes,
the state will collect them by selling them at the annual tax sale. Anyone can purchase these back taxes, from individuals to private companies. The tax purchaser
will pay one year of the homeowner's taxes and get a lien on the property. After
a redemption period they will get a deed to the house. As a result of these transactions, the homeowner loses everything, including all of the equity they have built
in his or her home. The tax purchaser can then sell the home at its market value.
ABC's Good Morning America did a program on this topic that aired on September
24, 1992.
A second means of conducting business is more complicated and insidious than
the first. It starts with the tax purchasers, or tax lien buyer. Purchasing taxes is
a big business and many companies as well as individuals are involved. The tax lien
buyer will purchase the taxes and get a lien on an individual's home. They then
contact the homeowner and inform him or her that unless the purchased taxes are
paid in full, the home will be foreclosed upon. They then offer a deal-if the homeowner is unable to pay the full amount, the company will arrange a monthly payment plan that will allow the homeowner to stay in his or her house. Because the
homeowner is desperate to remain in his or her home, the deal is agreed upon. The
tax purchaser then refers the homeowner to a mortgage company, which the tax
purchaser actually owns. The mortgage company will then exchange the tax lien for
a mortgage. Again, the mortgage offered is generally double the market rate with
very high administration and processing fees. The homeowner gets a mortgage he
or she cannot afford to pay and over time the mortgage company forecloses.
This can be an acquisition strategy on the part of the tax purchasing companies.
It is quicker and cheaper to foreclose on a mortgage than to perfect title with a tax
deed through the courts. In Michigan, personal notice of a foreclosure is not required, and foreclosures are an administrative process, not a judicial proceeding.
The notice is only published in the Legal News, which even few lawyers read, and
the property is listed by its legal description, not by address. With the administrative foreclosure, the mortgage company can merely present an affidavit to the sheriff
to have the homeowner evicted. In Ann Arbor, an elderly widow with Alzheimer's
disease was confronted by a County Sheriff's Deputy with eviction papers of which
she had no understanding. She was forced to move out of her home. A tax purchaser
obtained her home for approximately $3,200 in back property taxes and later sold
the home for $95,000. This women saw none of the proceeds from the sale of her
home. She eventually ended up in a State Psychiatric Hospital that has since closed
due to state budget cuts.
The City of Ann Arbor's Community Development Department had been working
with another elderly widow with Alzheimer's disease. She was unable to pay her
property taxes and subsequently they were purchased. Home Loan Financial Corp.,
a subsidiary of Birmingham Bancorp Mortgage Corp., obtained her name from the
delinquent tax roll published by the County Treasurer's Office and offered her a
loan to pay all of her back taxes. The mortgage company discovered that the Community Development Department of the City of Ann Arbor had a lien on the property for rehabilitation work completed several years earlier. The mortgage broker
asked the city to subordinate to the new mortgage, which they were negotiating.
The broker told the senior citizen and her daughter that they needed to act quickly
or a tax purchaser would take the home. He put a good deal of pressure on these
people to sign his note, calling them three or four times a day. He was also upset
with the city staff for becoming involved and alleged we were obstructing his business. We discovered that although this homeowner needed approximately $ 13,000
to pay her delinquent taxes, the loan amount offered was for $35,000 at 18 percent
interest. Her monthly income was $770 and was derived from Social Security. Her
mortgage payment would have been $680 per month before taxes. She would have
been left with $90 per month on which to live and still have to make property tax
payments. This homeowner's case was presented to Great Lakes Bancorp, a local
bank, and was approved under the Community Reinvestment Act. The homeowner
was able to obtain a mortgage of $ 15,000 at 9 percent with monthly payments of
$326 per month which included a property tax payment.
Community Development staff also assisted a disabled Vietnam veteran. His deceased mother left him her home, which had a mortgage payment of $348 . He could
not afford his increased property taxes and they became delinquent. He, too, was
contacted by a representative of Birmingham Bancorp Mortgage Corporation, and
agreed to a mortgage at 22.5 percent with a monthly payment of $980 dollars before
property taxes. His disability income was $ 1,050 per month. He was facing foreclosure after 60 days of signing the note. Again, Great Lakes Bancorp, mindful of
the Community Reinvestment Act, helped. He was approved for a 7.125 percent
loan, and Great Lakes escrowed his property taxes to insure payment.

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There is also a case of a 77-year-old widow in Whitmore Lake, Michigan, who
could not pay her medical bills and her property taxes. A mortgage company got her
name from the delinquent tax role published by the Washtenaw County Treasurer's
Office. In 1989 this woman received a $ 12,729.50 mortgage at over 25 percent interest. Her monthly mortgage payment without property taxes was $350 per month,
and her monthly income was $520, derived solely from Social Security. The loan had
a three year balloon payment, and eventually the woman defaulted. The mortgage
company refinanced the loan with similar terms, and after she defaulted, they again
refinanced. Her debt increased from the original $ 12,729.50 to $39,500 within eighteen months. The woman actually received only $4,066 from these two additional
transactions, the rest going to pay points and administrative fees. This senior citizen could not read the mortgage documents she apparently signed because of poor
eyesight, and she did not understand the mortgage process . She had neither a
checking nor savings account. In the court agreement negotiated with the mortgage
company, the woman has eight months to refinance the total debt so she does not
lose her home of over forty years.
In Ypsilanti, Michigan, a 40-year-old mentally disabled man owned a home his
mother left him "so he would always have a place to live." But his property taxes
increased more than the disability income he received from the state, and he became
delinquent in his property taxes. A property tax purchasing company bought the
taxes and traded the lien on his property for a mortgage. His mortgage payment
was $250 a month before property taxes; his monthly income was $220 . The annual
interest rate on the note he signed in March, 1992, when mortgages were available
for 8.5 percent, is over 21 percent. He is currently borrowing from family and
friends to make his mortgage payment, and he spends approximately $25 per month
for food. This year his property taxes will increase over 10 percent. He is less than
a step away from becoming one ofthe homeless mentally ill.
In Adrian, Michigan, an elderly person bought a home on a land contract subject
to a mortgage to be paid by the land contract seller. The seller defaulted on the
mortgage and the land contract purchaser was evicted. Without personal notice and
a judicial foreclosure she had no knowledge of these proceedings until she was told
to vacate the premises .
There are many abuses in the non-conforming mortgage market, and what was
once considered usurious mortgages are now allowable under current law. Many
lower income homeowners are being victimized. We are not against non-conforming
mortgages, in fact, the Mayor and Administrator of Ann Arbor, along with City
Council, are currently trying to develop a loan pool with local banks under the Ann
Arbor Credit Enterprise initiative to write non-conforming mortgages to help low income individuals obtain housing. However, we feel that there are consumer protections than can be put in place to help protect the low income, vulnerable, and disadvantaged, from an unchecked and under-regulated segment of the banking industry. We recommend the following for your consideration.
Recommendations
• Repeal exemptions from state usury laws in the Federal Banking Statute.
• Establish a Federal Usuary Law, regulating interest rates as a specific percentage
above prime rate and controlling the total financing charges imposed.
• Strengthen and clarify the notice of foreclosure prevention services existing in
current law.
• Require personal notice of foreclosures to all significant interests in the property.
• Require judicial foreclosure of all mortgages.
• Amend the Older American's Act to require that low income senior citizens be referred to social service agencies before their property can be foreclosed.
Summary
The problem of reverse red-lining mortgages, along with the threat of tax foreclosures, is so severe in the City of Ann Arbor and the State of Michigan, that our
Mayor, along with the City Administrator and City Council, has established a foreclosure fund to help our citizens with this terrible problem. But we have far too few
dollars to meet the need, and many people are falling through the gaping holes in
the small safety net that we can afford to throw out. As President Clinton is telling
the nation today, these are austere times for Federal, State and Municipal government. We have less money to spend on the seemingly insurmountable problems facing our nation. Legislative action is needed to take care of this abusive mortgage
system, which was largely created by the Depository Institutions Deregulation and
Monetary Control Act of 1980. The practice of reverse red-lining mortgages is
threatening the sanctity of part of the American dream, home ownership, for those

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who can least afford it. This activity is wrong, unfair, and unjust; it must be
stopped.
STATEMENT OF JOHN P. HAMILL, PRESIDENT, FLEET BANK OF
MASSACHUSETTS
Good afternoon, Mr. Chairman, and Members of the Committee. My name is John
Hamill, President of Fleet Bank of Massachusetts, and with me from Fleet Finance,
Inc. ("Fleet Finance") are R. Harold Owens-Chief Operating Officer, John B.
Stanforth, Senior Vice President-Finance, and Therese G. Franzen, Senior Corporate Counsel. We are pleased to represent Fleet Financial Group, Inc. ("Fleet")
and Fleet Finance today in discussing allegations that residents of communities that
lack access to traditional sources of credit have been targeted by unscrupulous brokers, lenders and home improvement contractors for loans with abusive terms and
conditions. We would also like to address the role of the consumer finance industry
in providing credit to these borrowers and the recent controversy surrounding Fleet
Finance and its business in Georgia.
1. Introduction of Fleet Financial Group and Fleet Finance.
a. Fleet Financial Group. Fleet, headquartered in Providence, Rhode Island, is the
nation's 14th largest bank holding company with over $47 billion in assets . Fleet
has 1,300 offices in 42 states, and employs over 27,000 people in its seven banks
and five major nonbank financial services companies, including Fleet Finance, its
consumer finance subsidiary. Fleet operates 7 banks in the Northeastern United
States, with approximately 800 branches and $33 billion in deposits. Fleet banks
serve their communities well, having consistently received "outstanding" or "satisfactory" ratings under the Community Reinvestment Act.¹ Fleet banks have provided over $1.6 billion in loans to low and moderate income neighborhoods in the
communities in which they operate.
Fleet's other nonbank subsidiaries provide conventional first mortgage banking
services (Fleet Mortgage, the second largest servicer of mortgage loans in the nation, made over $19 billion in mortgage loans in 1992); student loan processing
(AFSA is the largest third-party student loan servicer in the United States, charged
with collecting over $2 billion in guaranteed student loans); trust and investment
services (Fleet Investment Services has over $44 billion under management or in
custody); and leasing/asset-based finance (Fleet Credit is the largest bank-owned
asset-based lender/leasing company in the United States, with over $2 billion in outstanding loans to small and mid-sized businesses).
b. Fleet Finance. Fleet Finance has a history of providing credit to those who cannot obtain credit from traditional sources, such as banks or credit unions. Fleet Finance began its business 57 years ago as “Southern Discount Company" during the
great depression, as a small loan lender in rural Georgia. During the ensuing decades, the business expanded to provide small consumer loans in other southeastern
states (Florida, North Carolina, South Carolina and Tennessee). In the 1960's and
70's, as the American consumers' appetite for larger personal loans increased, the
consumer finance industry and Fleet Finance began to offer secured real estate
loans. This type of loan provided more credit to the borrower, consistent with a lender's prudent credit standards . Many of Fleet Finance's early real estate secured
loans resulted from Fleet Finance refinancing secured or unsecured small loans into
real estate secured loans in order to provide additional credit to the related borrowers, usually at lower rates.
Due to geographic restrictions on Fleet's ability to expand its banking franchise
prior to adoption of interstate banking in 1985, Fleet sought to expand its presence
into other geographic markets through nonbank acquisitions . One of Fleet's first
nonbank acquisitions was the acquisition of Fleet Finance in 1973.
Under Fleet's ownership, the operations of Fleet Finance continued to expand and,
in 1983 , Fleet acquired Credico Industries, a subsidiary of U.S. Industries, which
gave Fleet Finance a Mid-Atlantic and Northeast presence. In 1985, the consumer
finance operations of several affiliates of Fleet were merged into Fleet Finance, giving it a Midwest presence . Until the late 1980's, Fleet Finance and Fleet's banks
did not operate in any common states (except to a very limited extent in Rhode Island). Today, Fleet Finance has a limited presence in the six states in which Fleet
has bank subsidiaries.
¹Additional information concerning Fleet's community reinvestment ratings and its associated
lending activities are described on Exhibit 1.

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As the scope of Fleet Finance's operations widened during the 1980's, the company's secured real estate portfolio grew. This growth was a result of various factors,
including increased consumer demand for secured real estate loans as compared to
higher-rate unsecured credit, the Tax Reform Act of 1986 (which eliminated personal interest deductions other than interest paid on home mortgage loans), increased real estate values (which—provided borrowers more equity in their homes
against which they could borrow) and the attractiveness of real estate loans from
a lender's viewpoint, i.e. , security with a more readily ascertainable value than
loans secured by home furnishings or other items. Fleet Finance grew from a company with $413 million in outstanding real estate loans at December 31, 1985 to
a company with $2.2 billion in outstanding (owned and serviced) real estate loans
at December 31, 1992. Total loans grew from $863 million at December 31, 1985
to $2.6 billion at December 31, 1992.
Today, Fleet Finance, headquartered in Atlanta, provides consumer finance services throughout Georgia and in 25 other states. Fleet Finance is now one of the largest consumer finance companies in Georgia (based on its aggregate principal amount
of outstanding loans in Georgia). Fleet Finance owns or services approximately
20,000 real estate secured loans in Georgia and another 60,000 throughout the
country. In addition, it has approximately 100,000 consumer loans (non-real estate
loans) outstanding across the country.
2. A General Overview of The Consumer Finance Industry.
To put in context the allegations which have been cited in the request for testimony and which have been leveled against Fleet Finance in the press and in various
lawsuits filed against it, it is necessary to review the role played by the consumer
finance industry in providing credit to deserving customers. The consumer finance
industry, in which Fleet Finance is a participant, provides credit to millions of consumers across the nation, many of whom are low and moderate income borrowers
who cannot obtain credit from traditional sources, such as banks or credit unions.
As Fleet Finance's real estate lending business has developed into the primary
focus of its business, so too has real estate lending become the dominant focus of
the consumer finance industry. The total principal amount outstanding nationwide
for what are now called "home equity" loans (both floating rate products and fixed
rate products) was approximately $270 billion at June 30, 1992, increased from $108
billion at December 31, 1985. The credit providers in this broad market include
banks, nonbanks, consumer finance companies and others.2 Fleet Finance competes
in the consumer finance sector of this vast market with major national companies,
such as Associates (a subsidiary of Ford Motor), AVCO Financial (a subsidiary of
Textron), Chrysler First Financial (a subsidiary of Chrysler and scheduled to be acquired by NationsBank), Household International, Beneficial Corp., Transamerica,
G.E. Capital, The Money Store and Old Stone Credit, the nonbank consumer finance
subsidiaries of Bank of America, Norwest and NationsBank, and many other companies. This industry has grown tremendously over the last decade and currently has
over 15,000 competitors.
3. The Role ofHome Equity Loans in Consumer Finance Transactions.
Home equity loans made by Fleet Finance and other companies are typically used
by consumers to reduce their monthly expenses by consolidating debts and stretching payments over a longer term. Longer terms and lower interest rates reduce a
borrower's monthly payment, easing cash flow problems. In addition, home equity
loans are used to finance home improvements, to acquire personal property, to pay
educational, medical or other expenses or for other purposes.
The growth of the consumer finance industry has been particularly beneficial for
millions of low and moderate income borrowers. Many of these borrowers have credit problems that disqualify them for unsecured or secured bank credit, traditional
credit cards or unsecured or secured small loans. Banks have been unable to pro2SMR Research Corporation reported as of June 30, 1992 home equity loan outstandings by
type of company and by specific entity. See Exhibit 2. The first chart includes all loans outstanding for these entities, whether bank or non-bank. The second chart shows the outstandings by
type of company, i.e. , finance company, finance company affiliated with a bank holding company,
etc.
3SMR Research Corporation, Second Mortgage Home Equity Loans, 1991 (the "SMR 1991 Report"), at p. 23. Also see Note 2 above. For a description of the growth in the consumer finance
business, see pages 6 et seq. of the SMR 1991 Report.
Fleet Finance's underwriting criteria (see Exhibit 3 ) reflect variances from the underwriting
criteria used by traditional first mortgage lenders. Fleet Finance's criteria are similar to those
used by other lenders in the consumer finance industry.

334
vide credit to many of these types of borrowers due to regulatory restrictions resulting from concern over the funding of these riskier loans with insured deposits, regulatory accounting principles and the historic lack of a secondary market to provide
liquidity for these loans. Consumer finance companies, however, because they are
free in many respects from regulatory restrictions (because they do not fund their
operations with deposits), traditionally have been able to employ more liberal underwriting criteria which enable them to lend to lower income borrowers and borrowers
with credit problems.
An example of the potential benefit to low and moderate income borrowers of the
typical consumer finance company's underwriting criteria is the use of so-called
"front end" and "back end" ratios. For example, on an FHA mortgage loan, only 29
percent (the "front end" ratio) of the obligor's income is available for payments of
principal and interest on the mortgage loan and taxes and insurance on the home
and 41 percent (the "back end" ratio) is available for total installment debt payments (including those associated with the loan). If a borrower does not meet these
ratios, the loan application is generally denied. A consumer finance company focuses
only on the "back end" ratio, permitting up to a 45-50 percent debt-to-income ratio
for all installment debt. This less restrictive guideline can provide a customer with
the flexibility to enable him to obtain and carry more housing-related debt and more
total debt for personal use.
The consumer finance industry provides a critical source of credit for low and
moderate income borrowers through secured real estate lending, enabling these borrowers to overcome their credit problems and borrow money when they need it without having to comply with traditional, restrictive bank lending guidelines. Moreover,
home equity loans as a source of credit reach far beyond restrictive conventional
mortgage loan programs, which generally provide credit only for a purchase or refinance of real estate, rather than for cash for personal use.
4. Why Costs to Borrowers for Home Equity Loans Are Higher Than Costs
for Conventional Mortgage Loans.
Consumer finance company interest rates on home equity loans are generally
higher than interest rates on traditional first mortgage loans or bank quality second
mortgage loans . These higher rates result generally from ( 1) higher delinquency
rates and charge-offs associated with consumer finance company home equity loans,
(2) higher costs of originating consumer finance company home equity loans, (3)
higher costs of servicing consumer finance company home equity loans, and (4) higher funding costs associated with consumer finance companies.
Consumer finance company delinquencies are traditionally higher than first mortgage loans or "bankable" second mortgage loans. These delinquencies are coupled
with higher loan charge-offs. The industry charges higher interest rates to offset the
effect of the higher charge-offs and delinquency rates associated with consumer finance home equity loans as opposed to traditional bank first mortgage loans and
"bankable" second mortgage loans.
The costs of originating and servicing a home equity loan are much higher than
those incurred in connection with traditional first mortgage loans because such first
mortgage loans generally have much higher balances. There is no appreciable difference in the cost of originating a $ 100,000 first mortgage loan and a $20,000 home
equity loan. Both loans require substantially the same documentation and analysis.
However, an origination cost of 2 percent on the first mortgage loan ($2,000) becomes 10 percent on the $20,000 home equity loan.
Likewise, the monthly cost of servicing a home equity loan is higher than the
monthly cost of servicing a first mortgage loan, relative to their respective balances.
In addition to the standard servicing costs, the type of credit risk reflected in a
consumer finance company's home equity loans is more costly to service than first
mortgage loans or bankable second mortgage loans due to the more labor intensive
work required to avoid delinquencies, to work with delinquent borrowers to avoid
foreclosure, to collect delinquent loans and to restructure or modify loans as required by customer demands or needs. These additional costs not incurred with respect to traditional first mortgage loans or bankable second mortgage loans result
in consumer finance company borrowers paying increased interest rates in order for
the consumer finance company to earn a fair return.
The funding of a consumer finance company is more costly than the funding of
a bank. Banks raise their funds through deposits at government guaranteed rates;
Fleet Finance and other consumer finance companies raise funds at market rates
dictated by their credit ratings, or from banks or insurance companies who lend to
the consumer finance industry (and who charge rates in excess of deposit rates).
"See 1992 SMR Report p. 23 and Notes 12 and 13 below.

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Consumer finance companies also do not enjoy the leverage of banks; their required
equity is more than double that of a bank, and thus, the funding cost in terms of
the required returns on equity is much higher. Finally, the relative illiquidity of second mortgages compared to conventional first mortgages has caused consumer finance companies to maintain larger balance sheets, resulting in larger-equity requirements and greater sensitivity to asset/liability management risks due to prepayments and interest rate changes.
Fleet Finance and other similar companies, although slightly more profitable on
a comparative basis (i.e. return on assets, return on equity) than a bank, are not
"wildly" profitable as the press would like this panel to believe. The companies price
their products commensurate with the risk inherent in their customer base, and a
fair return is garnered.
The chart attached as Exhibit 6 compares Fleet Finance's interest rates to the
rates of its Georgia competitors during 1992. These rates, which ranged from 9.99
percent to 17.50 percent throughout 1992, compare to credit card rates as high as
21 percent and to small loan rates as high as 30 percent. The interest rates charged
on consumer finance home equity loans clearly are higher than those charged on
first mortgage loans or bank quality second mortgage loans, but in the end provide
a cheaper alternative to other unsecured debt, such as credit card or small loan
debt.
5. Fleet Finance's Development of Business: Issues and Recent Changes.
As the consumer finance industry developed and changed its focus to secured real
estate lending, Fleet Finance changed its focus to this type of lending along with
it. During the 1980's Fleet Finance decided to expand its real estate lending business through the acquisition of loans which were originated by other correspondent
lenders. In Georgia, as well as nationwide, it is a common and established practice
for banks and finance companies to purchase loans originated by third parties.
Fleet Finance has acquired loans from over 300 correspondent lenders nationwide.
Fleet Finance purchased loans from correspondent lenders, generally on a loanby-loan basis, often preapproving the loans prior to purchase. The correspondent
lenders would submit to Fleet Finance a loan package consisting of a credit application, credit history, debt-to-income and other relevant ratios, and estimated property
value. Fleet Finance would perform an analysis of this preliminary package, and
make its basic underwriting decision. Unlike some other companies, Fleet Finance's
policy required it to underwrite each loan purchased from its correspondents, not
just a sample. Fleet Finance rejected substantial numbers of loans for various reasons. Approval rates for preapproved loans were as high as 65-70 percent for some
lenders. After establishing that the loan met its lending criteria, Fleet Finance
would give conditional approval for the purchase of the loan. After closing and funding, and subject to the borrower and correspondent lender having complied with all
conditions to approval, the loan would be purchased by Fleet Finance. Fleet Finance
also acquires loans in bulk packages from correspondents and others (including the
RTC and other large lenders). Underwriting procedures for a bulk purchase may
vary and may consist of a loan-by-loan review or a review of a sample of the loans
to be purchased.
In 1989, Fleet Finance tightened its lending requirements by discontinuing the
origination or purchase of loans secured by undeveloped land and, discontinuing, in
most cases, the purchase of loans made for the purpose of home improvements directly from the originator. Changes, such as discontinuing the purchase of home improvement loans, were made by Fleet Finance in response to changes in the economy as well as difficulties in policing the practices of home improvement companies.
Because of federal and state laws regarding home improvement contracts, Fleet Finance was ultimately responsible for repairing incomplete or defective home improvements in connection with loans it had purchased.
In 1988, Fleet Finance was purchasing approximately 85-90 percent of its loans
from correspondent lenders. For various reasons, but principally to reduce its dependence on these purchased loans, Fleet Finance made a strategic decision to more
*Correspondent lender networks are the standard means of doing business in the first mortgage industry. For example, Fleet Mortgage acquires loans from over 800 correspondents.
FNMA, GNMA, FHLMC and other mortgage conduits effectively acquire all of their production
through a correspondent network. In this regard, the consumer finance industry is not much
different, as many ofthe larger lenders acquire much of their production through such networks.
See 1991 SMR Report (at p. 74), "The Rise of Wholesale Channels" regarding the growth of the
wholesale market for second mortgages (attached as Exhibit 4).
"Of these pre-approved loans, only approximately one third ultimately closed and were purchased by Fleet Finance due to fall-out foil various reasons, including failure to meet closing
conditions or the customer obtaining credit from another source.

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rapidly develop its branch structure by upgrading personnel and systems to enable
its branches to make and service more home equity loans. Branches achieved
growth through direct marketing and referrals from various parties. From 1988 to
1992, the mix of loans originated/purchased changed from approximately 85-90 percent purchased/5-10 percent originated to approximately 50 percent purchased/50
percent originated. Beginning in 1990, the branch origination focus was enhanced
by the consolidation of servicing of all purchased loans into regional service centers,
which left branches with a greater capacity to originate and service their own loans.
Fleet Finance decided to entirely phase out the purchase of loans from correspondent lenders, effective December 31 , 1992. The decision to eliminate the purchase of
loans from third party lenders was made with the goal of providing direct contact
between Fleet Finance and its borrowers prior to the loan being closed. The change
was also made in response to criticisms concerning the allegedly excessive rates and
fees charged on loans sold to it by third party lenders and for other alleged improper
practices of these lenders . To eliminate this criticism, Fleet Finance decided to control each loan beginning width the application and proceeding through the negotiation of interest rates and the terms ofthe loan and the loan closing.
In addition, Fleet Finance decided in 1992 to discontinue making loans to higher
risk borrowers (identified in the industry as Class 4 or Class D borrowers).
6. The Georgia Lawsuits, Alleged Activities of Fleet Finance in Georgia and
Fleet Finance's 10-Point Initiative.
a. Background. Before discussing the specifics of the lawsuits against Fleet Finance in Georgia and the allegations in the press concerning Fleet Finance, it is
necessary to describe the backdrop against which these lawsuits and allegations
have taken place. In Georgia, unlike in the vast majority of states, third party loan
brokers and lenders and home improvement contractors are completely unregulated,
and interest rates and points are virtually unrestricted. In addition, Georgia has an
aggressive plaintiffs' class-action bar, which welcomed the opportunity to bring law.
suits that they could couple with a media campaign to extract favorable settlements
from Fleet.
Another reason Fleet has been the subject of attack is due to its high profile selection as the acquiror of Bank of New England ("BNE"). As a regulated bank holding
company with obligations under the Community Reinvestment Act, Fleet was and
is a particularly attractive target for community activists. A challenge against
Fleet's ' acquisition of BNE was made by the Union Neighborhood Assistance Corp.
("UNAC") and other community groups. Bruce Marks, in the presence of representatives of the Federal Reserve Bank of Boston, met with Fleet officials, but Fleet did
not agree to his demand that $20 million be placed under UNAC's control for a
housing fund. Fleet made other contributions to help solve the so-called " second
mortgage scandal" in Boston, however it made its contributions through a broad
array of community groups (and not UNAC). Since that time the volume of allegations made in the press have largely been the result of an orchestrated attack
against Fleet by UNAC with the help of the plaintiffs' attorneys. This attack has
been made without regard to the facts and is Mr. Marks' attempt to make good on
his promise to have the story covered in the national press, whether or not it is
based on the truth (a promise he had made in his meeting with Fleet).
b. Georgia's Regulatory Framework. Georgia enacted legislation in 1983 to remove
its restrictive limitations on interest rate charges and adopted a free-market approach. Prior to the change, Georgia had capped mortgage rates making it impossible for Georgia residents, particularly low to moderate income borrowers, to obtain
loans in the high interest rate environment of the early 1980's . To remedy this, legislation was passed which lifted the mortgage interest rate limitations, and credit
immediately began to flow into the state.
The Georgia legislature, however, may not have given adequate consideration to
the fact that Georgia, unlike most other states, does not regulate brokers and lenders. In comparison, Fleet Finance makes real estate secured loans in 26 states, and
is required to be licensed in 23 of these states. Many of these states regulate the
amount of compensation which can be paid to a broker or lender, but Georgia does
not. Georgia also does not regulate home improvement contractors.
c. The Georgia Lawsuits. Despite the fact that the alleged injuries complained of
by the plaintiffs in the Georgia class action lawsuits pending against Fleet Finance
were caused by the parties from whom Fleet Finance purchased the plaintiffs' loans
or by home improvement contractors who contracted with the plaintiffs prior to
Fleet Finance's purchase of the plaintiffs' loans, purported class action lawsuits
Fleet supports the licensing and regulation of brokers and lenders. Such legislation is now
pending in Georgia.

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have been brought against Fleet Finance, beginning in 1991, alleging violations of
Georgia's criminal usury laws, as well as fraud, conspiracy, federal and state RICO
claims and Truth-in- Lending violations.⁹
The usury charges against Fleet Finance and other companies in Georgia, which
charges are, for the most part, the basis for these lawsuits, are premised upon a
very radical interpretation of the Georgia criminal usury statute. The interpretation
postures that points and other up-front fees charged on a loan should be allocated
completely-to the first month to calculate whether Georgia's law prohibiting interest charges above 5 percent per month has been violated. This theory directly contradicts the concept of "spreading the points over the term of the loan, which is
the standard practice in Georgia ( as set forth in a 1990 Georgia Supreme Court
opinion), as well as the standard practice under Truth-in-Lending regulations, generally accepted accounting principles, regulatory accounting principles, the Internal
Revenue Code and the law of all other states.
Oral arguments were heard on January 19, 1993 by the Georgia Supreme Court
in the plaintiffs' lead case (a similar case was dismissed in federal court and the
appeal is stayed pending the state court's decision). Fleet Finance's legal position
with regard to the usury calculation is supported by the banking industry, and numerous lending institutions and trade associations have filed amicus briefs with the
court supporting this position, including Trust Company of Georgia, NationsBank,
Wachovia, Citizens Trust Bank (a minority-owned institution), AVCO, Transamerica, Norwest, the National Second Mortgage Association, FNMA, and the Georgia Bankers Association. A decision on the issue is expected in two to six months.
d. Specific Allegations About Fleet Finance. Various specific allegations have surfaced in the press regarding the consumer finance industry and Fleet Finance.
While Fleet Finance cannot speak for the industry, it would like to address the following specific charges that have been made against it:
ALLEGATION: Fleet Finance has amassed a pool of home equity loans made at exorbitant interest rates and with excessive finance charges.
The facts are straightforward: Fleet Finance's rates range from lower rates for
better credit borrowers to higher rates for borrowers with credit problems. While
certain borrowers, due to their credit circumstances, are required to pay higher
rates than others, very few Fleet Finance borrowers have loans of the type cited by
the activists and the media. The facts are:
• Fleet Finance's portfolio of home equity loans in Georgia has a weighted average
note rate of approximately 14.8 percent. Moreover, it has a weighted average annual percent age rate including all lender points and all other prepaid finance
charges ("APR") of approximately 15.9 percent.
• Approximately 98 percent of the principal balance of Fleet Finance's Georgia loans
have interest rates below 21 percent; 83 percent have interest rates below 18 percent.
• Approximately 89 percent of the principal balance of Fleet Finance's Georgia loans
have an APR below 21 percent; 69 percent have an APR below 18 percent.
• Approximately 41 percent of the principal balance of Fleet Finance's Georgia loans
by principal balance have 0 lender points; 63 percent have less than 5 lender
points; 88 percent have less than 10 lender points; 98 percent have less than 11
lender points.
• Points charged were financed by the lender and repaid over the life of the loan
(contrary to first mortgage loans where payment of points must be made at closing).
• Approximately 79 percent of the principal balance of Fleet Finance's Georgia loans
had 0 broker points; 90 percent had 5 or less broker points; and 98 percent had
10 or less broker points.
• Fleet Finance competes with many other lenders. The competition would bring
any lender into line with other lenders in the industry. In fact, rates on loans
owned by Fleet Finance are comparable to those charged in Georgia¹º and
throughout the country by other lenders.
• The effect of financed points during the term of a loan on the annual percentage
rate is not as dramatic as one might expect.¹¹
Despite the above facts, Fleet Finance has decided to eliminate any possibility of
this charge reoccurring in the future by taking the extraordinary step of limiting
brokers to a total of 5 points and placing an 18 percent interest rate cap on its loans

A summary of the litigation is set forth as Exhibit 5.
10 See Exhibit 6 for a comparison of rates charged by competitors in Georgia.
11 See chart on Exhibit 7 for a comparison of effective annual percentage rates with various
numbers ofpoints.

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in Georgia and nationwide. Many states specifically permit higher levels of points
(such as Florida which permits 10 points) but Fleet Finance chose this lower level
to deflect the above criticisms, whether or not they have merit.
ALLEGATION: Fleet Finance engages in "home equity stripping"; Fleet Finance
makes huge profits on the sale of foreclosed properties. Fleet has destabilized
communities through its foreclosures.
This allegation is false. Fleet Finance loses money on foreclosures; eliminating
foreclosures would make the company more profitable. The number of foreclosures
in Georgia clearly establishes that Fleet Finance is not in this business, and could
not be responsible for destabilizing neighborhoods. The facts are:
• In Georgia, Fleet Finance lost more than $5.4 million on foreclosures in 1991 and
more than $8 million in 1992. Nationwide, Fleet Finance lost $18.6 million and
$24.6 million on foreclosures in 1991 and 1992, respectively.
The weighted average combined loan-to-value ratio of Fleet Finance's Georgia
portfolio is approximately 70 percent. Fleet Finance's loan to value ratios are
based on appraised values under the current market conditions.
• Approximately 79 percent of the principal balance of Fleet Finance's Georgia loans
have combined loan -to-value ratios in excess of 60 percent; 25 percent have combined loan-to-value ratios above 80 percent; 50 percent have combined loan-tovalue ratios between 60 percent and 80 percent.
• Fleet Finance foreclosed on approximately 530 loans in Georgia during each of
1991 and 1992.
• Because Georgia has been its headquarters for 57 years, Fleet Finance is the largest consumer finance company second mortgage lender in Georgia, therefore, gross
numbers of foreclosures compared to other smaller companies are misleading.
• Fleet Finance's policy is to not commence foreclosure until a loan is at least 90
days delinquent. During the period of delinquency, Fleet Finance works with the
borrower in an attempt to keep the borrower in their home.
ALLEGATION: Fleet Finance made loans without regard to whether the borrower
had the ability to repay the loan.
Because Fleet Finance loses money on foreclosures, it would not be profitable for
Fleet Finance to lend money to borrowers who lack the ability to repay their loans.
The ability of the borrower to repay the loan is established by requiring sufficient
cash flow. The facts are:
• Fleet Finance's underwriting criteria require (and have always required) a debtto-income ratio of less than 50 percent, as well as verification of income and verification of employment.
• The weighted average debt-to-income ratio of Fleet Finance's borrowers in Georgia
(calculated by including all debt at origination, including the Fleet Finance loan)
was approximately 36 percent.
• Approximately 62 percent of Fleet Finance's Georgia borrowers had debt-to-income ratios of less than 40 percent; 78 percent had debt-to-income ratios of less
than 45 percent and 90 percent had debt-to-income ratios under 50 percent.
• Fleet Finance's delinquency rates are comparable to those found generally in the
industry, 12 and, while such rates are higher than first mortgage loans, they are
not substantially higher.13
ALLEGATION : Fleet controls the correspondent lenders and brokers in a conspiracy
to steal people's equity in their homes.
Fleet Finance did business with over 300 third- party lenders nationwide. A wholesale production network is common in the production of mortgage loads. This type
of wholesale network has become the backbone of much of the consumer finance industry.14 Fleet Finance qualified its lenders through an internal review and ap12 See Exhibit 8 for Fleet Finance's delinquency statistics compared to other industry participants.
13 On November 25, 1992, the Mortgage Bankers Association issued its report on nationwide
first mortgage delinquencies and foreclosures at June 30, 1992. Residential first mortgage loans
in foreclosure were 1.04 percent of total dollar amount of loans outstanding, while 90 day delinquencies on first mortgage lo